Deciding whether to verticalize or not is a strategic choice that depends on multiple factors unique to your business. However, with companies facing poor retention rates, operational visibility challenges, and disappointing profits, many believe verticalization is a new strategic approach to growth. Almost 90 percent (89%) of IT leaders and executives say vertical SaaS is the way of the future.
Verticalization can offer significant rewards, such as deeper market penetration, enhanced customer loyalty, and differentiation from competitors. For instance, within two years, organizations retain just 30% of their small- and medium-sized business clients when they offer a single product. However, expanding to just one additional product can increase that retention rate by nearly 20%, while expanding to four products delivers a retention rate of 80%. But it also requires careful consideration of your company’s current capabilities, resources, and market dynamics.
Expanding into new markets isn’t just about identifying an opportunity – it’s about assessing whether your company is truly prepared to make the leap. To evaluate this, I like to approach the question from five key perspectives:
- Determine the size and maturity of your company, which reflects how well-positioned you are for growth.
- Consider the size of your business, which influences the scalability of new ventures.
- Evaluate the quality of your sellers and marketers, and the upskilling or hiring efforts required to succeed in a new market.
- Identify your customer base and buyer demand, and how that aligns with new verticals.
- Take a deep look at the market itself and consider factors such as the total addressable market (TAM), serviceable addressable market (SAM), share of market (SOM), competition, and the lift required to effectively verticalize your product.
Will these answers provide the assurance a company needs that it’s time to verticalize? That depends. By examining these five perspectives, and measuring indicators, you can determine whether you’re truly ready to venture into new verticals and set yourself up for long-term success.
A chart like this, for example, can help stakeholders compare the measurable impact factors like Development, Integration and Adoption, and the Potential for Differentiation have on their decision to verticalize and measure the risks associated with company size, customer base, competitors, and market demand. This is far from a one-size-fits-all model. The decision to move toward growth is as unique as the company itself.
Let’s examine these indicators separately to determine how each impacts the decision to verticalize.
Sign #1: Consider Company Size
Few things provide a clearer picture of a company’s ability to verticalize than company size since it influences a business’s capacity to handle the complexities and demands of targeting specific industries. More often than not, larger companies are better positioned to verticalize.
Here’s why:
Resources
Larger companies typically have more resources—financial, human, and technological—that can be allocated to developing industry-specific solutions, which often require significant investment in research, product development, and marketing tailored to a particular sector.
Market Presence
Additionally, larger companies usually have a more substantial market presence and brand recognition, which can be leveraged to gain a foothold in specific verticals, making it easier to build trust and credibility within a new industry.
Scalability
As companies grow, they develop the ability to scale their operations more efficiently, allowing them to meet the unique demands of different industries without compromising quality or performance.
Risk management
With greater size comes a better capacity to manage risks, as larger companies typically have more robust risk management strategies and can absorb potential setbacks more effectively than smaller firms.
Diverse Customer Base
Bigger companies often have a more extensive and diverse customer base, providing valuable insights into different industries and helping to identify the most promising verticals to target. Additionally, existing relationships with customers in various sectors can facilitate smoother entry into new vertical markets.
Robust Infrastructure
Larger companies usually have more mature operational processes and infrastructure, which is critical when customizing offerings for different verticals, ensuring that the company can deliver specialized products or services without significant disruptions.
Are there exceptions?
Typically, verticalization only makes sense once your company is well beyond $100 million in revenue, although there are exceptions. These exceptions occur when there’s a differentiated use case your company has successfully sold into that stands apart from the rest of your business.
For instance, if the automotive sector has a distinct sales cycle, different buyer personas, and unique buying cycles, and what you’re selling to them is also unique—possibly even priced differently due to varied cost bases—then it makes sense to consider verticalization. Additionally, if your CFO prefers to keep it separate, verticalization makes much more sense.
Understanding how your company’s size impacts resource allocation, customer focus, and scalability ensures that verticalization aligns with your capabilities and growth objectives.
In the next installment, we’ll consider how Seller Quality impacts verticalization strategies. Watch for it!
