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The Green Sheet Online Edition

July 27, 2009 • Issue 09:07:02

Vertical market virtues - Part II

Establishing a niche in one or more vertical markets is said to be an excellent way for an ISO or merchant level salesperson (MLS) to expand a merchant portfolio during any type of economy. We thought it would be valuable to seek perspectives on this topic from our esteemed advisory board. Thus, we asked them to answer the following questions:

  1. What are the pros and cons of pursuing vertical markets as opposed to being more of a generalist?

  2. How do you evaluate which markets are best to pursue during an economic downturn? What factors do you consider in determining which markets are worth pursuing? Which verticals do you think are hot right now?

  3. Which vertical markets does your company pursue right now? Why did you choose these types of businesses, and which ones have brought you the greatest success?

    Are there other markets you have your eye on for the near future? Have you ever met with failure in attempting to break into a market you thought would be ideal?

  4. What advice do you have for MLSs who want to break into new verticals? Are there certain things they absolutely should and shouldn't do?

The Green Sheet, July 13, 2009, issue 09:07:01, contains the first portion of their responses; following is the final portion. Many thanks to those busy professionals who took the time to share their knowledge.

    Dan Lewis
    AmeriBanc National

    1. Pros: Your learning curve pays back much more quickly as you learn to anticipate and handle the needs of the merchant prospect since, in a vertical market, almost all of your businesses have similar needs, issues, questions and problems. Networking is also simpler as "birds of a feather."

    Cons: Population density can cause a lower sales frequency since you are passing over many other merchant types to target only one type. Also, if most or all of your eggs are in one basket, if your processor hands your merchant a change or problem, it can affect your entire portfolio.

    2. You need to look at your cost/benefit ratio, as some verticals may have a much more defined need in an economic downturn. But that may be a precursor to going out of business. Balancing a clear need with a stable outlook to pay you dividends for the long run has to be addressed for success.

    Verticals that are "hot" right now would be surrounding educational markets, do-it-yourself industries, as well as resale types of outlets that all traditionally thrive as the economy turns down.

    Auto repair is doing well, as many consumers are holding on to their vehicles for longer periods instead of buying that new car. With loan qualification being more stringent and auto makers disappearing and dealerships closing, it can be a tough time to buy a new car.

    Along with a successful idea usually come a few failures because the true test of an idea isn't if it looks or sounds good; it's can you really sell it? Can you get others engaged enough with the idea to literally buy into it?

    4. Try more than one vertical, and be brutally honest about your results in comparing them to each other. Don't let your passion for your idea keep you from being successful in the arena that is actually showing a profit.

    I can't even begin to tell you how many great ideas we have had, and tried, that we just couldn't get to work. We still think they're great ideas; we just can't make any money with them.

    So guard your objectivity, and make sure you've got a good sounding board relationship with someone who's not afraid to tell you that your idea is a stinker when you look at the numbers and ROI (return on investment). Numbers don't lie.

    Biff Matthews
    CardWare International

    1. The obvious pro in pursuing a vertical market is becoming highly proficient and cost effective in that area in addition to being deemed an expert.

    A siloing con is highly evidenced today by those organizations that focused on restaurants, lodging and hospitality industries. When they're hot, they're hot; when they're not, they are, in this instance, frigid.

    On the other hand, siloed focus can generate exponential growth, however, at the expense of long-term stability; for, as things go up, so do they come down.

    2. A hot vertical today is surely remote deposit capture (RDC) / back-office conversion (BOC) / point-of-purchase (POP), plus most anything away from credit.

    Cash and cash equivalents will remain the payment methods of choice, in my opinion, through 2015. Credit and its abuse really has taken a beating, and it could take a generation, 2028, before credit comes into real favor again.

    Hot market: anything to do with the future necessities of the aging baby boomers - health and wellness care, activities and places associated with retirement. Where will boomers spend what retirement money they have left and how will they spend it is another consideration.

    The economy is cyclical, so like gas, the downturn shall pass. Our industry, our clients - businesses of all types - are consumer driven. Therefore, consider pent-up consumer demand - what will it be or where will it be?

    Next, what is stable today? The basic necessities, from food and sundries to utilities and housing, along with medical care, remain relatively stable. While not glamorous in any economy, they provide a stable base from which to launch other high-flying opportunities as they recover.

    3. The company is pursuing RDC/BOC/POP relationships and opportunities. Without divulging proprietary information, we are leveraging our strengths in people, technology and systems into nontraditional areas.

    A former chief financial officer shared that what we are doing today is not what we will be doing tomorrow, as evidenced by our shutting down imprinter repair - the foundation of the company.

    Providing services and products aligned outside or beyond the electronic transaction industry broadens our experience, further enhancing what we do in supporting electronic transactions.

    Why nontraditional markets? For one, many nontraditional markets are less likely to be living and dying on price. Many are markets in which value and quality play important roles.

    Fail, yes, we did fail and fail well. About a decade ago we failed with a box, LogoExpression, between the standalone terminal and printer that produced graphics and marketing messages on the face of receipts.

    We believe the reason the concept failed is we were too far ahead of that curve, having to educate users to the benefits of personalized, individualized printer receipts. Plus, this was about the time of migration to the integrated terminal/printer.

    4. In my opinion, research, research, research well the vertical and its market potential, both short and long term. Why have some failed and exited? Learn from the mistakes of others. Also, what is the successful competition doing that makes them successful?

    Honestly, understand your niche and the value you bring to the game. Understand the competition and why they are successful. Competing on price is OK so long as you don't muddy the water for everyone else. Pigs get fat; hogs get slaughtered. Understand that it takes time, typically considerably more time, to penetrate a vertical market, hence deeper pockets to sustain the effort while the silo develops.

    Have an exit strategy in the event of failure as well as a managed growth plan in case of huge success.

    Tim McWeeney
    WAY Systems Inc.

    1. I think it's wise to be pursuing all avenues of business now. That being said, vertical markets represent independent challenges and require resources from the vendor that typical brick-and-mortar merchants do not. If calling on merchants in a vertical market, one should be prepared to support that market with the idiosyncratic needs they bring with them.

    The upside is that vertical markets tend to be more loyal and offer the possibility of higher rates/fees to support their specific needs.

    2. Proximity payments is becoming a vertical market on its own, and it is sizzling hot. The downstream effect on all contactless payments equals more merchants for everyone, including hardware manufacturers. Anything that expands the merchant market is a win for everyone.

    The economy is down for certain. The fundamentals of business development have not changed. What we are seeing is more pressure to reduce costs and increase features. This is something that is not going to go away.

    All markets are worth pursuing at the right price. The trick is knowing when a market (or vertical) becomes more of a loser than a winner if you are awarded the business.

    3. My company manufactures pocket-sized, multi-application, wireless POS devices. We are seeing a tremendous interest from merchants and their ISOs in the direct selling arena. This is no surprise. With the economic downturn, new merchants (formerly 8 a.m. to 5 p.m. workers) are opening their own businesses.

    My company is exploiting that need with our low-cost solution for these new merchants. For WAY, this has been a very good year, thus far in 2009, for primarily this reason.

    Markets that seemed like a good idea at the time? The airline industry. The needs of the major airlines are very specific and demanding.

    Couple that with an industry suffering economically, and you have a combination of high need/low revenue - a less than desirable market for my company. Yet, that model met the needs of other companies who sought and gained that business.

    4. Make sure the needs, and your ability to meet/exceed them, are in your "wheelhouse." Don't let your reach exceed your grasp or else you will lose money and respect. These days, none of us can afford to lose either.

    Bill Pittman
    SoundPOS LLC

    1. By definition, vertical markets are smaller target markets. Consequently, you are going after a smaller piece of the pie, thus limiting your upside. However, everything is relative, so what is a small amount of money that could not sustain a large ISO will support a small MLS just fine.

    Thus, the size of your target vertical market, your competitive advantage and your ability to differentiate yourself determine your potential success. If it is too small of a market, it can be easily saturated, and you may have a hard time surviving.

    However, a small target market also limits your competition, so you may be able to become an expert in your vertical market and thus increase margins. Typically, large businesses target large markets and use economies of scale to drive down costs.

    If you are interested in raising money from venture capitalists (VCs), one of the first points you have to sell the VC on is the size of your target market.

    VCs are only interested in companies with large target markets. If you have the best widget but can only sell three of them, a VC will not be interested.

    One way to address this is to use what is known as Bowling Alley Marketing by segmenting the market. You look at the total potential market as 10 pins in a bowling alley. Each pin represents a potential vertical market segment.

    Rather than go after all the pins at once, you identify the first vertical market that offers the best opportunity to succeed and make it the head pin. You then target that market exclusively.

    Once you dominate that market, you use your momentum from that success to knock down the next row of pins (or vertical markets). You continue this pattern until you have all the pins knocked down.

    2. In general, markets that are inefficient, underserved or are growing provide the best opportunities. You need to research your markets, review the competitive landscape, regulatory environment and new technologies, and try to understand how they will impact the industry and create opportunities. Remember, change creates opportunities.

    Important factors are elasticity of demand and competition. Ideally you would like the demand for your product to be very inelastic so that businesses have to have your product to be in business. Completion is key to determining the price customers will pay for your offering.

    You also need to pursue markets that you know and you can sell value to. This becomes even more important during an economic downturn.

    Businesses are struggling to survive, so you need to be able to provide solutions with real value that lower costs, reduce expenses or increase revenues. The sale becomes less about personality and style and more about ROI.

    There are a lot of vertical opportunities in this industry, depending on your business. From a vendor's perspective, I believe PC-based POS, mobile, medical, government, debit, gift/loyalty, home-based business and alternative payments are all growing.

    3. We targeted the PC POS vertical. We have a new product called a Virtual Electronic Cash Register (vECR). It provides similar functionality to a physical cash register plus payment terminal, but via software offered as a hosted service.

    Our research indicates there is a large gap between a traditional cash register plus payment terminal and a standard PC POS system. Our vECR fills that gap.

    We are focused on providing a high-value system that provides basic POS functionality with low monthly fees that is easy to install, set up and use.

    It takes advantage of new software technology in conjunction with a hosted software service to accomplish this in a way you could never do with traditional, fat-client software.

    We would like to expand our concept to other verticals - such as fast food/restaurants, health care and franchise businesses - over time, but we need to stay focused at this stage of our business.

    If you try to do too many things at once, you end up doing none of them well (remember the bowling alley). We also need to do more market research before we decide how and what markets we want to explore before moving forward.

    I've had many successes as well as some failures. There is a saying that if you meet someone who has never failed, then they have not reached their full potential. You try to do everything that you can to minimize your failures. You need to have more successes than failures to stay in business. You can fail for many reasons, such as not knowing the markets as well as you think you do. For example, not understanding the competitive landscape can result in a new competitor bringing out new products at prices you were not expecting.

    Another common reason is running out of money before your business takes off. Everything takes longer than you think it will, so you need to make sure you have sufficient money (your runway).

    You need to learn from your failures so you don't repeat the same mistakes. Remember, it is possible to fail for reasons outside your control, so you can't take failure too personally. It is what you do with that failure that is important.

    4. What markets to pursue depends a lot on the knowledge and skills of you and your team. Go after opportunities you know and have the domain knowledge to support.

    Research your market, understand your competition, build a competitive advantage and differentiation, and talk to potential customers. Build a cushion into your plan.

    Expect things to go wrong and take longer than you think they will. Have a fall-back plan just in case, so you do not put all your eggs in one basket and thus limit your downside.

    Jeffrey I. Shavitz
    Charge Card Systems

    What is great about our industry is that we, as ISOs and MLSs, have the potential to meet thousands of prospective merchant customers; however, these endless opportunities also create a lack of day-to-day focus.

    This morning, you are selling to a restaurant, in the afternoon working with a gas station, tomorrow a business-to-business merchant, and next week you are planning a technology integration with a start-up, e-commerce company. Just visit www.sec.gov/info/edgar/siccodes.htm, a Web page prepared by the United States Securities & Exchange Commission that lists the Standard Industrial Classification Code List (SIC codes) that illustrates the numerous industry types.

    Although working with a myriad of industries is exciting, there is great validity to developing a specialty or niche within a particular vertical market. Pick one within the SIC code list, or work within an industry that appeals to you - from challenge and profit perspectives.

    For example, Charge Card Systems has many sales partners that have taken ownership of industries (including nonprofits, medical/health care, gas stations, fast food restaurants, automotive and many others).

    Specializing in an industry makes networking and referrals that much easier. Win one nonprofit, and they undoubtedly will know the executive director of many other organizations and nonprofits in the area. Identify and attend a few industry tradeshows and, within days, you will know the key players in the industry.

    In today's marketplace, we believe that there is great opportunity to earn profitable accounts in these niche markets versus just calling on the neighborhood retailer who typically has incredibly competitive pricing.

    With special and reduced rates now for emerging markets and other interchange classifications, salespeople who understand these interchange programs will have a competitive advantage in winning those merchants. Bottom line: Becoming a specialist and having expertise in a niche market will help you exponentially grow your merchant portfolio and increase your earnings going forward.

    J. David Siembieda
    CrossCheck Inc.

    1. One of the pros of focusing on a vertical market is that it gives you an opportunity to specialize and become successful in that particular market. This can open the door to more business from referrals, industry contacts and networking. It can also make good use of time spent researching new opportunities and preparing special, industry-specific programs.

    However, staying with just one or two verticals can lead to tunnel vision, so keep aware of what's going on throughout your business environment, and stay prepared to react if new markets open up.

    2. Look at your existing market base and determine which business segments are the most profitable. Then ask yourself if the merchants within those segments are stable. Do you see a need from those merchants for future products? Is the industry growing and adding new members? If the answer is yes to these questions, there could be great potential in that market.

    Health care is an example of a business segment that is hot right now for payment processing.

    Many physicians' offices are not set up with credit card processing, and almost all could benefit from a back-office conversion service. The market for cosmetic surgery continues to grow and, because much of that work is not covered by insurance billing, streamlined payment processes are in high demand.

    3. For years we've had tremendous success with the auto industry and new car dealerships. That's changed a bit, though surprisingly a lot of our new business is still from dealers. Recently we've seen a lot of growth from auto repair, and we've been able to leverage our experience with auto and auto aftermarket to extend this market.

    Being able to offer services such as back-office conversion and recovery has helped us break into the medical market, and we see a huge future in this.

    4. Gaining referral business is one of the most effective ways of getting business in a vertical market.

    Your reputation as a service provider who understands the needs of the market can open the door to new contacts, so make sure you educate yourself on the industry; know the language, the rules and the protocol.

    Conversely, a sloppy reputation can get around a market just as fast, so always provide top-notch service, and go the extra mile for all, even the smaller accounts within the market. Those small accounts can grow to big ones.

end of article

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