Vertical Market Specialization by BtoB Vendors

To compete for the highly sought-after enterprise budget, B2B vendors are implementing more sophisticated and narrowly targeted go-to-market strategies. Many such efforts involve some level of industry specialization. The Shirman Group conduced a study of 125 companies to examine how they align resources and go-to-market efforts around target vertical markets or industries. We looked at:

• Drivers and motivation of industry specialization
• The degree of alignment and specialization in sales, marketing, products, alliances, and services.
• Quantitative and qualitative benefits of industry specialization
• The evolution of industry alignment over time.

The companies participating in the study were split almost evenly between those selling primarily products, including financial and telecommunications, (53%), and those selling primarily professional and business services (47%). Product companies represented a broad range of industries, with especially strong representation by business software, hardware, and manufacturing companies. 

Study participants were also well-distributed by level of responsibility. Approximately one quarter each are CEOs and VPs, one fifth are Managers, and one sixth hold Director-level posts.

Motivation of Investment in Industry-Focused Activity

The need to engage senior decision-makers was the most commonly cited motive for aligning activity to target vertical markets. Also important were the presence of industry-specific products, and the desire to increase average deal size. Competitive pressure was an especially significant motivator among larger companies, but played a smaller role for companies with less than $250 million in annual revenue.

Target Industry Concentration

Smaller companies, and those with less than two years of experience in vertical market specialization focus their efforts on one to three industries. Larger companies with over $250M in annual revenue averaged five target industries in which they invested industry-specialized activities or resources. As companies become more experienced with industry specialization, the number of target industries tends to either settle at three, or rise to seven or more.

Plans for Industry Specialization

The level of industry specialization has been increasing among two thirds of study participants, and even more intend to increase the level of industry specialization further in the next two years. Slightly over one quarter indicated they plan to keep the level of industry focus the same. Among product companies, the intent to increase specialization is even higher, with 75% of respondents indicating they indent to invest more in the next two years. Only five percent of study participants indicated they intend to reduce the level of industry specialization.

Functional Specialization

About three quarters of companies that have any level of industry specialization indicated that their Marketing, Sales, Alliance, Service and Product organizations were hybrids of horizontal and vertically-aligned activity or mostly or entirely aligned to industries.

Marketing and sales content were the most common items that study participants produce in industry-specialized form. These are produced by 83% of respondents. The next three most common industry-specialized activities were PR and awareness efforts, lead generation campaigns, and product options or add-ons. Larger companies tend to invest much more heavily in product specialization, while smaller companies focus primarily on
specialization in their go-to-market activities.

Marketing: While over 80% of companies indicated they produce industry-specific sales and marketing content, only half said they follow the marketing talk with action such as PR, awareness, and lead-generation campaigns.

Sales:  Almost one quarter of participants indicated that their sales function was entirely aligned by industry. On average, however, companies align half of their sales reps to their customers’ industries. Larger companies are twice as likely as smaller ones to have industry specialists or other sales overlays that provide domain expertise in deals. Such overlays assist both industry aligned and non-aligned sales reps.

Products: One quarter of participants have industry-specific products. Many more, especially among the larger companies, offer product-related enhancements targeted       at specific markets. These include product add-ons and configurations, integration with other products, and product bundles.

Over three quarters of companies develop industry-specific products and enhancements internally. Larger companies also acquire other companies to increase product-related industry specific capabilities.  Smaller companies are more likely to productize professional service deliverables for create such targeted offerings.

Services: Half of participating companies have services personnel who specialize in an industry. Industry-specialized support, assessment, deployment and implementation services are each offered by just over one quarter of participants.

Alliances: The most valuable types of alliances for study participants were those with system integrators (SIs) and technology vendors. Over 40% of participants said that their industry-focused relationships with SIs are providing notable or significant impact on their industry efforts. Technology partnerships were also highly valued, especially by product companies, who rated the impact of these alliances equal to that of SIs.

Benefits of Specialization

The investment is paying off. Among companies who have focused on target vertical markets for at least two years, 90% report notable or significant impact on leads within target industries and 80% report improved brand awareness. Seventy percent of reported notable or significant impact on revenue after two years of specialization. Even in the first few years of industry-focused activity, approximately half of companies reported notable or significant impact in all three metrics.

Among all the functions, marketing alignment along industry lines has the greatest impact on revenue and lead generation. Sales alignment is also effective in improving these metrics within the target vertical. Services specialization provides a significant boost in industry leads – most likely from enhanced effectiveness and depth of pre-sale customer engagement and improved post-sale success. Leveraging industry alliances had the greatest impact on brand awareness within an industry, significantly more than marketing specialization alone.