In our recent eGuide, The Power of Verticals we highlighted the growing importance of vertical specialisation as a way to differentiate and protect margins. The IT channel is at the forefront of this trend. Over half of MSPs now specialise their services for specific industries, with healthcare, finance and legal being the most popular.(1) In this article we look at what is driving this shift and why it’s essential that vendors get aligned.
The vertical route to higher margins
In an environment of intense competition, squeezed budgets and technology commoditisation, it can be difficult for channel businesses to protect margins and build a robust and sustainable business model.
Verticalisation is an increasingly popular way for channel partners to differentiate themselves. By building and demonstrating expertise in a particular industry, resellers and MSPs can stand out from the competition and create stronger and more valuable customer relationships.
Recent research has shown that MSPs with a vertical focus earn better margins than those with a more generic approach. 42% of MSPs targeting specific verticals earn over 20% net margin compared to 32% of generalist MSPs. The verticals most associated with higher profitability are legal - with 43% of legal-vertical MSPs reporting profits of 20% or more - followed by government (40%), finance (39%), and professional services (38%).(2)
To find out more about the different degrees of verticalisation and the investment required for each one, read our blog How Vertical Should You Be?.
According to Deloitte, the preferences, behaviours, and expectations of B2B customers are changing rapidly, and in response the way vendors sell needs to evolve. The traditional focus on products shifted first of all to a focus on solutions and is now moving towards a focus on end-to-end experiences, which need to be personalised, frictionless and outcome-based.(3)
Where can you get the insights you need?
To engage buyers and persuade them that you can help fix their business challenges, you need to demonstrate that you’re an expert in their field. That means having an in-depth understanding of their sector-specific issues. So you need to decide upfront where you’re going to get that understanding from.
You should consider a range of sources, including subject matter experts, sales teams and even reaching out to your existing customers.
The rise of vertical specialism in the channel is one consequence of this demand for a more personalised approach. It enables providers to delve deeper into their customers’ drivers and business needs; and develop solutions which are tailored to those specific requirements. By ensuring solutions fit with the organisational and IT characteristics typically found in that industry, adoption is more straightforward for the customer.
In the past, most customers would have to make do with “off-the-shelf” generic (horizontal) products, with a few customizations if they could afford it. However, flexible technology platforms, often in the cloud, have enabled a plethora of specialist software to be developed to address niche requirements in a more cost-effective way. Software review aggregator G2 listed over 34,000 SaaS products across 745 vertical SaaS categories in 2018.(4)
With so many more niche applications available, channel businesses have an opportunity to serve as curators to their customers, building highly-targeted service offerings to meet specific industry needs.
A natural channel fit
Many channel businesses are well-suited to a vertically-focused go-to-market approach. They’ve often grown their business initially through word-of-mouth or their own personal networks, which has resulted in clusters of customers in the same sector. As a result, they build up expertise in addressing specific industry challenges, which they can leverage to win more customers in that space.
Therefore, building vertical propositions and campaigns is a logical development for many resellers and MSPs, as it enables them to maximise the value of the expertise, the case studies and the relationships that they already have. Given that the majority (59%) of MSPs have less than 100 clients, focusing go-to-market activities on a limited number of sectors where they are already strong offers a surer path to profitable growth than a broad, scattergun approach.(5)
Help needed to execute
Although channel partners may have some natural advantages when it comes to executing a vertical strategy, they also have challenges to overcome. They need insights into the broader market trends and drivers, they need to translate their technical expertise into compelling business stories, they need to align their vertical propositions with the offerings of their vendors, and they need to build effective digital marketing campaigns. And they need to do all of this with limited resource and budget.
Globally, 44% of MSPs report marketing and sales to be their leading pain points. Why? Because they often lack in-house resources and expertise, particularly in areas such as content development and inbound, digital marketing.(6) 46% of MSPs spend less than 2% of annual revenue on marketing activities(7), and most activity is based around networking.
Get aligned to get ahead
This is where vendors have an opportunity to add significant value, and in so doing build stronger, more collaborative relationships with their channel partners. A vendor that supports its partners’ vertical ambitions with sector-specific insights, propositions, campaigns and enablement tools is likely to see much higher levels of engagement and loyalty.
If vendor and partner are aligned on a vertical approach then the vendor is more likely to find their campaigns adopted and their solutions included in proposals. They become the ‘go to’ vendor for the partner in that sector.
Conversely, vendors that don’t offer any level of vertical go-to-market support can find it difficult to build strong channel engagement. They put the onus on the channel partner to adapt generic messages and tools to meet customers’ needs, creating additional ‘friction’ into the relationship and ultimately pushing up the partner’s costs of doing business. A resource-constrained partner is likely to follow the path of least resistance when selecting between two vendors, irrespective of the technical merits of the competing solutions.
Benefits of an aligned value chain
Aligned thinking between vendors and partners and coordinated investment in vertical initiatives can benefit the whole value chain:
- More efficient and effective channel engagement, strengthening partner loyalty.
- Improved ability to respond to evolving market needs and take advantage of growth opportunities.
- Increased awareness and demand based on industry-specific use cases
- Channel partners:
- Lower go-to-market costs and less reliance on internal resource
- Improved ability to respond to specific customer demands with an industry-relevant solution
- Better ROI on go-to-market activity by leveraging high-quality, insight-led, vertical content
- End customers:
Verticalisation of the value chain takes B2B tech further along the route towards personalisation, but there is more to come.
The next level is likely to be more multi-vendor solution co-creation to deliver more precisely targeted vertical solutions. Vertical ecosystems and marketplaces are also springing up in increasing numbers. We’ll be looking more at these areas in subsequent blogs.
However the model evolves, it is clear that vendors and channel partners need to work more closely together to deliver more personalised, tailored solutions for customers – and verticalisation is an important step on this journey.
Download our eGuide The Power of Verticals, to see our eight guiding principles for planning and implementing successful vertical GTM programmes.
- Datto 2019 State of MSP report
- IT Glue 2020 Global MSP Benchmark Report
- Deloitte Digital, Experience Selling: The Future of B2B Sales Five Steps to Transform and Deliver the Right B2B Experience (November 2019)
- Datto 2019 State of MSP report
- Datto 2019 State of the MSP Report
- MSP501 2019 survey and report