|By Jack Newton||
|November 24, 2014 05:15 PM EST||
Case Study: The Big Benefits of Thinking Small
It had always been a dream to start a company with my childhood best friend, Rian Gauvreau, but we hadn't been able to truly find a business model that worked for us. In 2007, cloud computing was just beginning to make waves, and while many recognized the opportunities that the cloud presented for business, most were quick to go for the "one size fits all" model seen in traditional enterprise technology solutions.
That same year, we began to see a need for a platform within the legal industry that could increase efficiency, saving lawyers both time and money.
When we founded Clio, a cloud-based practice management solution for lawyers, many were quick to question our move to build a product for such a niche customer base. Why go for one specific audience, when the numbers were so much greater if you created a tool for all kinds of businesses?
While at the time, we recognized we were taking a risk, we also saw the potential in targeting a specific audience with a cloud-based solution. In the seven years since we launched our SaaS platform for law firms, building a vertical product has proven to be a winning strategy; here are four reasons why:
1. Lower Customer Acquisition Rates and Higher Market Share
Vertically focused SaaS companies are able to capture disproportionately large shares of their markets as a side-effect of the "winner-takes-most" dynamics seen in horizontal markets.
A number of leading companies serve as examples of the clear advantage of targeting a highly specialized audience. In the wellness industry, MINDBODY has penetrated over one third of the yoga studio market with its practice management software; and in the global life sciences sphere, Veeva Systems, has achieved one third market share since launching in 2007.
To further compound that advantage, customer acquisition costs have proven to be lower for vertically focused SaaScompanies. Gordon Ritter of Emergence Capital says his portfolio companies have seen customer acquisition costs reduced as much as 75 percent for vertical products. A main factor in reducing acquisition costs and driving high growth for these vertical cloud solutions is the ability to offer specialized, compelling marketing campaigns - a luxury that horizontal products don't have.
When Clio first launched in 2007, the legal industry turned to a small handful of technology writers and bloggers for advice and technology news. Early coverage from this group of influencers earned us instant mindshare and credibility, as well as a raft of new customers. Such dramatic market ownership would be much less likely when competing for market share across the board.
2. Increased Trust = Increased Lifetime Value
Nearly a decade ago, Kathy Sierra urged marketers to "Quit telling us how great you are, and start telling us how you plan to deliver something that helps the user become greater". This advice still rings true today. Focusing on one type of user allowed us to deliver a product that truly improved the life of our customers.
Vertical-specific businesses, especially the smaller set, are looking for more than just software - they are seeking out direction on how to run a successful business in today's world. Becoming a trusted resource by leveraging the expertise gained in tailoring your product to a specific industry is invaluable compared to a generic offering. You can build out this expertise with added offerings such as industry data, monthly webinars, and customer conferences.
Once you've established a deep trust with this market, it's feasible that in the future they would trust you to deliver services that would allow you to grow the lifetime value of your customers.
3. The Myth of the "Small" Niche Market
When we started out, entrepreneurs and venture capitalists associated the phrase "niche market" with smaller opportunities and returns. Today, a range of players have shown that vertical markets hold incredible potential for upward revenue.
For example, in 2012, Mindbody generated $32.5 million of revenue from nearly 18,000 subscribers, and Veeva Systems grew its annual revenue last year by 62% for a total of $210M. With messaging and product offerings that directly resonate with one demographic, these specialized SaaS providers show that niche markets have great opportunity to drive desirable economics.
At Clio, becoming a trusted provider means that we could offer our customer a broader scope of solutions in the future, giving us upward revenue potential that would be impossible in a horizontal market.
4. Horizontal: A Race to the Bottom
Though we couldn't have predicted this when we started, the marketplace for one-size-fits-all SaaS services has essentially become a race to the bottom. That's because price quickly becomes the key differentiator for generic products that are easily targeted by competitors.
In the marketing automation space, Constant Contact, Mailchimp and CampaignMonitor are just a few examples of horizontal players that face a high level of downward pricing pressure to compete on a similar offering. Had these companies focused on developing more specialized marketing products, such as turnkey solutions for independent designers or home improvement professionals, they may have ended up with a wider depth of services at a higher value.
The Road Less Traveled
When it came to one of the most critical early decisions in our company, we took a risk that ended up being our ticket to success.
Building our product around law firms helped us gain product clarity and traction. We also figured that cracking the legal industry nut - one that is difficult to win over in terms of software adoption - would position us to take on other industries in the future.
I've cited law, yoga and life sciences as just a few examples of the successful penetration of vertical SaaS. Over the coming years we will see many more traditional industries transformed by tailored products built by companies that take the time to really understand what they need in an evolving world driven by ever-changing technology.
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