Should your startup sell horizontally or vertically?

The promise of a technology or idea often seems huge and broadly applicable… horizontal. When done right, horizontal plays can drive huge success for entrepreneurs and investors and span from apps (ex. Dropbox) to deep backend infrastructure (ex. Oracle).

This is why founders ask me regularly whether their company should sell horizontally or pick a vertical. Turns out the answer has very little to do with the technology or product. Here is one way to decide in basic Boolean logic. Explanation after the chart:

Boolean logic to decide if your startup should go horizontal or vertical

Chart

Having a broadly applicable technology and productization are only table stakes (in blue) to a horizontal play. The decision is dominated by go-to-market considerations (in green) from pricing, to sales model to post-sales setup.

Pricing power equity is needed across industries to avoid pricing conflict (“why did the manufacturing guy get it for a lower price? That’s not fair”) or leaving too much on the table in higher-willingness-to-pay industries that may take longer to sell.

WORK AROUND – separate brands: Use separate branding and/or slight reskinning of the product to make it seem different to different segments/industries. This trick is used relentlessly in hardware (how different are the innards of a Volkswagen and an Audi?). It works in software too.  SAP does this with its “SAP for [fill in the blank]” industry sub-branding. The challenge as a startup is that with limited resources and time, it is hard to maintain multiple brands and even slight variations in products.

A self-service sales model is the strongest sign that a horizontal play is afoot

In self-service sales, marketing efforts drive prospects through an automated funnel conversion process (whether to freemium/premium or paid). This is a great fit for horizontal plays because any requisite industry message customization is highly scalable. With a small number of industry focused marketing campaigns, landing pages and “use case” materials, you open up your market to many or even any industry. Box.com does this brilliantly. Their landing pages make you feel like Box was made just for healthcare, government, manufacturing, etc. Same exact product and pricing.

Things get complicated when your sales model is people driven via inside or outside sales. Any needed industry message customization is not scalable but specific to the people you hire and their industry expertise and comfort. There are several flags to watch for:

  • Educative sale or consultative sale: If the sale requires the sales person to educate or “consult” to the customer (eg, play the role of industry expert), it is difficult to be horizontal and target more than a few industries
  • Post sale implementation: Products and services with significant post sale implementation drive verticalization because implementation and customization are often industry specific
  • Service layer: If there is a service layer sold with the product or software, it often requires personnel to have industry expertise, driving verticalization

You’ll notice that all of the above are present in most enterprise sales, making enterprise sales models difficult for horizontal plays.

WORK AROUND – the integrator: These complications can be managed and a horizontal model maintained by outsourcing expertise to an “integrator” ecosystem around you, much as Salesforce, SAP, ExactTarget and Oracle did.  Of course, it’s easy to get integrators and consultants interested in your “ecosystem” when you’re a $1B+ company. Harder when you’re a startup. You may have to cut some nice deals to do it.

In making a horizontal/vertical decision there are a few other litmus tests you can consider too:

  • Do the buyers/users tend to be very industry specific or do they move across industries? Let’s say you sell into the sales function. Do the sales people and leadership come from multiple industries? If your buyer is horizontal, likely you can be too.
  • To make a great product, do you need to integrate with industry specific services and APIs? If yes, you are probably a vertical play!

Don’t worry, vertical plays can be wildly successful too, though it is true that most SaaS unicorns are horizontal (Salesforce, Workday, etc).

5 thoughts on “Should your startup sell horizontally or vertically?

  1. Great post. I relate to the VW/Audi example. I owned and ran a small e-commerce business where we leveraged the SEO in a consumer-facing website to build a second site selling to OEMs.

    The product – a float switch – was being used primarily by aquarium hobbyists, but had wide application as a component in many devices and products like refrigeration and HVAC. We built two new websites – one that had a consumer feel and a brand name that was more “fun” and another that showed industrial applications, had an industrial-sounding name and appealed more to engineers working on product development. The basic products were the same and we even used the same shopping cart for online purchases.

    Although selling to OEMs seemed like a better business (and was in the end), we maintained the consumer element because it had built-in SEO advantages that kept both of our sites high in search engine rankings for the key search terms. It also wasn’t a bad thing to have a consumer-oriented business when the recession came, since it acted as a hedge against the inevitable slow-down in OEM sales.

    Although my experience was with a physical product, I think the same concepts apply to software, e.g. the box.com example.

    1. Hi Patrick, I love that example. Thank you.

      I’ve gotten some pushback that the “workarounds” I mentioned aren’t feasible for startups. Great to see such a specific example where they are!

  2. Hi Guy,

    I appreciate the effort you put into this post, but it feels like you took an awful lot of trouble to say some rather simple points:

    1: If people from different industries are willing to buy your product without too much hand-holding, you should sell to all of them.

    2: If your product requires industry-specific guidance, integration, etc, you should probably focus on one industry rather than spread yourself too thin.

    The examples you use throughout your post- Box, Salesforce, Oracle, SAP, ExactTarget) are not startups. They’re huge companies. A startup cannot be simultaneously Volkswagen and Audi.

    The workarounds you recommend- separate brands and ‘integrators’- aren’t feasible for startups. They require immense resources which startups do not have. “You may have to cut some nice deals to do it”- has any startup ever done this?

    Would love to hear your thoughts.

    Cheers and love,
    Visa

    1. Hi Visa,

      I like your synopsis. It captures most of the message.

      That said, there is value in understanding in more detail the different forks in the road of the decision (pricing parity, sales model, product and post sales factors) – hence the more detailed post.

      Workarounds: Yes, the examples are big companies, but many of those tricks are achievable at much smaller scale. It’s easy for self-service startups to have say ten industry specific landing pages. This should be par for the course for any horizontal software play’s SEO strategy. Step number 1 for a “growth hacker” hire.

      Re integrators, startups can building relationships with smaller integrators – I don’t mean Accenture – by sending them leads and not charging them (a good deal). Who doesn’t want new business? These relationships can build over time. One of our companies that sells into government does this.

      And startups cut good deals all the time with bigger players for distribution just to get in the market….

      Thanks for the thoughts! Keep them coming.

      GT

Leave a comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s