The Vertical Market Gamble

Many VARs believe that they should focus on becoming the best in one market. Bob Hess of Paragon Print Systems feels differently. In fact, the VAR historically has avoided getting pigeonholed into one market. As president, Hess has  made it a priority for his company to avoid becoming dependent on one customer, market, or product. Instead, the VAR focuses on creating bar code printing software solutions for markets that have received little to no attention from other  VARs. Boiled down, Paragon strives to create specific applications for very focused markets. "There might be an industry out there with only 1,000 companies in it, but if you've got a bar code printing product specifically for them, you've got a captive audience," Hess reasons. But is this the right strategy? What is the cost of developing solutions for many different markets? One of Paragon's current niche projects involves a chain-of-custody application designed for law enforcement, drug companies, and government. Based on a solution the VAR created for one of its existing customers, the application provides a digital trail that allows authorities to identify who had ownership of evidence or drug samples at what time. How Paragon has developed the product may provide insight on what it takes to tackle new markets.

Government Decision Makers Vary
Having little experience with law enforcement and government, Paragon first had to determine whether it was targeting local law enforcement or state police. "We started making phone calls asking how the departments make purchases and who the decision makers were," explains Hess. "You can spend a lot of marketing dollars and find out you've been targeting the wrong person or group." When selling to local police, Paragon found most success in targeting the police chief. The VAR first sends marketing collateral along with a cover letter and then follows up with a telephone call. If the department is interested, the sale eventually goes before city council or city government. At this point, the city IT department may get involved to help make assessments of the application.

As you can guess, any time the government is involved, the sales cycle can be lengthy. In fact, Hess explains that the process can take anywhere from six months to one year. "Whatever you're trying to sell to government, it's usually not in the budget for the current year," says Hess. "If you start in September, it might be six months before approval. If you start in January, it might be a year." That's a year from when you have a product to sell.

VARs interested in developing a totally new application for a market they're not completely familiar with should be prepared to invest considerable man-hours prior to the sale. For example, Hess says that it's not unreasonable to devote one full week to take a project from concept to a complete design. From there, programming and testing can take two weeks, and finalizing and packaging can take another two weeks. Of course, these timelines will be different depending on a VAR's capabilities (both time and skill level) and the scope of the project. "There are a lot of people involved in such projects," says Hess. "It would be hard for a two-person company to do this. You need people who can manage projects, do the coding and testing, and market the product." Paragon's chain-of-custody application has at least one month's worth of R&D into it, costing the VAR over $3,000.

Can You Afford To Lose Your Largest Customer?
Only time will tell if Paragon's chain-of-custody gamble was worth it. Still, the VAR has employed this strategy of targeting niche markets successfully over the years. Success has come in the form of sales growth, but also in keeping the VAR in business. In addition to limiting the amount of competition the VAR faces, going after a variety of business in a multitude of markets has another effect. Just as mutual funds typically dilute one's risk of loss by spreading a financial investment across multiple securities, so too does having a portfolio of products for a variety of markets. "I've worked hard to get a diverse customer base," says Hess. "In fact, there's not a single customer we could lose that would affect our business profoundly." In this regard, Hess' business strategy appears to be safer than the traditional 'be the best at one thing' model. Indeed, Hess goes on to explain that if you rely on one market and it bottoms out or someone else gets into it with a better product, then you can find your business in trouble. "Just as you don't want 80% of your business with one customer, you don't want 80% of your business with one market," adds Hess. "It's not always competition. Sometimes a market bottoms out. For instance, suppliers to the building industry have seen 30% lulls in 2007 due to issues with the lending market and other economic factors. If it was the only market we were in, our business would be down 30%, just like the industry."

There are many VARs who think that the way to go is to focus on one market and become the best they can in that market — to be the go-to supplier. As Hess says, "That's a great strategy if you can really be the best." The reality is that there are a lot of VARs coming up with groundbreaking new solutions every day. As Business Solutions proves every month, there are many clever VARs out there. "We look at our competition and are amazed at some of the things they come up with," says Hess. And so Paragon has decided to limit the amount of competition it faces by developing applications for very niche industries. It seems to be working. The VAR has been in the bar code printing business for 14 years and expects to increase revenue by 10% in 2008.

  Click here to check out the installation review on selling to the law enforcement vertical in the
  April 2007 issue.