10 Ways a Professional Service Firm Can Determine the Correct Industry Segments for Them

Magnifying glass over target market segment

Boutique professional services firms are resource-constrained, with only so many dollars, hours, and employees available to pursue growth. This makes it mission-critical to point these resources at an industry segment that gives the boutique the greatest opportunity to scale.

When a founder pursues a broad, poorly segmented market, they spread their resources thin and never become the leader of their niche. And a founder who segments a market narrowly limits their opportunity and, therefore, evolves into an insignificant lifestyle firm. Yet, proper segmentation is difficult to achieve, especially since many boutique founders have not been trained on how to do it properly.

In this article, I present 10 ways to segment a boutique professional service market. By using these 10 items as a guide, you will put your boat in the most opportunistic waters. Also, listen here to learn more about selecting your target market.

How to Build Your Industry Segment for Firm Growth

The best way to segment a pro serv market is to group clients together based on their common wants, needs, and desires, which are as follows:

1. Size.

Should you serve large, medium, or small clients? Large clients, such as the S&P 500 large-cap companies, have very specific requirements that service providers must meet. For example, MSAs, NDAs, information security standards, exclusivity, etc. Medium clients, such as the S&P 400 mid-cap companies, have different needs than large clients. For example, they often compete with the S&P 500 and want similar capabilities but cannot afford them. They often hire challenger brands and buy on price. And small clients, such as the S&P 600 small caps, are less mature and need easier-to-implement solutions.

2. Price level.

Price levels can be categorized generally into three categories: luxury, premium, and value. A luxury provider has a very small number of clients but each client has a high spend. For example, Rolls Royce delivered only 6,021 cars in 2022, but the average price was $497,670. A premium provider has a modest number of clients, and each client pays a modest premium for differentiation (~20%). For example, Lexus delivered roughly 800,000 cars in 2022 with an average price of about $80,000. A value provider has loads of clients, and each client spends little. For example, Toyota delivered 10.5 million cars in 2022 at an average price of $25,000. And as you can imagine, the wants, needs, and desires of these different customers are very different.

3. Features.

Different clients want different features of a service. For example, Emirates Airlines offers seven different types of seats to its customers. Economy class offers a regular seat, a preferred seat, a twin seat, and a seat with extra legroom. And they offer a seat in first class, business class, and a seat called premium economy. Each seat has different features. And by tailoring their features to different types of customers, they can meet the customers’ needs.

4. Technology.

Our economy is in the midst of a digital transformation. Software and cloud services are altering the competitive landscape in every sector. Segmenting a market based on what tech clients use is a consideration. For example, a content marketing agency would be wise to segment its market by HubSpot users, Salesforce users, etc. The tech in place can drive client requirements.

5. Raw materials.

The raw material in professional services is talent. Firms hire talent, train them on how to deliver the service, and deliver them to the client as a finished product. This is the talent supply chain. A boutique service firm can segment its market based on access to raw materials, or talent pools. For example, if an IT service provider can afford top-dollar salaries, they will have access to the finest software engineers in the world. And they should target the S&P 500 large-cap space because those are the firms that require this type of raw material.

6. Packaging.

Why does someone pay $5,000 for a Louis Vuitton bag when they can pay $500 for a Kate Spade bag? Packaging. Some clients make purchase decisions based on emotion, on how the purchase makes them feel. This is why some lawyers get $10,000/hr. When facing jail time, a well-heeled client will pay what it takes to remain free.

7. Performance.

There is a segment in every industry of clients who will only pay for performance. For example, hurt in an auto accident? Hire a personal injury attorney which will cost you nothing unless they win your case. If/when they win, they will take 40% of the settlement. If you are the best at what you do and make your clients a ton of money because of it, only pursue the industry segment containing clients who want to bet on the outcome.

8. New vs. replacement buyers.

Some clients have never bought the type of service that you provide. These clients are under-informed and will need lots of education on what should be in and out of scope, budget, timeline, milestones, etc. Yet, some clients will have a supplier on retainer and be looking to replace them. This type of client knows exactly what they are looking for. Apples and oranges. Decide if the industry segment you want to work with contains new buyers or replacement buyers and tailor your approach to their needs.

9. Whole solution vs. point solution.

Certain prospects want to deal with a provider who can handle the service end to end. They require a whole solution. In contrast, a different set of prospects wants to buy point solutions and piece together the end-to-end solution using a best-of-breed approach. As you can imagine, the wants, needs, and desires are very different for each. You can offer a whole solution and a point solution, but if you do, you need to master both separately to meet the needs of both types of clients.

10. Bundle vs. unbundle.

There are prospects who want to bite off big projects all at once. They want the entire bundle day one. Other clients are more risk-averse and prefer to buy in bite-sized pieces. They want to see the entire project but will only commit to one sprint at a time. Both bundle and piecemeal clients will require very different sales techniques to meet their needs and enable a sale.

As you’re considering these 10 different viewpoints, remember that the industry segments available to you are not just based on your current clients. If you’re looking to grow your firm into a new market, your industry segment should fit and address the needs of the realistic client that you will be targeting in this new market.

If you want to read more about the types of markets before you branch out, read our blogs about emerging, mature, and declining markets.

Running a lifestyle business can lull a Founder to sleep. The days, weeks, months, and years pass by as you are “doing just fine”. Then, one day, you are in your mid-50s, and realize you cannot retire, and after all these years, you don’t have much to show for your life’s work. What then? On this episode, Tad McIntosh, President at HumCap, shares how after 20+ years he is trying to convert a lifestyle business into something he can scale, and sell, someday.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Surf podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely on the needs of leaders of thriving boutique serve firms. My name is Greg Alexander. I’m the founder and I’ll be your host today. And on this episode, I’m going to talk to you about becoming self-aware enough to realize that you’re running a lifestyle business and more importantly, mustering up the courage to attempt to convert it into something more than a lifestyle business. And we’ve got a great collective 54 role model with us today. His name is Ted McIntosh, and he runs a very successful firm called Hubcap. He’s been at it for 20 years, which is rather remarkable because most lifestyle businesses start and end in five years. So he’s lasted four times longer than typical, but recently he’s decided to try to make it more than a lifestyle business. So he’s a fantastic example of what it is that we’re going to talk about today. So, Ted, it’s great to see you. Thanks for being here. And please introduce yourself.

Tad McIntosh [00:01:32] Thanks, Greg. My name is Tad McIntosh and I’m the founder of Humm. Our mission is to solve companies human capital problems in recruiting and human resources with excellence. And I’m a glad to be a member of Collective 54. And I’ve been learning. Learning a lot.

Greg Alexander [00:01:53] Okay. And as I mentioned, you’ve been around, I think it was 22 years.

Tad McIntosh [00:01:58] It’s I. Yeah. So we started that’s about right at 22. We started in the fall of 2001. Yeah.

Greg Alexander [00:02:06] That’s almost 22 years. Yeah.

Tad McIntosh [00:02:08] It seems like yesterday, but Yeah.

Greg Alexander [00:02:12] So I’d love for you. Maybe just to start at 30,000 feet. And as you explained to me, you realized that you were running a lifestyle business a little while back and you’ve developed ambition and aspirations to do more than that. So what caused you, after all these years of running a successful business, to want to make a change?

Tad McIntosh [00:02:31] Well, part of it. We are determined to deliver excellence and value to our customers for a long time, and that’s a good thing. So the customers and the community derives value, but in some ways I just forget about the pain that it is to give them that value for a long time. And some say a glutton for punishment and maybe a little bit of upbringing and then going to West Point for what? What should have been college. And then being an Army officer, you kind of you’re taught to be tough. Be tough, be tough. And finally, I’m like, well, maybe I maybe I shouldn’t be this tough and maybe this maybe this should be easier than what I’ve made it or allowed it to become. Might be the best way to put it. I have a lot of become difficult through some level of behaviors and some levels of lack of knowledge.

Greg Alexander [00:03:28] When you say lack of knowledge, what do you mean? So this was your first entrepreneurial journey and you were learning as you go?

Tad McIntosh [00:03:34] Absolutely. So I am a first time entrepreneur and and I’ve learned a lot about how to run a better company. But until I have been a part of collectivity for some of those things we lack, I have been what have been holding us behind for scale. So sometimes it’s like seeing it. Yeah, finally seeing it through a different lens. Is there certain attributes of what we’ve done that has helped us keep in business and deliver value, but have also kept us from scaling? Because in some ways we’re doing too much and to wider? Yeah, you know, wider markets and others not too much. Maybe not a niche enough. As you said, the riches are in the niches. Maybe I’m in too many niches or too wide a niche. Yeah.

Greg Alexander [00:04:19] Okay. So Ted is graciously allowed to participate in an exercise with me today, and we’re going to use a tool that we have a collective 54 called the Tolerance Level Checklist. And this checklist is meant to gauge your level of tolerance and settling for a lifestyle business or maybe an intolerance for that and wanting to scale and remove the bottlenecks and, you know, develop a much larger business. It’s ten questions we’re not going to ask all ten. We don’t have time for that. You write each question on a scale of 1 to 4, one is acceptable. Two is somewhat acceptable. Three is somewhat unacceptable and four is unacceptable. And I’m going to ask Ted some questions. I’m going to ask him to rate it and then tell us a little bit more about why he rated it, what he did. So the first question I’m going to ask and this is one that’s going to be near and dear to everybody’s heart, is the question or the statement is I, I spend time on things I do not enjoy doing. So, Ted, how would you rate yourself on that?

Tad McIntosh [00:05:31] I would rate it somewhat unacceptable because there are things that are, you know, second nature to me now that can be more easily done by other people. And in some ways it’s unacceptable because either the lack of having those people or enough team around me to do those things and it just gets boring. You’re doing the same something you learned 12 years ago type of thing. Yep.

Greg Alexander [00:06:00] And this is very typical. So, you know, when you start your firm, you’re in those early years and basically you do everything and it’s not. It’s not. Intolerable at that point because it’s still new then. And then you wake up and this example 12 years later and you say Jesus is boring because you’ve been doing the same thing over and over again. And one of the things that’s required to move out of a lifestyle business into a scale firm is to build a team, delegate those things to the team, and then elevate yourself yourself up the value stack and keep your own intellectual stimulation alive by taking on new kind of pioneering work. Okay, so that was number two. Let me move to question number three, which is I rarely feel a sense of making meaningful progress on scaling my boutique. How would you rate yourself on that one?

Tad McIntosh [00:06:46] And I’d say I’m somewhat acceptable there because the beginning of scaling our boutique is having a team around me, and I feel, you know better than I have in a long time about the team around me. And I’m finally knowledgeable that I have a big enough team in the different parts of our businesses, and I have a better viewpoint on investing back in the business on sales and marketing, which happened to be one of my strengths and in what entrepreneurial it feels like I’m overinvesting, but I’m actually based on what I’ve learned through the collective. I’m not overinvesting. I might still be under-investing. Yeah.

Greg Alexander [00:07:25] So and that’s a great example for you because sales and marketing comes naturally to you’re really good at it. So you keep doing it, doing it, doing it, and you’re the sole right rainmaker in the organization, but there’s only one of you. So until you hire other rainmakers and build a rainmaking department, a sales and marketing department, the firm’s only going to get so big because as one salesperson, as opposed to five salespeople. And that takes a tremendous amount of self-awareness and courage to delegate something you enjoy doing and staying out of it, teaching others to do it and letting them do it. So that’s a great example. So I’m glad you make a progress on that. Congratulations.

Tad McIntosh [00:08:00] And so it’s a work in progress, but we’re we’re on the road to success.

Greg Alexander [00:08:04] That’s right. Yeah. I mean, this one’s one step at a time, right? And let’s go to question four. So I do not make enough money relative to my personal workload. How would you rate yourself on that one?

Tad McIntosh [00:08:18] I think it’s unacceptable.

Greg Alexander [00:08:19] Okay.

Tad McIntosh [00:08:20] It’s partially because of how long I’ve been in the business and partially based on. It’s you know, you didn’t ask question one, but I was definitely unacceptably overscheduled. Right. And so that’s kind of part of the things I’ve got to help other people do those things that can be done by other people.

Greg Alexander [00:08:42] And yeah.

Tad McIntosh [00:08:45] Then I’ll make more money. Honestly, because other people are doing things they can do and I’m not doing things that other people can do without me.

Greg Alexander [00:08:55] So for the listeners, there’s a concept called opportunity costs. I’m sure you’re probably aware of that, but in the context of what we do. Being an entrepreneur is hard. Being a founder of a boutique processor firm is hard, scaling. It is even harder, and you have to measure your effort and reward in relation to what your alternative path may been. So, for example, it probably would have been easier for Ted to stay in the military and he could have had a career for years and years and years and rose up the ranks. And that would have had a certain profile, a certain level of effort, you know, typically measured in hours per week and a certain financial reward, which would have been, you know, an annual salary benefits and a retirement plan. And you measure that effort slash compensation package of that journey versus the journey that he’s on. And if there’s a gap there, that’s the opportunity cost. And the problem with opportunity cost, the delta between what you’re doing today and what the alternative path would have been is that it compounds over a number of years. So as we suggested, you know, Ted’s been at this 20 years plus. So if there is an opportunity gap and opportunity cost excuse me, it’s whatever that gap is times 20 and the numbers add up. So you constantly have to make sure that. You know, the juice is worth the squeeze. They say the squeeze is worth the juice. I think I got it the other way around. Is that your workload, your personal workload is proportional to the reward, the compensation that you’re making. And there’s really only two levers to pull there. One is work less and make the same amount, and you can have a hell of a lifestyle doing that or work more. But if you work more, you’ve got to make a lot more to justify the level of effort. Those two things need to be in proportion, and when they’re not is when you know somebody who’s happily running a lifestyle business wakes up one day wanting to retire again and they say, What happened? And then they realize they can’t work into the graveyard. You know, they don’t want to work 60 hours a week when they’re 70. And and the problem is, if you wait too long to get to that point, you just can’t flick a switch. It takes a while to build teams, delegate work, build repeatable processes, etc. So that’s a really important question. I’m glad we had a chance to to discuss that, which is a logical lead into question number six or statement. Statement number six, forgive me, I’m not able to retire at this time if I wanted to. Now, Ted, I know you’re not looking to retire tomorrow, but if you wanted to retire tomorrow, could you?

Tad McIntosh [00:11:25] That’s not comfortable, you know? Yeah. And it’s not that I can’t retire in the next, you know, if you will, about five, seven years based on a combination of age and savings. I’ve done well on investing. But the difference is, if you said to me, okay, you’re. And I’m 56. Yeah, I’m all set, this will mess with you. I’m a 56. I’m still 56. All right. So. But he said, oh, at 56, 61, do early retirement. Could you live comfortably today on what I’ve built up? And the answer? No. I still need income from the business. Yeah.

Greg Alexander [00:12:01] So now the good news is, as 56 is, you know. Not retirement age. So you still have time to do that And based on your plans that you share with me, I’m confident you’re going to get there. But, you know, we all want the option. So, I mean, 56 is not 26. So, God forbid. You know, I don’t know, ten at health scare or something like that. If you wanted to be able to retire or if he had to retire, he could. And you want to build your firm in such a way that that’s the case. You know, when you’re a founder of a services business, of people driven business and it’s a small one, you have a tremendous amount of risk. You have all of your net worth tied up in an illiquid, small firm. A couple of things don’t go your way and you really feel it. So the reason or one of the reasons to scale beyond a lifestyle businesses to de-risk your life, you know, a bigger firm can withstand more. I don’t know. You lose a key employee. Okay. It stinks for a period of time, but you’re not in big trouble. You lose a couple of clients. Yeah, it’s not pleasant, but, you know, you can still pay the rent, that kind of thing. When you’re a smaller. The lifestyle business is way too risky. So that’s one of the reasons why we make the statement and we ask members like Ted to rate themselves. Okay, let me hit you with maybe one more and then we can summarize what we’ve learned today. So step number eight. I have not built a firm that could be sold today. How would you rate yourself on that?

Tad McIntosh [00:13:29] It’s unacceptable as well. You know, and partially, again, to the markets we serve and how we sell them. Not having enough concentration. What I’d call in deeper, deeper, more repeatable niches of service offerings. And partially due to senior employee in my concentration of knowledge of the firm. So a lot of that succession and I would even phrase it differently. It’s unacceptable that I don’t think there’s a succession not far enough in place that if something really bad happen tomorrow, it wouldn’t be a big deal. Yeah, right. And I’d say that. So it’s about being sold as really being able to say how how much am I needed? Yeah, exactly. How much of my top 10% of leadership needed. If, if something happened, God forbid, then it’d be. It will be good. And that’s my what I’m really resolved to is build a firm that can have succession, successful succession, you know, without without me. And then that is a firm that it’s almost like you build a firm ready for succession and then it can be sold. Yeah, but if you don’t, it’s, you know, top heavy is the way I would tend to phrase it.

Greg Alexander [00:14:52] Yeah. Listen, small, small services firms are risky. And the reason why they’re risky for investors or potential acquirers, which is what we’re talking about here with this statement, is the founder in the firm are one and the same. If the founder goes away, there’s no firm that’s called key employee risk. And what that is talking about is succession. In other words, being able to get other people in the firm to do what he does as well as he does it so the firm can run without him. If he was if he chose not to be part of it in the future. And when you’re able to do that, then if you wanted to sell the firm someday again, it would be your option. You actually have an asset that’s sellable because you in the firm are two separate entities. A purchaser of your business would do so because the business would not be dependent on you. And that’s what that question in the tolerance level checklist is meant to surface. So, listen, you know, they say that 50% of solving a problem is recognizing that you have one. I think, boy, I would be bold enough to say the majority, greater than 50% of our members in collective 54 is struggling with this. And the reason why I wanted to come on the call today is because he’s confident enough and comfortable enough in his own skin to be vulnerable and go through this exercise and and, you know, demonstrate that he’s working on some of these things, but he doesn’t have the code cracked, so to speak, because others don’t as well. So, Ted, a great example of leading from the front of being a real role model. I’m really looking forward to the Friday member Q&A session and I’m hoping that others will open up as well as you did here today. So on behalf of all the members, thank you so much for being on the show.

Tad McIntosh [00:16:34] Now. Happy to do it. Happy. Thanks for what you’re doing, Greg.

Greg Alexander [00:16:38] Okay, great. All right. So let me give everybody a couple of calls to action. So if you’re a member, make sure you attend today’s Friday Q&A session and we get in a meeting and vote on that. If you want to put yourself through the tolerance level checklist, that’s all can be located on page 51 of the new book, The Founder Bottleneck How to Sell Yourself If You’re Not a Member. And after listening to this, you might want to become one. Go to collective 54 dot com and fill out the contact contact us form and one of our representatives will reach out to you and talk to you about it. If you’re not quite ready to be a member, but you want to educate yourself some more, subscribe to Collective 50 for insights and again, you can find that on the website. You’ll get three things every week Monday, a blog, Wednesday, a podcast, and Friday a chart. And hopefully that will be valuable to you. So for all out there in the world of podcasting, thanks for listening and we’ll see you on the next show.

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Day: April 24, 2023