Going Vertical: Serving niche can pay big dividends, but it’s not without some risk

When Michigan’s craft beer industry started taking off about 10 years ago, Mark Irwin had an idea: maybe his Antrim County insurance agency could develop a profitable niche insuring breweries, brewpubs and tab rooms.

Irwin created “Protect Craft Beer,” a program that offers businesses in the industry a suite of insurance services, including loss prevention, workers’ compensation and liability coverage.

“It was one of those few occasions when the light bulb went on and I did something about it – and I’m thankful I did,” said Irwin, a principal at Fischer Insurance Agency, which has offices in Bellaire, Elk Rapids and Mancelona.

Today Fischer insures the operations of 34 craft brewers, wineries, distilleries and mead producers in Michigan under the umbrella of Protect Craft Beer. (Mead is an alcoholic beverage made of fermented honey and water.)

“It’s easily 50 percent of the work I do and it’s growing,” Irwin said.

His business is among many embracing specialized niches or “verticals” as a way of growing revenues and profits. It’s an especially attractive business strategy for small and midsized companies that don’t have the resources and marketing budgets to pursue customers in multiple industries.

“It’s a really good approach for young companies that can tailor a product or service to a segment ignored by their competitors,” said Ken Szymusiak, managing director of Michigan State University’s Institute for Entrepreneurship and Innovation. “You usually have limited resources, so finding an ignored segment is a great way to grow your business.”

One Traverse City certified public accounting firm developed a vertical long before the term was popularized by internet companies. Dennis, Gartland & Niergarth formed a unit to provide accounting, tax and audit services to oil-and-gas development companies about 15 years ago.

There are 10 people on the firm’s oil-and-gas team, representing 20 percent of DGN’s 50-person staff. DGN is the top oil-and-gas accounting firm in the state, according to Michael Shaw, who leads the firm’s energy team.

It’s a complex business that requires deep knowledge of the oil-and-gas industry as well as ever-changing tax laws that affect it.

“Every oil-and-gas deal is different,” said Shelly Ashmore, a DGN partner and a member of its oil-and-gas team. “There’s a lot more variance in these deals than in other industries we serve.”

DGN also is one of three local companies that comprise Midwest Energy Advisors, which Ashmore describes as a “one-stop shop” for accounting, legal and insurance services for companies in the oil-and-gas industry. The other two are the Larkin Insurance Group and the Smith Haughey Rice & Roegge law firm.

The internet has been a major factor in the growth of verticals, allowing businesses and professional service firms to exploit a specific market far beyond their local addresses.

Traverse City lawyer Enrico Schaefer started blogging on the internet in 2004 as a way of trying to gain clients for his new intellectual property law firm, TraverseLegal.

“I thought that if I blogged my niche expertise online, I would draw clients from all over the world,” Schaefer said. “That was more than an absurd proposition. It was laughable. And I was criticized for sharing my expertise online for free.”

But the gambit eventually paid off. Schaefer picked up four clients through the internet in his firm’s first year and 15 more clients the next year.

“Now we have over 400 companies contacting us every month,” he said. “Ninety-eight percent of those are outside Michigan and 35 percent are outside the United States.”

Half of those new prospects are drone companies. Schaefer said he has taken up drone law as a specialty and spends virtually all his time on it.

Drone use is exploding in business. Farmers fly drones to check crop conditions. Realtors use them to produce videos of homes they’re trying to sell. Construction companies employ drones to monitor construction sites for potential safety problems.

The Federal Aviation Administration has approved about 5,300 applications for commercial drone use and has a backlog of thousands more requests.

“Every major corporation in the world is pushing the government to integrate drones in the commercial airspace,” Schaefer said. “I tell people all the time I’ve never seen anything like this in my 25 years of practicing intellectual property law.”

Focusing on a niche, or vertical, has risks, though. For Schaefer, unanticipated regulatory changes resulting from, say, a serious drone-commercial aircraft collision could prompt the FAA to stop licensing commercial drones.

“And if you’re doing niche work, you have to be aware of the possibility that competition will dramatically increase,” he said.

DGN is facing a slowdown in its oil-and-gas vertical with the drop in oil prices over the past couple of years. But it has been able to offset the impact with growth in its other verticals: manufacturing, agriculture and hospitality.

“When one area is down, the others are up or holding their own,” Shaw said. “When oil prices are down, it helps the hospitality industry” because lower fuel prices prompt people to take more trips.

Local business owners and experts say those who want to pursue a vertical must become experts in the industry that they’re trying to serve. They must study the segment, attend industry conferences and keep up to date on issues and trends.

“Do a lot of customer discovery,” said MSU’s Szymusiak. “Don’t trust the rumor mill. Put in the time and effort on your own” to determine if you’re pursuing a viable niche.

Such work can pay off by giving the niche provider a reputation as an expert, which often leads to more business. That’s what Irwin of the Fischer Insurance Agency has found.

“The craft brewing industry is extremely specific in terms of its needs,” said Matt Drake, chief operating officer of Short’s Brewing Co., one of Irwin’s clients. “Because Mark (Irwin) has specialized in representing craft brewers, he knows things in ways others wouldn’t. There’s a benefit to having someone who takes the time to understand our issues.”

Specializing in an unusual niche also can add a little spice to a seemingly mundane service, such as accounting or insurance.

“Insurance isn’t the most glamorous thing,” Irwin said. “Insuring beer, wine and spirits is pretty fun.”