1 equation to validate a vertical

I shared 16 criteria to help you choose a vertical in yesterday’s email.

These 16 can help you narrow the options to 1, 2, or 3.

Now, it’s time to ensure the revenue for your agency is there.

Here’s how: If the amount of revenue you expect to generate in three years excites you, you have validated the vertical market.

I use the following formula:

TAM x 20% x 3% x average revenue per client = estimated revenue in 3 years

TAM = Total Addressable Market, the number of businesses in the vertical market

20% = Pareto Addressable Market, a conservative count of businesses who can hire you

3% = assumes you capture 3% of the 20% in 3 years

Average Revenue Per Client = your average annual revenue per client

I recently took a strategic integrated communications agency through this process. We identified hospital systems as a potential vertical market. The research shows 2,466 hospital systems in the U.S., and their average annual revenue for a hospital systems client is $150,000.

Let’s apply this data to the equation:

2,466 x 20% x 3% x $150,000 = $2,219,400

When I asked if that revenue target was exciting, my client responded, “It sure is!”

Want my help with finding a vertical market for your agency? My 1-hour Vertical Finder Strategy Session is for you!

CQ

Frequently Asked Questions

What's the actual formula for validating a vertical market's revenue potential?

TAM x 20% x 3% x average revenue per client. Total addressable market multiplied by a conservative reachable segment, a 3-year capture rate, and the average revenue per client produces an estimated 3-year revenue figure.

What does the 20% figure represent in this formula?

The Pareto Addressable Market, a conservative estimate of how many businesses within the total market could realistically hire the agency, rather than assuming the entire market is reachable.

Why use 3% as the capture rate assumption?

It assumes capturing 3% of that reachable 20% within three years, a deliberately conservative number meant to produce a realistic, not overly optimistic, revenue estimate.

How did this formula play out in the hospital systems example?

With 2,466 hospital systems in the U.S. and average annual revenue per client at $150,000, the formula produced an estimated $2,219,400 in three-year revenue, a number the client found genuinely exciting.

What's the actual test for whether a vertical has been validated?

Whether the resulting 3-year revenue estimate is exciting. If the number produced by the formula doesn't feel motivating, that's a sign the vertical, or the assumptions behind it, might need reconsidering.