Vertical niche one-stop shops, the example of PoolCorp

March 26, 2024

028 | Vertical niche one-stop shops | PoolCorp | How founders can learn from a $15 billion pool-servicing leader

This week:

PoolCorp: A billion-dollar vertical niche one-stop-shop success story in the construction industry
Lessons from PoolCorp on distribution, pricing power, and recurring revenue in a service niche
Why it's so powerful when you dominate vertical niches in construction-tech

Billion-Dollar Niche Success

PoolCorp: The Billion-Dollar Construction Niche Success Story You've Never Heard Of

PoolCorp is a publicly listed company with a market cap of around $15-17 billion, operating in the pool products and services industry. Despite its massive size, the company remains relatively unknown to many, even within the construction and tech sectors. "It's a company with a market cap. I mean, it was quite a bit higher. These days it's around the 15, 16, 17 billion dollar market cap, which keep in mind, it's still very high," Shub points out. PoolCorp has managed to build a dominant position by focusing on a narrow niche – providing a one-stop-shop for all pool-related products and services. As Shub explains, "They would supply all the chemicals and the treatment units going into for the pool. The tiles you see here on the periphery, as well as near the pool, they'll supply all of that. Believe it or not, they'll also help you supply products for all the landscaping and the garden and the lawn and the stuff around that." The company's success lies in its ability to anticipate and cater to the full lifecycle needs of pool owners, from construction and installation to maintenance and remodeling. By offering a comprehensive suite of products and services, PoolCorp has effectively locked in its customers, with 62% of its revenue coming from non-discretionary maintenance contracts. "They actually describe this portion, the maintenance part of the revenue, they describe it as non-discretionary," Shub notes.

Go Narrow to Dominate

The Power of Going Narrow: Why Dominating a Vertical Niche is Key in B2B Construction-Tech

In the B2B construction-tech space, narrowing one's focus and dominating a specific vertical niche is often the key to success, especially in the early years. Contrary to popular belief, a narrow market can still be large enough to build a venture-backable outcome. "I think the nuance is in the fact that there are certain categories or use cases where if you do a good job, either with the service quality or with distribution, maybe even product quality, depending on the state of the market, you could have the ability to build a monopoly or at least a disproportionately large market share," Shub explains. PoolCorp is a prime example, operating in a $10-12 billion serviceable market. By going deep into a niche, companies can develop unparalleled expertise, build strong relationships with customers, and ultimately achieve a disproportionately large market share. As Patric notes, "In many B2B niches, market shares of 50-70% are common for legacy players, a feat that is nearly impossible to replicate when starting with a broad, horizontal approach."

Mastering Distribution Illusion

Mastering Distribution and the "Illusion of Choice": Lessons from PoolCorp for Construction Marketplaces

PoolCorp's success is deeply rooted in its masterful distribution strategy, which fosters an "illusion of choice" for customers. "The interesting thing is, as I mentioned before, even though one may assume that a category like this of pool products would lend itself very well to D2C or direct to consumer, the way they've gone about doing it is just sort of planting their products everywhere. So like retailers, contractors, all sorts of online stores, et cetera," Shub explains. Rather than directly branding all its products, the company distributes through a vast network of retailers, contractors, and online stores, often using generic or third-party branding. This approach not only avoids the perception of a monopoly but also creates an illusion of choice for customers, making PoolCorp's dominance less apparent. As Shub points out, "I think it's another cool way of kind of staying under the radar, creating this illusion of choice. And this illusion of choice makes you sort of omnipresent across channels." Construction marketplaces can learn from this strategy by establishing their own private label products, which can help break the illusion of perfect price discovery and increase pricing power. As Patric notes, "The option to even begin pushing private labels where typically as the platform that is both, you're not technically owning the production because it's usually contract manufactured, but like ordering the production as well as distributing it. So that gets unlocked because you have the distribution power."

Private Labels for Pricing Power

Private Labels: An Underrated Path to Pricing Power for Construction Marketplaces

The ability to offer private label products is an often-overlooked opportunity for construction marketplaces to extract pricing power and deepen their offerings. "I think offering private labels, I think is in my opinion, highly understated as an ability to, as a way to extract pricing power, as a way to deepen the offering and to do this in a way where you cultivate different sorts of manufacturing partners, different consumer groups, target them effectively," Shub states. By cultivating relationships with manufacturers and targeting specific consumer segments, marketplaces can introduce their own branded products alongside third-party offerings. Private labels not only provide a source of differentiation but also enable marketplaces to break the illusion of perfect price discovery, as competitors cannot easily reverse-engineer the pricing of proprietary products. As Shub explains, "In other words, if a competitor comes on board, you can't reverse engineer the price of a private label product offered by you because, I mean, there's no precedent for the price you're setting." As marketplaces gain distribution power and demand-side market share, they can leverage this advantage to secure exclusive supply arrangements with manufacturers, further solidifying their position and increasing profitability. "The further you get with your private label presence, the deeper you have locked the manufacturing or the supply side of the game," Shub points out.

Recurring Revenue Redefined

Recurring Revenue Redefined: How Maintenance Contracts Drive Profitability (Examples from PoolCorp and Elevators)

The traditional notion of recurring revenue is challenged by companies like PoolCorp and the major elevator manufacturers. In these industries, the bulk of revenue and profitability comes not from the initial sale or installation but from ongoing maintenance contracts. "They actually describe this portion, the maintenance part of the revenue, they describe it as non-discretionary," Shub notes about PoolCorp, which generates 62% of its revenue from non-discretionary maintenance services. Similarly, as Patric explains, "The four largest elevator companies, ThyssenKrupp, Kone, Schindler and Otis, don't make money on the production and installation of elevators. They calculate these as break-even. Zero." Instead, the true profit lies in the mandatory maintenance contracts that follow. "So that's why when you purchase an elevator net new or you replace one in an existing building, it will always come with typically three years, can be two years, can be four years, but like three years is the average of a maintenance commitment. And the margin is exceptional on the maintenance commitment," Patric adds. These examples redefine the concept of recurring revenue, demonstrating that it is not limited to traditional subscription models but can also stem from the inherent need to maintain mechanical and electrical systems.

70% Market Share Norm

Rethinking Market Size: When 70% Market Share is the Norm in Construction Niches

Many investors and founders in the construction-tech space often underestimate the potential market size of niche opportunities, wrongly assuming that market shares will be limited to 5-10% at best. However, as Patric points out, "In every B2B market in the world. And within those ERP software for these niches that I just mentioned, in every one of them, you will find someone with 70% market share today. Every one of them." This is a stark contrast to the winner-take-all mentality prevalent in certain tech sectors, where the assumption is that a single player will eventually dominate the entire market. As Shub explains, "The truth is, at least in the given the current state of infrastructure, technology, the business processes we are in, with most B2B industries and certainly true in construction, the current state of affairs just don't support that level of consolidation anytime soon." In construction, the current state of infrastructure, technology, and business processes often favors the coexistence of multiple players, with a dominant leader capturing the lion's share of the market. This reality necessitates a shift in thinking, as Shub notes, "So what you always need to sort of factor in is along with the TAM, what is like an attainable market share, if you will. And I think sometimes the more attractive path is aim for a narrow niche, which is also still venture backable or venture supportable, where you have a credible path to a large market share."

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Keywords: construction tech, AEC industry, construction marketplaces, private labels, recurring revenue, maintenance contracts, vertical niches, niche domination, market share, PoolCorp case study, distribution strategy, pricing power, one-stop shop