Gone are the days of one size fits all software. Businesses today, whether significant, midsize, or minor, demand a customized, tailored solution that meets their industry’s specific needs, and that’s where Vertical SaaS comes in.
In this article, we will explore:
- Origins of SaaS
- Differences Between Horizontal and Vertical SaaS
- Benefits of Horizontal and Vertical SaaS
- Challenges of Horizontal and Vertical
- Which SaaS type is right for your software business
- The growth of vertical SaaS
- Vertical SaaS Implementation Strategy
- The Future of SaaS
Origins of Saas
The Origins of SaaS link back to the late 1960s. The first software as a service was Enterprise Resource Planning (ERP) systems and customer relationship management (CRM).
ERPs are complex information systems that manage a company’s resources, such as accounting, purchasing, production planning, or human resource functions.
CRMs focus on ways to help businesses better access and organize their company data.
These types of software are both early examples of horizontal SaaS.
Horizontal SaaS
Horizontal SaaS is a software as a service that serves a need for a particular department or function, but they are not industry-specific. They perform in multiple industries and niches.
Horizontal SaaS examples:
- Salesforce: Customer relationship management
- Office 365: Cloud-productivity tool
- Freshworks: Another type of CRM solution
- Quickbooks: accounting solution used across all industries.
- Slack: online software used for team communications
These are all prominent examples of horizontal SaaS companies as they are all designed to solve a specific problem, such as productivity or team communications. But we do not confine them to a particular industry such as Real Estate or insurance.
Vertical SaaS
Vertical SaaS is the next evolution of software as a service. It focuses on one industry as opposed to providing a solution that would work across multiple industries. Vertical SaaS could be an HR management solution for healthcare or customer relationship management (CRM) for the Insurance industry.
Vertical SaaS focuses on solving one problem within that industry, such as a CRM, or it could be a platform to help run a business in the industry they created it for. An example would be Club Management software for managing a gym or a salon.
Vertical SaaS examples:
- Textura: SaaS for the construction management industry
- Fleetmatics: SaaS for fleet tracking in the logistics industry
- Guidewire: SaaS for the Insurance industry
- Veeva: SaaS for the Life Sciences industry
- Infor: SaaS for the Manufacturing industry
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Vertical SaaS VS. Horizontal SaaS
When we decide which SaaS product to build, we must know the differences between the two products.
| Vertical SaaS | Horizontal SaaS |
|---|---|
| Vertical SaaS focuses its marketing strategy on a smaller pool of potential clients. Therefore, it can concentrate on its messaging. | Horizontal SaaS markets to business and has to tailor its message to what the masses want. Less focused. |
| Vertical SaaS, since they create it for a specific industry, it is more easily adaptable to changes within the industry they built it for. | Horizontal SaaS adaptations to specific industry needs are more time-consuming and labor-intensive because they created them for the mass market. |
| Vertical SaaS was created to solve specific problems for a particular industry. | Horizontal SaaS was created to solve a common pain point across many industries. |
| Vertical SaaS is tailored for ease of use for the industry it services. | Horizontal SaaS, because of having to solve a problem across multiple industries it’s challenging to use because it has more features than a specific industry needs. |
| Vertical SaaS comes with the exact features and customizations necessary to the industry it services. | Horizontal SaaS was created to serve the market at large to limit customizations for a specific industry. |
| Vertical SaaS can quickly and smoothly adapt to industry trends related to the market it services. | Horizontal SaaS is more time-consuming to change for trends within a specific industry. |
Benefits of Horizontal and Vertical SaaS
When we look at the table above, we can see quite a few differences between vertical SaaS and horizontal SaaS. Each type of SaaS also has its own set of unique benefits that we must consider when choosing which kind of SaaS we want our solution to be. Let’s explore the benefits of each type of SaaS below.
Vertical SaaS Benefits
- Created for a specific industry or niche market, and all marketing efforts can be tailored to this market.
- Because of the ability to focus marketing dollars, customers can expect a lower customer acquisition cost than horizontal SaaS markets.
- Able to ensure compliance with industry rules and regulations.
- Because of the niche expertise able to be offered by Vertical, SaaS companies often experience a higher retention rate.
Horizontal SaaS Benefits
- Since the market horizontal SaaS covers are broad, there is also a much larger revenue possibility.
- SaaS companies have a greater chance of acquiring a larger market share in the SaaS industry because of the enormous marketing netcast
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Challenges in Horizontal and Vertical SaaS
As we have seen above, both vertical SaaS and horizontal SaaS each have their own unique set of benefits, and with special services comes a fantastic collection of challenges. We need to go into these challenges to know what we are getting into when we choose to use one SaaS model over the other.
Horizontal SaaS Challenges
- Because of the broad nature of the business model, retention is lower than with vertical SaaS because there can be a lack of industry-specific expertise.
- Specific industry leadership for horizontal SaaS is complex without a significant spend on hiring industry-specific experts.
- Customer acquisition cost is high because of the extensive marketing spend to reach several industries at once.
Vertical SaaS Challenges:
- The lead pool is smaller than horizontal SaaS because of marketing to only the specific niche the solution services.
- If prospects are already using a horizontal SaaS solution, convincing them to move to a less seasoned vertical solution can be challenging.
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Which Should You Choose for Your SaaS Business?
We have discussed several important topics so far as it relates to your SaaS company. Let’s do a quick recap before moving on to the correct solution for your SaaS business.
They built horizontal SaaS to solve a specific problem or problems inside an array of industries, think Salesforce or Slack. The critical item to remember about Horizontal SaaS is:
Horizontal SaaS = Across many Industries
They built vertical SaaS to serve a specific niche industry it can solve just one problem within that industry or help run the entire business, but the vital thing to remember is:
Vertical SaaS = Specific Niche Industry
Both SaaS models come with unique differences, benefits, and challenges, but when deciding on which is correct, we need to ask ourselves the following question.
Do we want our solution focused on one specific niche/industry, or do we want to reach the masses?
If our solution and knowledge, and experiences are best suited for a specific niche/industry, we choose vertical SaaS.
With that in mind, building a vertical SaaS solution differs from creating a horizontal SaaS solution, and each requires its unique approach.
We have put together a shortlist on the differences in building a vertical SaaS solution below. Let’s check it out and get some insight into these differences.
| Vertical SaaS | Horizontal SaaS |
|---|---|
| Vertical SaaS is created for a specific niche/industry. Which allows tailored niche/industry-specific customization to be built into the product “out of the box.” | Horizontal SaaS must attract decision-makers in a wide range of industries, which requires multiple versions of the platform so customers can tailor the product to their specific niche/industry. |
| Vertical SaaS More capital efficient because of the ability to spend money in one niche/industry. | Horizontal SaaS Must spend more in marketing to show how it can overcome obstacles within a specific niche/industry. |
| Vertical SaaS Must consider niche/industry-specific compliance issues related to that industry’s specific regulators. | Horizontal SaaS Offers one size fits all features. |
| Vertical SaaS uses customer feedback to update and improve products on the fly. | Horizontal SaaS Focus on features that for multiple industries |
| Vertical SaaS must show that they are a better fit for their particular niche/industry than a less customized Horizontal SaaS option. | Horizontal SaaS Well-known SaaS model with hundreds of big players which are firmly entrenched in several industries. |
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The Growth of Vertical SaaS
Until now, we have been exploring two distinctly different SaaS, horizontal and vertical. But our focus is solely going to position on Vertical SaaS and why we think it is the best option for your SaaS business.
The best place for us to start is how vertical SaaS is growing as an industry, and we feel it will continue to grow.
In the past decade, the market share for vertical SaaS companies has tripled, and there is no reason to believe this trend will not continue.
Research performed in 2020 by SEG shows us that SaaS companies have recently outperformed the S&P 500 and the Dow Jones, despite market volatility.
As if the above was not enough to show us the upward trend in vertical SaaS growth, let’s look at a few companies in-depth to get even more understanding of the incredible opportunity vertical SaaS offers.
- Veeva, an all-in-one cloud-based vertical solution for the life sciences industry, went from zero to $2.4 billion valuations in just around six years.
- Cox Automotive, a Vertical SaaS provider for the automotive industry, acquired Dealertrack, an on-demand Vertical SaaS provider, for $4 billion.
- Lufax, a financial Vertical SaaS company based in Shanghai, rose in valuation to $39.4 billion in just around eight years.
These are some awe-inspiring numbers regardless of the industry. Vertical SaaS is experiencing huge demand right now and has been for over a decade. Now is the time to break into verticals to take advantage of this unprecedented growth as well.
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How to Implement a Vertical Strategy for Your SaaS Business
Now that we know there is growth in vertical SaaS and the opportunity will only increase let’s look at a strategy for implementing vertical SaaS into your SaaS business.
1) Choose a Growing Niche (Vertical)
As with any industry, we must make sure that we have chosen a profitable and growing niche/industry. We know from the data above that Vertical SaaS as a whole is a thriving and growing industry, but some niches or verticals have a more positive growth outlook than others.
With this in mind, we need to do our research and choose a vertical in growth mode.
Market Research performed by Bowery Capital found that while there are opportunities in all areas of vertical SaaS, four industries, drones, manufacturing, transport, and cannabis, are most likely to see the most significant continued growth.
Now, this is valuable information, but it is just as essential for us to do our market research to help us determine if we have a profitable vertical or not.
When we have determined our vertical, either by research or experience in a specific industry, it is essential to pull together a list of our top competitors.
Create a detailed list of all their offerings and price points to have a starting point for what our product will need to provide.
From there, we must determine what our USP (unique selling proposition) will be. What will differentiate us and place us ahead of our competitors in our prospect’s minds?
2) Stick To Your Niche (Vertical)
Once we have done our market research and chosen our vertical, we must keep our narrow focus on the product at hand. Adding additional verticals (niches) requires us to water down our solution and spend time and resources creating customized offerings for each niche. Stick to your niche market. We have done our research and know we have a profitable idea.
A quick example:
Innovaccer, a healthcare vertical SaaS provider, started with a more horizontal approach. They dabbled in many diverse vertical sectors such as entertainment retail, finance, and healthcare.
In 2016 they cut ties with their non-healthcare customers and made a move from horizontal to vertical.
This move initially cost them 60% of their revenue, but it helped them build momentum, which has led to raising more than $220 million in capital to date.
3) Vertical Products Must Contain Industry-Specific Compliance Tools
Focusing on one vertical (niche) allows us to provide compliance tools built into our SaaS solution tailored for our vertical. Here are a few examples of compliance options within specific verticals.
- HIPAA (Health Insurance Portability and Accountability Act of 1996) – If your vertical is in healthcare, complying and providing tools for compliance with HIPAA is a must.
- METRC (Marijuana Enforcement Tracking Reporting Compliance) – If your vertical is in the growing cannabis vertical, compliance is another area where you must not overlook.
To help yourself stand out in the crowd, you must offer necessary industry-specific compliance tools.
4) Speak to industry experts to get an insight into your target market
We must speak the jargon of our target vertical if we have any hope to gain and keep customers, and we can accomplish this in a couple of different ways.
Personal experience – If we have industry experience, then we need to take advantage of this and use it to our benefit.
Hire experience – If we do not have this experience ourselves, we can hire an industry consultant to make sure we are speaking the jargon of the target market.
Speaking to experienced industry experts will help to ensure you are building the best vertical SaaS solution possible.
5) Market, Market, Market
The world’s best widget without a buyer is just a fancy expensive paperweight. In the same way, if we do not put our product in front of the target buyers, it does not matter how fantastic our solution is; they will not see it or buy it.
While it is imperative to create a comprehensive marketing strategy with a team of marketing professionals, we have included a few tips below so you will have a good starting point.
- Keyword Research Do this to determine what words related to your niche/industry are being searched for and the total volume of searches every month.
- Mobile-Friendly Website optimizes your website for mobile device viewing. In the first quarter of 2021, over 50% of all website traffic worldwide was from a mobile device.
- Content Marketing related to your niche helps you be viewed as an authority in your field and, when done correctly, will help drive organic (free) traffic to your website.
- PPC Advertising, when done correctly, can be a great way to drive targeted leads to your offer.
- Focus on getting your solution onto 3rd party review sites such as GetApp, Capterra, and G2.
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The Future of SaaS
This has been quite a ride! We have covered everything from the difference and benefits of horizontal and vertical SaaS to how to implement a vertical SaaS strategy for your SaaS business. Thank you for hanging in there with me.
This last part is, without a doubt, the easiest part of this post to write. We have the growth of vertical, and we have no reason to believe that this trend will do anything but keep going up. And the reason is simple:
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As more businesses move to vertical SaaS, they will only be satisfied with the tailored services and industry-specific knowledge that only a vertical SaaS provider can give them.