The shift from perpetual license-based business models to solely focusing as software as a service (SaaS) has been a defining trend over the past 20 years. Led by Salesforce as the first pure-play SaaS superstar, companies of all types have shifted including Adobe and Autodesk, and also others were born into the business model, such as Dropbox, Netflix, and Wix. Over time, this has led to us accepting this recurring payment model, being integrated as a normal way of purchasing solutions.
Vertical SaaS definition: Vertical SaaS is a model that caters specifically to niche industries, contrasting it with horizontal SaaS that serves a broader market. This recent emergence of vertical SaaS offers potential benefits for businesses looking to specialize in specific sectors.
However, as innovations occur – one that has become an unbundling of sorts, focusing on vertical SaaS.
Introduction to Vertical SaaS
Vertical SaaS, also known as vertical software as a service, refers to cloud-based software solutions specifically designed to meet the unique needs of a particular industry or niche. Unlike horizontal SaaS, which targets a broad audience across various sectors, vertical SaaS companies focus on developing software solutions that address the distinct challenges and requirements of a specific industry. For instance, vertical SaaS solutions are tailored for industries such as retail, financial services, insurance, healthcare, and manufacturing. By honing in on the specific needs of these sectors, vertical SaaS companies can provide more relevant and effective software solutions, making them indispensable to their target industries.
What is vertical SaaS? Let’s dig in!
In the wave of early SaaS companies coming to the market as the internet grew in popularity, they often sought to solve broad problems that were across multiple industries, thus meaning they operated horizontally. This means they have large total addressable markets and can tailor their marketing messages into numerous industries and company sizes.
Vertical SaaS is an offshoot of this as it is when a company focuses on one industry as a strategy. A couple of good examples of this include Veeva as a CRM for the life sciences industry, Plangrid as productivity software for the construction industry, and Gorgias as the Help Desk solution for e-commerce companies powered by Shopify. Other examples of vertical SaaS include Procore for construction project management, Clio for legal practice management, and SimplePractice for health and wellness professionals. These examples of vertical SaaS highlight the specificity to particular industries and the unique needs they fulfill.
Vertical SaaS vs. Horizontal SaaS
The primary distinction between vertical SaaS and horizontal SaaS lies in their target audience and market approach. Horizontal SaaS companies aim to provide software solutions that can be utilized across multiple industries, offering a broad range of functionalities that appeal to a wide audience. In contrast, vertical SaaS companies focus on developing solutions tailored to the specific needs of a single industry. This targeted approach allows vertical SaaS companies to differentiate themselves from horizontal SaaS providers by offering specialized features and functionalities that address the unique challenges of their chosen market. As a result, vertical SaaS companies can establish a stronger presence and build deeper relationships within their specific industry.
So, why would a company be vertical?
At first thought, why would a company want to limit itself from an addressable market perspective? When you unpack the wrapper, there are many reasons! Vertical SaaS companies can enhance relationships with existing customers by providing tailored consultative services, which helps them navigate industry-specific challenges more effectively. Let’s dig in.
Better targeted advertising = lower acquisition costs
As horizontal companies have to tailor their product and messaging to multiple industries, they spread themselves thin on their marketing efforts. Comparatively, focusing only on one vertical means that marketing teams can be much more tailored in their messaging, positioning, and ultimately brand perception. This can lead to significantly lower customer acquisition costs compared to horizontal companies that cast a wide net.
Finite industry focus = Specific industry-based hiring
By only focusing a few industries, vertical companies can focus on hiring not just people with a tech background, but rather industry-specific experts. For example, in the healthcare industry, companies might hire experts familiar with compliance tools tailored to industry requirements, such as HIPAA for data privacy. By hiring both of these, they can pair them together, leading to efficiencies in being able to close deals, especially when it comes to speaking industry lingo. At Coohom, I focused on the home furnishings industry and our team had hired an industry consultant to help us with this specifically.
More concentrated development efforts = deeper product value
As horizontal firms focus on multiple industries, their product becomes pretty broad in the offering. When sold, it is likely that it is the best solution in the market today and not the one that perfectly fits the needs of their business requirements. By focusing on a few industries, vertical SaaS software firms can develop deeper for their customer requirements, building out functionality that truly proves valuable. This can speed up decision making on product development and make the company more efficient with capital. It also opens up for a company to develop integrations that are specific to the platforms and tools with the workflows that its customers use today.
Deep functionality = easier sales process
Selling any product is a difficult task. Customer relationship management software plays a crucial role in streamlining the sales process by helping manage interactions with potential clients. Companies that have a product that goes deep in solving particular problems better than competitors that are broad in their solution make it easier for a sales team to close deals. That, coupled with the fact that the product marketing team will be aiming them with more direct content that talks to their buyer, it becomes easier for a sales team to explain why its solution is the best one in the market for their direct need.
Extra-relevant product = higher lifetime values & greater upsell opportunities
As a result of having a more deeply integrated vertical SaaS product that meets their needs, customers are less likely to switch vendors, which in turn leads to higher lifetime values. Lifetime value is the measure of how long a customer will continue paying for the services. This is one of the key metrics for measuring the longevity of any SaaS company. On top of this, with deeper functionality being built, there are more opportunities for upsell and expansion of accounts.
Low CAC and high LTV = Higher valuation multiples
As SaaS companies are built around measuring the efficiency of capital – largely driven by the ratio of customer acquisition costs to lifetime value – these efficiencies can lead to higher valuation multiples. Horizontal SaaS differ in terms of valuation as they target a wide range of industries with universal features, making it harder to differentiate from competitors. While they seem to have smaller addressable markets, they make up for it by focusing on going deep on providing value to companies within one domain.
Industry Examples and Applications
Vertical SaaS solutions can be applied to a variety of industries, each benefiting from software tailored to their unique needs. Here are some examples:
- Healthcare: Solutions such as patient diagnostics, telehealth services, and medical billing software help streamline operations and improve patient care.
- Financial Services: Banking, investment, and insurance software provide tools for managing financial transactions, investments, and risk assessments.
- Insurance: Claims management, policy administration, and risk assessment software enhance efficiency and accuracy in handling insurance processes.
- Retail: Customer relationship management (CRM), inventory management, and e-commerce software help retailers manage their operations and improve customer satisfaction.
- Manufacturing: Supply chain management, quality control, and production planning software optimize manufacturing processes and ensure product quality.
These industry-specific solutions enable businesses to streamline their operations, improve efficiency, and enhance customer satisfaction, making vertical SaaS an invaluable asset.
Challenges and Opportunities for Vertical SaaS Companies
While vertical SaaS companies face several challenges, such as intense competition, regulatory compliance, and limited market size, they also have significant opportunities to thrive. By catering to the specific needs of a particular industry, vertical SaaS companies can establish a strong market presence and develop deep relationships with their customers. Understanding the unique pain points of their target industry allows them to offer customized solutions that address specific challenges, setting them apart from horizontal SaaS providers.
Moreover, vertical SaaS companies can expand their product offerings and services to adjacent industries or markets, leveraging their industry-specific expertise to develop innovative solutions. This approach not only helps them stay ahead of the competition but also opens up new revenue streams. By recognizing and capitalizing on these opportunities, vertical SaaS companies can develop effective strategies to succeed in this growing market.
Vertical SaaS companies are the future
As more companies rely on SaaS, going deep and focusing on a few key industries seems to provide great value in the long-term. Being more capital efficient, knowing their customer better, and also developing deeper product innovation are some of the key advantages that come out of this. As SaaS becomes a mature business model, I predict that more companies will start to pick apart horizontal companies with large addressable markets and build industry-specific offerings.
But, with everything, risks also need to be looked at. For example, companies that focus on one industry may face issues when that vertical is hit with regulatory issues, declining growth, and other turbulence, such as the current state with the pandemic situation. Toast, a point of sale software provider that focuses on the restaurant industry and boasted a valuation of ~$5B, just cut nearly half of its workforce due to the current state of the world as an example.