The tech industry is, by nature, very prone to change, including the thriving SaaS sector.
By now, virtually everyone has some knowledge or experience with using the tools that SaaS produce, and SaaS remains a rapidly growing sector, with 28.6% growth in the first half of 2017 alone.
These days, there is more to SaaS than when they began – business models have changed to reflect new priorities, including the formation of both vertical and horizontal SaaS.
What do these mean? Let’s take a look:
Vertical and Horizontal SaaS
How are vertical and horizontal SaaS constructed? What makes them different from one another? Here’s the quick overview:
Horizontal SaaS tend to be the more mature model on the market, the model having been around for well over a decade. This type of SaaS focuses on a category of software, catering to a business need.
Some prominent examples include QuickBooks (accounting), Salesforce (CRM) and HubSpot (marketing). Horizontal SaaS aim to provide a broad service that can cover a wide breadth of the market, through different industries. There are many different types of businesses who choose to use the SaaS mentioned, for example.
When you think about how many industries a horizontal SaaS might want to reach, you can see that marketing and sales strategies might require considerable resources. They are probably running several parallel marketing campaigns, trying to target different industries individually.
Slack is one example – they run paid advertising which is made to appeal to different types of companies. You can see on their “Customer Stories” page where they highlight stories of very different businesses, agencies and nonprofits that use their software. It’s important to gather a variety of stories because they want to ensure that potential customers can find something they relate to.
In contrast to the horizontal, vertical SaaS produce software that is targeted to a very particular industry. This is a more recent trend in SaaS so not as mature as the horizontal market. In fact, there are several commentators who feel that there may be more opportunity for new vertical SaaS due to them being a more recent phenomena.
Some examples of vertical SaaS include:
- BioIQ – Software for health-testing.
- Health Assurance Plan – Software that allows dental practices to create their own membership plans.
- Guidewire – Software solutions for the insurance industry.
The vertical SaaS model doesn’t aim to be all things to all people or cover a broad product category; instead, they focus much more narrowly on industry verticals. Their solutions are purpose-built for clear industry niches and in doing so, they narrow the size of their potential market.
It’s often the case that they’ve been developed by people with expertise in that particular industry. For example, Health Assurance Plan was developed by a dental practice initially for their own use. They discovered that it worked so well in their own practices that it would be something that others could put in place too. It solves a very industry-specific problem of being able to offer dental plans to those who either can’t afford insurance or don’t have it available as an option.
Vertical SaaS can obviously take a much more narrow approach to marketing than their horizontal counterparts, which would tend to require fewer resources.
Side note: There is another kind of SaaS…
In an article for Digital Current highlighting SaaS trends for 2018, Sam Hurley notes a third model of SaaS that is trending – the “On Top” SaaS. He describes these as:
“Targeted and/or industry-neutral software that is built to integrate with an existing solution, or multiple solutions (e.g., Zapier that works with Xero, Salesforce, Slack, etc.)”
He points out the strength of these types of SaaS to harness the already considerable power of current large SaaS platforms, without having to build everything from scratch. This opens the door to co-marketing initiatives and to opportunities within verticals (such as what Veeva has done with the pharmaceutical industry).
“As more brands like Salesforce and HubSpot begin to create proprietary “ecosystems” in this way (known as Platform as a Service or PaaS), other SaaS businesses can tap into this opportunity (just like Veeva did) and go vertical, with the added reassurance of being taken under the wing of a robust brand.”
Thoughts on Vertical vs. Horizontal SaaS
As stated earlier, horizontal SaaS tend to be at a more mature stage of the market, as such, they have often already come through the challenges associated with creating awareness and educating possible customers.
Their customers are already aware of the benefits that a good SaaS tool can bring them, so a big focus has been on the concept of “customer success” – promoting the ability for the customer to achieve whatever their desired outcomes are for the product. In turn, a focus on customer success is hoped to lead to better retention rates for the SaaS. Their customers tend to have a number of options they could go with (for example, there are now multiple SaaS offering project management solutions), so their ability to survive will rely on them attracting and retaining enough of “their” people.
We also see among horizontal SaaS that commonly, the big players remain dominant in their given market. For example, Salesforce is a platform unto itself, while any new players in the project management space will find it challenging to carve out their own area next to Asana, Basecamp, Trello or Zoho Projects. (We said “difficult” but not impossible – there will always be the possibility of disruption should significant new technologies or approaches be developed).
On the other hand, a horizontal SaaS has the obvious advantage of targeting a much wider possible market. This means that there is more room for different SaaS, as compared to those which target a narrow vertical. It will take longer for the horizontal market to become completely saturated.
When we look at vertical SaaS, one of the first challenges that stands out is that many of them are targeting verticals that are still very traditional in their approach to business. They have their work cut out for them educating the health professionals, insurance companies, banks or construction companies as to why it’s time for them to make a change from their traditional solutions.
They’re somewhere around the point that horizontal SaaS were 6-8 years ago from that perspective.
Vertical SaaS models offer the opportunity for the SaaS to go deep, to offer full-featured solutions that answer very specifically to the problems of an individual vertical. At this stage, you’d be hard-pressed to describe any as “dominant” in any vertical because it’s still a relatively new market.
According to Blossom Street Ventures, there are a couple of other advantages to pay attention to when it comes to vertical SaaS:
- They can realize up to 8 times cheaper acquisition costs due to their highly targeted customer base.
- Lately, they are achieving higher valuations than horizontal SaaS. “As of March 2017, the median vertically-focused public SaaS comp was trading at 6.8x revenue compared to 3.8x for horizontal SaaS (based on an index of representative companies).”
Why are vertical SaaS enjoying higher valuations? The Blossom Street Ventures report goes on to add: “Further, companies are more easily able to adapt to the demands of its user-base, developing tailored features for a specific industry. Ultimately, this flexibility translates into decreased churn and the ability for further upsell opportunities with its current customer base.”
What would be your inclination to develop – a vertical, horizontal, or even an “on top” SaaS? The market is still hot for well-executed SaaS – the 2017 State of SaaS report reveals that SaaS startups are still getting funded and growing in popularity.
With this popularity however, comes a caution; expectations of performance and availability have risen too. Create something that is world-class, or find your SaaS on the reject pile.
Koombea helps companies to develop top-performing SaaS. Talk to us about how we can help you today.