Apr 03, 2020 | 6 min read

The Difference Between Vertical SaaS and Horizontal SaaS

Pavel Kaplunou, Marketing Communications

In recent years, the software-as-a-service business model has gone vertical. But what does that mean for the Horizontal SaaS market? And how do these two market planes relate when it comes to software solutions?  Let’s find out by looking at Vertical SaaS vs Horizontal SaaS in more detail.

When we say Vertical SaaS, we are referring to a software market that caters to a niche user segment, domain or industry. While Horizontal SaaS simply refers to more or less universal software solutions that are not specific to any market.

The software as a service market size is estimated to grow to $60bn from 2019 to 2023. It is apparent that while renowned market players such as SAP, Hubspot, Salesforce will retain their piece of the pie, there is still room for growth. And expansion will happen owing to diversification made possible by vertical software companies and their niche offerings.

Vertical vs Horizontal SaaS 

Vertical market software should not be confused with vertical cloud computing. Even though both relate to IT and computing, the two only correlate in terms of how they work for their specific business domain.

With that out of the way, let’s define the two types in order to draw a logical conclusion that ‘sticks’ well.

Horizontal Software-as-a-Service

Very simply put, horizontal software services a horizontal market. A horizontal market is one that caters to a wide and broad ranging market of consumers. In other words, it is a mass-market solution designed to satisfy the needs of as many people as possible.

Horizontal SaaS solutions are used across multiple industries by people with different end-goals and needs. At the same time, their exhaustive character is a good fit for many lines of work and business requirements. It is no doubt wonderful to have a tool that works like a Swiss army knife, with a ranging set of instruments to be used when you need them, for what you need them.

The phrase ‘silver bullet’ is almost always used in a context that describes something, which cannot exist. Unlike the folklore origins of the idiom, horizontal market software is quite actually the magic pill for many problems. However, it is in no way the panacea to all problems.

Vertical Software-as-a-Service

If horizontal market software services the eponymous market, ergo vertical software services a vertical market. The definition of a vertical market is one where incumbent vendors target specific occupations, trades or industries. Therefore Vertical SaaS refers to software solutions aimed at satisfying niche user segments with narrow requirements.

In contrast to Horizontal SaaS, which is an all-in-one solution for a range of businesses and industries, Vertical SaaS is an all-in-one solution for a particular line of business or industry. Though, of course, vertical software does not automatically mean it closes all of the niche business’ needs, and can focus on any particular series of tasks, as well. 

In essence, a Vertical SaaS provider understands the industry they are serving and the trends that govern the needs that arise from its incumbents.

Vertical SaaS and Horizontal SaaS examples

It is worth challenging yourself to enumerate all the industries you can think of, while reading the examples of horizontal market software.  

The most commonly cited Horizontal SaaS examples are: 

  • Office 365 (cloud-based productivity tools offered on a subscription basis)
  • Salesforce (CRM software platform delivered as PaaS)
  • Quickbooks Online (accounting software delivered as SaaS)

How did the challenge go? If you were able to think of at least 5 industries that could take advantage of this software, you have probably bolstered the definition of Horizontal SaaS home.

We might as well lay the industry enumeration challenge to rest. The Vertical SaaS solution examples are:

  • SAP Business ByDesign (cloud based ERP solution for midmarket players)
  • Veeva (cloud platform for life science and pharma) 
  • Guidewire (insurance industry SaaS solution)

Benefits and Shortcomings

When it comes to advantages and disadvantages, we have to put the two types of software as a service models side by side. Their most widely cited junction point is sales and marketing. 

Where horizontal software prioritizes sales and marketing to engage different verticals to try and convert more leads into customers, vertical software will only need to narrowly target a specific cohort. Establishing leadership or market expertise in a specific vertical boosts chances of converting more leads and makes upselling easier.

Similarly, horizontal market solutions rely on customer success stories to promote to a large target audience. What is apparent is that Vertical SaaS will have lower costs of acquisition and overall lower lead generation spend.

Vertical software also enjoys the full benefits of being compliant with industry-specific standards and requirements. For example, if you are a healthcare services provider looking to launch an  application that works with Protected Health Information, you would start your search with software development companies that are HIPAA compliant.

From a software development point of view, a narrower product scope allows the software to be manageable and scalable thanks to reduced complexity of operations and features. In this sense, Vertical SaaS providers can benefit from a smaller in-house team or a small outsourced dedicated team that builds the MVIP

As far as shortcomings go, just like a decade ago, horizontal software solution providers faced the challenge of targeting very traditional, non-digital business. The same stands true for Vertical SaaS provider today. Their biggest barrier will be starting their leads on their digital transformation journey or getting them off the horizontal SaaS needle. 

Tradeoffs and takeaways

In his blog, venture capitalist Tomasz Tunguz talks about Vertical SaaS tradeoff. The idea is about being the market leader in what is ,albeit, a small market, but one where you are the leader nonetheless. 

Netflix in its own time began providing streaming services with content enjoyed by smaller audience groups. It quickly grew into a large player of the home media market and even encroached on full-scale movie making as it grew. As opposed to big Hollywood studios trying to produce mass-market films that captivate as large an audience as possible, Netflix began to craft content for very narrow viewerships.

Whether becoming a vertical software company is worth it or not is entirely up to the entrepreneurs, who are considering the business model. With time, we will surely see a slew of new software companies. Perhaps, the Swiss army knife approach is giving way to innovative and refined precision tools after all. The choice to go vertical has already proven to be a lucrative one for many.

03 April 2020

WRITTEN BY

Pavel Kaplunou , Marketing Communications

Pavel is Smart IT's Marketing Communication Manager. He oversees content creation and is in charge of the official Smart IT blog. Contact Pavel to learn about potential media and content collaborations. p.kaplunou@smart-it.io

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