A Shift In SaaS: The Future Is Vertical

Software as a Service (SaaS) has infiltrated virtually every aspect of business. Many of us use several different SaaS tools as part of our daily workflows. The data is pretty telling too, seeing that the industry as a whole is expected to grow at a compound annual growth rate (CAGR) of 21.2 percent over the next five years.

With so much momentum in the larger ecosystem, some SaaS companies have started to define themselves as specialists in a particular industry, or vertical. Hence was born the term “vertical SaaS.” More and more industries are beginning to adopt solutions tailored to them, as the market size for vertical SaaS has tripled in the last decade.

Building a vertical SaaS company presents many unique advantages but is certainly not without challenges. This article will discuss why and how to build a vertical SaaS product, and common roadblocks to watch out for in doing so.

Defining Vertical SaaS

The earliest SaaS products began as “horizontal,” serving a single function for a variety of industries. A classic example of a horizontal SaaS product is customer relationship management (CRM) software Salesforce. Historically, horizontal SaaS companies have had huge a total addressable market (TAM), yet they require laborious marketing and sales efforts to wrangle in potential prospects.

Vertical SaaS is the more new-age alternative to traditional SaaS products, with a focus on serving the distinct needs of a single industry. Vertical SaaS may be designed for a single business need or a suite of functions. Regardless of the model all vertical SaaS companies have a clearly defined target market, but usually a smaller TAM than their horizontal counterparts. Repsly is an example of a vertical SaaS company that provides retail execution software to consumer packaged goods (CPG) brands.

It’s interesting to note that some legacy software companies are now offering vertical SaaS products as part of their product lineup, proving that there is potential for horizontal and vertical platforms to coexist.

The Benefits Of Going Vertical

The recent uptick in the volume of vertical SaaS products on the market today doesn’t come as a surprise when you consider the advantages of this business model. Positioning yourself as an industry leader makes your company more attractive to a buyer than another company that doesn’t specify in their niche. Vertical SaaS affords sales teams the ability to use language that resonates with their buyers and have a deeper understanding of their business problems, making the transaction that much easier.

Customer retention also becomes less of an issue when customer success teams have expertise in the industry they serve. Marketing teams are in an opportune position to reach prospects since they can concentrate their efforts toward one industry instead of running numerous campaigns simultaneously to target multiple.

Then there’s the luxury of having options for who can hire. Vertical SaaS companies might employ folks with rich experience in a particular industry, but minimal experience in technology. These hires might even come directly from a company’s customer base, offering more industry expertise and credibility. Conversely, they might hire tech veterans who are not as knowledgeable about the industry the company serves. Many vertical SaaS companies are bringing in a mix of both skillsets.

Besides these internal benefits, there are external factors that make vertical SaaS very attractive. While each industry is different, there tends to be less direct competition in any one vertical, and early arrivers can emerge as leaders in a category. Vertical SaaS companies also can do a better job at providing support for industries with demanding regulatory compliance issues.

Moreover, studies show that vertical SaaS companies realize customer acquisition costs up to eight times cheaper than traditional SaaS models thanks to their narrowly-targeted customers. They’re also seeing greater valuations and report lower churn and higher upsell rates from their existing customer base.

Product Considerations

Building a vertical SaaS product requires taking a different approach to product development than horizontal SaaS apps. Here’s some examples of the ways that vertical SaaS products differ from horizontal SaaS.

• Horizontal SaaS companies are tasked with the challenge of attracting decision makers from several industries. This causes the need to create “platforms” instead of products so their customers can configure or build the solution for their unique industry on that system versus buying it off the shelf.
• Horizontal SaaS companies often necessitate significant investment to appeal to buyers in multiple industries and describe how you address their one-of-a-kind problems. In contrast, vertical SaaS companies are known for being more capital efficient.
• Vertical SaaS companies oftentimes face competitive deals against horizontal SaaS brands but have an edge because of their capabilities that are must-have differentiators for their target market. Going back to the example of Salesforce, the CRM giant has chosen to partner with other vertical SaaS players such as Veeva, who works in the life sciences industry.
• Vertical SaaS products take into account industry-specific compliance issues in order to better manage data governance and provide increased transparency.
• Vertical products are more apt to build integrations with other systems that are already widely used in their customers’ industry. They might also build out features that encompass more of their users’ everyday workflows.
• Customer feedback remains a core determinant in the product development of vertical SaaS companies. These companies are more likely to attend industry-specific events, and work in conjunction with customers on standards and regulations. They also can get access to expert insight if they hire from within their customer base.

In Conclusion

As more and more businesses rely on SaaS to get work done, vertical SaaS has emerged as a standout option for its highly tailored offerings. By forming tighter relationships with customers and homing in on the nuances of a particular industry, vertical apps have been able to experience rapid success. It’s no wonder why the space is seeing a record number of unicorns.

About The Author

Mat Brogie is part of the founding team and CEO of Repsly. Mat has spent the past 15 years of his career focused on bringing technology enabled business solutions to the consumer goods industry, having implemented solutions for tens of thousands of field reps at companies such as Coca-Cola, Procter & Gamble, Pepperidge Farm, and hundreds of others.