Software as a Service (SaaS) has made business software more accessible by offering cloud-based, on-demand access to a range of solutions, from project management and collaboration to sales and marketing.
Thanks to SaaS solutions, businesses can easily scale their workflows, eliminating the need to install programs locally or pay for expensive licenses.
But not all SaaS products are alike. Some solutions, like Slack or Microsoft, are useful for any kind of business. Other types of SaaS are relevant only to companies in specific industries. The former is called horizontal SaaS, while the latter is known as vertical SaaS.
While their target audience and the breadth of their solutions are the key differences, vertical and horizontal SaaS also share many similarities, in particular cloud-based hosting and subscription business models.
In this blog, we’re going to explore the characteristics of vertical vs horizontal SaaS and what SaaS companies should consider as they carve out a space for themselves in a highly competitive marketplace.
TL;DR
- Software as a Service (SaaS) provides cloud-based, scalable software solutions accessible via subscription models, eliminating the need for local installations or licenses.
- Vertical SaaS solutions are tailored for specific industries, addressing niche needs with in-depth customization and compliance with industry standards.
- Horizontal SaaS refers to general-purpose software solutions that are applicable across industries and attract a diverse user base.
What is Vertical SaaS?
Vertical SaaS solutions are SaaS products designed for use by a specific industry or business vertical. This differs from horizontal SaaS solutions, which target numerous industries with a single product.
Vertical SaaS focuses on solving the specific needs or pain points experienced by industries that are often poorly served by general SaaS providers. Some examples of niches targeted by vertical SaaS providers include healthcare, eCommerce, finance, and education.
To achieve this, vertical SaaS products bring in experts from niche markets to develop industry-specific features, ensure compliance with industry standards or regulations, and integrate with key business platforms that are standard within that industry.
What is Horizontal SaaS?
Horizontal SaaS refers to general-purpose software solutions that apply to multiple industries, rather than providing solutions that are relevant to one specific market.
These platforms provide functionalities that a diverse user base benefits from, such as project management, social media, automated workflows, or customer relationship management (CRM). Because horizontal SaaS companies serve both startups and enterprise businesses, scalability is a key selling point. This commonly takes the form of add-on services or multiple pricing plans that offer flexible features, like additional user seats or more storage space.
By serving common business needs, horizontal SaaS platforms have a very wide target audience. One of the most well-known examples of horizontal SaaS is Salesforce, which offers a broad suite of tools to assist businesses with CRM, email marketing, conversion tracking, and more.
Differences Between Vertical SaaS vs Horizontal SaaS
Now that we’ve got the fundamentals down, let’s take a closer look at the factors that differentiate vertical and horizontal SaaS companies.
Target market focus
Horizontal and vertical SaaS each target a very different customer base. Where vertical SaaS targets specific industries with purpose-built tools, horizontal SaaS companies develop more generic solutions that are relevant to many different types of businesses.
Customization and functionality
Because vertical SaaS models are industry-specific, they typically offer high levels of customization to meet the needs of industries with complex or technical requirements. This could involve building custom workflows or introducing regular updates to keep pace with regulation changes. Because horizontal SaaS products are based around more generic functions, they tend to offer less customization or charge higher prices for customizable features.
Scaling and integration capabilities
Because vertical SaaS has a small market size and narrow product focus, this makes scalability more straightforward than for horizontal SaaS applications. It’s easier to accommodate entrepreneurs to enterprise within one industry than several. Horizontal SaaS, meanwhile, needs to service a much broader range of business types to keep acquiring customers, which can put a strain on development resources.
Market competition and entry barriers
Vertical SaaS providers are designing solutions for a specific niche. As such, they can face less competition because of the high barrier of entry that comes with developing specialist SaaS products.
Horizontal SaaS, on the other hand, needs to reckon with the relative ease of developing generic solutions with a wide range of use cases. This creates an intensely competitive landscape with a higher churn rate, but greater customer acquisition opportunities.
Similarities Between Vertical and Horizontal SaaS
Horizontal and vertical SaaS businesses can overlap in certain areas. Consider the following.
Subscription-based model
Subscription pricing is the most common model used by both horizontal and vertical SaaS providers. Users will pay a recurring monthly or annual fee to access a specific set of services. Usually, providers will offer more than one plan at different price points, depending on the number of features or the amount of customer support included. It should be easy and seamless to upgrade once a business outgrows the functionality of one plan, as this helps SaaS businesses boost customer retention.
Cloud hosting and accessibility
Cloud-based technology allows both vertical and horizontal SaaS platforms to scale seamlessly and offer users access to their applications via the internet, meaning they can use multiple devices and access data on the go. This is a big advantage for distributed teams and companies who have multiple locations of business, as programs don’t need to be locally installed.
Importance of user experience and interface
Regardless of whether your SaaS product is tailored to a specific industry or more general use, easy-to-use platforms and intuitive features are paramount to avoid lengthy user training. Dense or complicated programs cause customer dissatisfaction or even early terminations of subscriptions. In some cases, providers may offer an account manager who is tasked with offering demos or providing tailored support for company users, which helps to streamline the transition into adopting new systems or workflows.
Ongoing updates and maintenance
No SaaS company can stand still for long if it expects to attract and retain users. As customer acquisition costs continue to rise, regular updates, new features, and performance improvements are a must for both vertical and horizontal SaaS companies to stay competitive and relevant to their target audience. A good way of doing this is to run regular engagement surveys to find out what tools or features users would most like to see added to your application.
Vertical SaaS Success Story: Veeva
Valued at $33.4 billion, Veeva is one of the best examples of vertical SaaS and how tailored software solutions are gaining greater market share. Veeva is a cloud-based CRM and content management solution built specifically for the pharma and life sciences industry. Among other functions, it assists companies with liaising with healthcare professionals, tracking sales metrics, data analytics, and process documentation.
What makes Veeva distinct from more general project management solutions is that it’s built to accommodate niche needs like coordinating clinical trials or regulatory compliance, things that more generic cloud-based solutions are not configured for. Some of its biggest clients include Pfizer, Johnson & Johnson, and Merck, who require the seamless scaling made possible by cloud-based technology.
Horizontal SaaS Success Story: HubSpot
HubSpot has probably the greatest name recognition in the SaaS industry, in part because it services such a broad range of different industries. Their inbound marketing tools, which include CRM, email marketing, content creation, and lead generation, are adaptable to virtually any business.
This set of SaaS tools gives HubSpot a simple but powerful value proposition; it’s the engine for your entire inbound marketing strategy. The HubSpot of Startups program offers significant discounts to enterprise-level products if businesses meet certain criteria, which it leverages to share compelling success stories about enabling businesses to scale with confidence.
The company is also very open to user feedback, emphasizing that understanding customer needs is the key to continuously improving its products. HubSpot’s acquisition of chatbot system Motion AI, for example, was a response to growing customer demand for on-demand communication systems.
What’s Next for Vertical and Horizontal SaaS Companies?
The vertical software market has developed much more slowly than horizontal software. This is due to the smaller market size and longer development time needed to create tailored industry solutions.
Not only that, but many industries are subject to strict local and national regulations, which can be onerous to comply with. For example, accounting software like QuickBooks needs to comply with Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS).
Because horizontal types of SaaS applications are more straightforward to develop and support, the market has undergone rapid expansion over the past decade. However, growing competition, combined with the difficulty of trying to serve so many industries with one product, has caused the growth of horizontal SaaS to stagnate in recent years.
As more industries begin to recognize the value of tailored solutions, vertical SaaS is experiencing significantly higher growth and investment. Features such as pre-built integrations, deep integration, industry compliance, and advanced analytics capabilities that use AI and machine learning are more common in enterprise-level vertical solutions, which gives the market an edge over horizontal solutions.
This being said, established horizontal SaaS companies with good market share are well-placed to accommodate this shift by trying to break into the vertical SaaS market. Augmenting their current platforms with industry-specific tools is faster than developing a vertical product completely from scratch, which may give existing horizontal SaaS providers an edge over vertical SaaS newcomers if they can recruit the industry expertise required.
Final Words
Both vertical and horizontal SaaS offer different challenges and opportunities that software providers need to consider carefully when developing a product. While horizontal SaaS offers a much larger target market, the market is intensely competitive because the barriers to entry are lower. This can make it difficult for providers to stand out and retain customers. Vertical SaaS helps providers to gain a valuable competitive advantage by ‘niching down’, but typically requires much longer development timeframes and has more limited use cases.
To select the right SaaS model, you’ll want to determine which aligns better with your software features, target audience, and brand messaging to stand out in an increasingly saturated marketplace. By considering the characteristics of vertical and horizontal SaaS as presented here, you can make the right decision that means better growth opportunities for your business.
And if you’re planning to offer credit card processing services with your software, be sure to partner with a solid payment facilitator like Stax Connect. With Stax Connect, you can quickly fuel the growth of your platform and enable payments for your users. Plus, our custom revenue-share opportunities allow each partner to monetize transactions instantly, growing enterprise value.
Contact us to learn more about Stax Connect.
Quick FAQs about Vertical SaaS and Horizontal SaaS
Q: What is Software as a Service (SaaS)?
Software as a Service (SaaS) offers cloud-based, on-demand access to various business solutions, such as project management, sales, marketing, and collaboration. It eliminates the need for local software installations and expensive licenses, allowing businesses to scale their workflows easily.
Q: What are the differences between Vertical SaaS and Horizontal SaaS?
Vertical SaaS solutions are designed for a specific industry or business vertical, addressing specific needs with high customization and compliance with industry standards. Horizontal SaaS, on the other hand, provides general-purpose software solutions that apply to multiple industries, serving a diverse user base with functionalities like project management, social media, automated workflows, or customer relationship management (CRM).
Q: What is the target market focus for Vertical and Horizontal SaaS?
Vertical SaaS targets specific industries with purpose-built tools, while horizontal SaaS develops more generic solutions applicable to many different types of businesses.
Q: What are the customization and functionality differences between Vertical and Horizontal SaaS?
Vertical SaaS models, being industry-specific, typically offer high levels of customization to meet complex or technical industry requirements. Horizontal SaaS products, based around more general functions, tend to offer less customization or charge higher prices for customizable features.
Q: How do Vertical and Horizontal SaaS differ in scaling and integration capabilities?
Vertical SaaS, with its small market size and narrow product focus, finds scalability more straightforward than horizontal SaaS applications. Horizontal SaaS needs to service a broader range of business types, which can put a strain on development resources.
Q: How does market competition and entry barriers differ for Vertical and Horizontal SaaS?
Vertical SaaS providers face less competition due to the high barrier of entry that comes with developing specialist SaaS products. Horizontal SaaS, in contrast, contends with the relative ease of developing generic solutions with a wide range of use cases, leading to an intensely competitive landscape.
Q: What are the similarities between Vertical and Horizontal SaaS?
Both vertical and horizontal SaaS providers use a subscription-based pricing model, leverage cloud-based technology for scalability and accessibility, prioritize user experience and interface, and focus on ongoing updates and maintenance for attracting and retaining users.
Q: Can you provide success stories of Vertical and Horizontal SaaS?
Veeva is a successful example of Vertical SaaS, catering specifically to the pharma and life sciences industry. HubSpot is a recognized name in the Horizontal SaaS industry, serving a broad range of industries with its inbound marketing tools.
Q: What is the future for Vertical and Horizontal SaaS companies?
Vertical SaaS is experiencing higher growth and investment due to the increasing recognition of tailored solutions. However, established horizontal SaaS companies are well-placed to accommodate this shift by augmenting their platforms with industry-specific tools.
Q: How to choose the right SaaS model for my business?
The choice depends on your software features, target audience, and brand messaging. Horizontal SaaS offers a larger target market but faces intense competition, while Vertical SaaS provides a competitive advantage by targeting a niche but requires longer development timeframes and has more limited use cases.
