Vertical SaaS is an emerging branch of software solutions tailored to specific industries or niches—as opposed to software for generic business needs like CRM, project management, or accounting (otherwise known as horizontal SaaS).
The world of software-as-a-service is an ever-changing one. With revenue expected to reach $135.10 billion in 2023, advancements in the SaaS industry happen almost in the blink of an eye. SaaS businesses must, therefore, keep up with the latest industry trends and always be on the lookout to expand their addressable markets.
In fact, many SaaS startups have been able to achieve multi-billion dollar valuations by focusing on vertical SaaS. The fact that vertical SaaS companies like Veeva, Toast, Blend Labs, and Procore have gone public is proof of how profitable this business model can be.
“People ask, why can Vertical SaaS reach higher levels of market share than their horizontal counterparts? It’s because they are purposed for a specific end vertical, customer, use case. They are Built to Serve,” says Tidemark founder, David Yuan.
In this article, we’ll dive deeper into the world of vertical SaaS, exploring its benefits, challenges, and best practices for success.
- Vertical software solutions are those that are hyperfocused on addressing the pain points or specific needs of small and medium businesses (SMBs) in certain industries or niches. In contrast, horizontal SaaS companies provide generic solutions that cater to the needs of several different industries.
- Vertical SaaS companies often focus on developing solutions for complex or underserved industries that have typically been ignored by bigger software companies. The benefits of vertical SaaS include improved functionality, greater cost savings, and increased operational efficiency.
- The most common challenges associated with vertical SaaS are competing for adoption against popular legacy or traditional SaaS solutions, a smaller lead pool that may soon exhaust, and managing the expectations of consumer-like SMB customers.
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Vertical SaaS: Definition and Characteristics
SaaS products can be largely divided into the following two types: horizontal SaaS solutions and vertical SaaS solutions.
Vertical software solutions are those that are hyperfocused on addressing the pain points or specific needs of small and medium businesses (SMBs) in certain industries or niches.
For example, companies in the healthcare or restaurant industry will need solutions that help with scheduling patient appointments or managing tables respectively. Vertical SaaS businesses build solutions that address such specific needs of a particular industry.
Some of the key characteristics of vertical SaaS include:
- Industry-specific solutions. Because these solutions are designed to meet the specific needs of particular industries or niches, they often provide specialized features and functionality.
- Deep domain expertise. Because vertical SaaS platforms are niche-focused (e.g., financial services, healthcare, real estate, eCommerce, etc.), these software companies are able to develop deep expertise in those niches. They can understand the unique needs and challenges of those industries and develop highly effective and targeted solutions.
- Targeted marketing strategies. Being niche-focused also means the company has to chase down a smaller, more reliable pool of leads. This increases conversions and ROI and lowers the customer acquisition cost.
- Customizable solutions. Vertical SaaS solutions often come with a high degree of customizability, so users can configure them to suit their specific needs. This is particularly important in industries with unique workflows and processes.
- Integration with other software. Vertical SaaS companies often provide industry-specific integrations—e.g., electronic health records (EHRs) in healthcare—that allow for seamless data transfer and improved efficiency.
In contrast, horizontal SaaS companies provide solutions that cater to the needs of several different industries. For example, Slack is a communication platform that can be used by any company for organization-wide messaging—regardless of the industry it belongs to.
To summarize, the following are the main differences between vertical and horizontal SaaS models:
|Vertical SaaS||Horizontal SaaS|
|Industry or niche-specific||Generic; caters to several industries|
|Relatively new in the market||Has been around for much longer|
|Fewer established players in the market, so entry is relatively easier||Many established players exist in the market, so entry is more difficult|
|Better integrations are possible because solutions are niche-specific||Industry-specific integrations are not possible|
|Greater conversions and ROI since the target market is narrower||Better growth opportunities since the target market is broader|
|A smaller, more targeted lead pool ensures lower customer acquisition costs||Customer acquisition costs are higher due to a larger, more generic lead pool|
Benefits of Vertical SaaS
Bessemer Venture Partners reports that market capitalization of the vertical SaaS industry has grown 12x—from $50 billion in 2010 to more than $600 billion in 2020.
The reason behind this phenomenal growth? Vertical SaaS companies often focus on developing solutions for complex or underserved industries that have typically been ignored by bigger software companies.
For example, small businesses in healthcare, food service, financial services, or construction often struggle to keep up with changing regulations, distinctive business models, and complex sales processes. Vertical software solutions tailored to meet such needs have made their lives a lot easier.
According to Fractal Software, “Vertical SaaS businesses don’t set out to fundamentally change the industries they operate in by replacing key parts of their workflows. Instead, they create the tools that enable business owners to do what they already do better.”
Here are some of the most notable benefits that vertical SaaS offers:
- Improved functionality. Being industry-specific, vertical SaaS can provide end-to-end solutions (with native integrations) that satisfy the specific needs of niche customers.
- Cost savings. Since vertical SaaS provides solutions tailored to the needs of a targeted audience, its conversion rates are usually higher. Optimized acquisition and retention strategies coupled with lower transaction fees provide vertical SaaS companies with better scalability prospects and cost savings.
- Increased efficiency. The pandemic forced businesses to rework their operations in order to improve efficiencies in the face of an economic recession. Vertical SaaS companies came to their rescue by providing software that increased employee productivity while reducing the need for additional headcount. By providing native integrations that don’t need additional developmental effort, vertical SaaS vendors helped small businesses improve operational efficiencies.
The rapid growth and success of vertical SaaS have led software giants like Salesforce and Microsoft to come up with “industry-focused” cloud services for sectors like healthcare, manufacturing, financial services, etc. These enterprises have realized that they will need to level up if they want to compete with the next generation of SaaS startups.
Challenges of Vertical SaaS
Despite its many benefits, vertical SaaS does come with its fair share of challenges. Let’s take a look.
As a software vendor with a niche market focus, you’re likely to come across prospects who have been using a traditional SaaS or a legacy solution for their business needs. Often these would be popular brands that have come to be accepted as industry standards (e.g., QuickBooks for accounting or HubSpot for marketing).
So even if you might have a better solution for your target audience, they may be unwilling to switch and may perceive it as a downgrade from their current system.
Think about how you can add more value to your software products—something that no one else is currently offering. Elevate the customer experience so that it’s unparalleled—be it through exceptional customer service, payment processing solutions, special customizations, workflows, or insights that your competitors don’t have the expertise or the bandwidth to provide.
Integrating payments within your platform will also make your platform stickier, and can provide an additional stream of revenue for your business. By offering payments as a feature of your product, you can customize your pricing structure, differentiate your platform from competitors, and deliver a more holistic experience.
2. A smaller lead pool
When you cater to a niche industry, your lead pool will likely be limited in size. Smaller industries will always get outnumbered by more mainstream ones. So even though your conversions may be greater, you’ll always run the risk of exhausting your lead pool.
There are a few different ways vertical SaaS vendors can expand their total addressable markets (TAM). Think about how you can help the customer succeed. What services can you offer to help their business expand? What new features or integrations can you upsell? (Hint: Payments are a good one!)
You may also want to consider exploring similar niches. For example, if your solutions cater to spas, you may want to venture into salons as well.
3. Consumer-like expectations from SMB customers
Perhaps the biggest challenge vertical SaaS vendors face is managing the expectations of their SMB customers. They are almost consumer-like in that they want inexpensive solutions and are a churn risk.
Plus, many of them don’t want to pay for a separate payment solution; they want it to be integrated into the software their business runs on. This is all the more important as even end-users don’t want to deal with multiple payment components.
For example, many restaurants use Toast to manage their business end-to-end—from processing payments to managing payroll, inventory, and lots more. Many wellness service providers will use Mindbody to manage bookings, scheduling, and payments from a single integrated platform.
Integrate payments into your vertical SaaS platform to ensure seamless payments. Not only can this help you build a new revenue stream by monetizing payments, but it can also help you reduce churn as customers start to rely more on your “all-in-one” solution.
If you’re looking to integrate a complete payments ecosystem within your vertical SaaS platforms—quickly and inexpensively—look no further than Stax Connect. Our all-in-one platform handles safety, security, risk, and compliance so you can focus on what matters most—growing your business.
Examples of Vertical SaaS
Now that we’ve covered the basics, let’s take a look at some real-world examples of successful vertical SaaS solutions in various industries.
Hindsite, a provider of lawn care and irrigation business software, was doing an amazing job of simplifying operations for its users but was looking for a way to add even more value to its solution by integrating payments into it. They chose Stax Connect as their partner owing to the outstanding support, communication, and visibility our team provided—every step of the way.
As a result of the integration, Hindsite has been able to save significant time that users would otherwise spend on reconciling revenue. This has greatly improved the user experience as their customers no longer need to use two different systems to manage their business.
Founded in 2012, Blend is a digital lending SaaS platform that simplifies applications for financial services firms. The company began as a solution catering to mortgage applications but went on to offer a diverse range of products for consumer loans, deposit accounts, insurance marketplaces, and credit card applications.
By targeting similar verticals, Blend was able to successfully expand its addressable market. In July 2021, the company went public raising $360 million with a market capitalization of almost $4 billion.
Veeva, a cloud-based software provider for the global life sciences industry, started out by offering CRM software to pharmaceutical sales reps. They started working on their future offerings well before hitting saturation in the CRM market.
Soon they came up with a new product line not just for the sales function but also for clinical operations and research functions. That’s how it became a $2.4 billion company (with initial funding of just $10 million) in less than six years.
Vertical SaaS showcases the power of targeting a niche market with powerful, tailor-made solutions that address its needs and challenges. In the current business landscape, this strategy definitely has more merits than developing generic products that appeal to all industries. The key is to find the missing piece in a niche market and focus on providing solutions to tackle that.
There will always be new trends and opportunities in the dynamic world of SaaS. However, offering integrated payments can be a simple yet effective way to add more value to and elevate the user experience of your vertical SaaS offering. Contact us today to find out how Stax Connect can help you achieve this easily.
What is vertical SaaS?
Vertical SaaS, also known as industry-specific or niche SaaS, is a specialized form of software-as-a-service that caters to a specific industry or niche, providing tailored solutions to meet the unique needs of that market.
What is vertical vs horizontal SaaS?
Vertical SaaS solutions are designed to meet the specific needs of a particular industry or niche (e.g., finance, real estate, healthcare, etc.). They offer specialized features and functionality that are tailored to the requirements of that market.
On the other hand, horizontal SaaS solutions (like project management software or email marketing tools) are designed to meet the needs of a wide range of industries and businesses. They offer more generic features and functionality that can be used across different industries and business types.
What are the advantages of vertical SaaS?
Being niche-specific, vertical SaaS solutions often provide specialized features and functionality that are customizable, targeted, and highly effective. Marketing to a small, targeted lead pool can enable lower customer acquisition costs and greater conversions. Also, by providing native industry-specific integrations that don’t need additional developmental effort, vertical SaaS companies can help SMBs improve operational efficiencies.