Horizontal vs. Vertical SaaS Business Models

There are pros and cons of targeting a horizontal vs. vertical SaaS market. 

Early in the evolution of SaaS, it was clear that the biggest markets were horizontal.   Salesforce targeted CRM which is relevant to every B2B company across all industries.  Soon many common functions of enterprises had solutions: for example, NetSuite (accounting) or HubSpot (marketing).  Competition in horizontal markets frequently segments by size of the company.   These companies built broad solutions that addressed a large percentage of either SMB or Enterprise customer needs but frequently do not address nuances or critical functionality of specific vertical industries. 

This opened the door for vertical SaaS solutions.  These solutions focus on a particular industry vertical where the SaaS provider is very intimate with its customers.  The vertical orientation brings several advantages in my experience:
  • They have what I call "Vertical IP".  They fully understand the industry and frequently have spent their careers connected to the industry.  They understand the jargon and lexicon of the industry.   
  • When they wake up in the morning, they know who their customer is.   Marketing and sales expenses are focus on a specific and smaller set of customers.  This efficiency manifests itself in the Customer-Acquisition-Costs (CAC).
  • They are close to their customers and design vertical-specific solutions that are exactly targeted at their customer pain points.   They are not providing the 70% solution and asking customers to workaround the other 30%.   Each release drives more and more value-add into their solutions and builds upon the prior releases capabilities.  This narrowly focused, continuous, development compounds the value of their product to its vertical over time. 
  • When a vertical SaaS player goes to hire the next resource, frequently they have the option to hire someone with deep vertical knowledge within the industry vs. a broad technologist.  This deepens the Vertical IP and allows functions like Customer Success to have tremendous credibility with customers and deep empathy for customer pain points.
  • Frequently, while the Total Addressable Market (TAM) is smaller, the number of competitors is significantly less.   Therefore, it is easier to be the leader in your vertical.
  • Lastly, vertical SaaS players typically are much more capital efficient.
The classic example of a vertical SaaS player is Veeva and the Pharmaceutical industry.  Other examples are Fleetmatics (Logistics), Opentable (restaurants), or Mindbody (salons and spas).

Today, both horizontal and vertical SaaS players have competitors.  I still think the vertical SaaS players have an advantage unless you are in Silicon Valley and have access to infinite capital (think Workday). 

There is an emerging category of player that Sam Hurley in a 2019 Digital Current article characterized at "On Top".  I would call it SaaS-on-SaaS.   This is a function of the API-first platforms.   A great example is Zapier.

Whether you are horizontal or vertical, focus is critical.  Focus is what the military calls a Force Multiplier.  Given the high cost of sales and R&D, a SaaS company can not afford to be too broad.  Focus raises the probability of success.

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