The Software as a Service (or SaaS) industry has grown a lot over the last several years. It generated over $100 billion in 2020 alone, and it’s expected to grow even more this year and beyond.
Are you thinking about diving into the SaaS industry? If so, you likely have questions about the different types of SaaS business models, including Vertical SaaS and Horizontal SaaS.
Have you never heard of these models? Do you have questions about which one is right for you? Read on to learn everything you need to know.
What Is Vertical SaaS?
Vertical SaaS is a relatively new faction of the SaaS industry. These vendors create products that are targeted to a specific industry, space, or trade. They zero in on particular industry verticals, and all of their solutions are geared toward one niche.
Vertical SaaS Examples
The following are examples of brands that use the vertical SaaS model:
- Textura: A software used by many construction management businesses
- Fleetmatics: Software used in inland logistics that helps with vehicle allocation
- Guidewire: Software often used in the insurance industry
- Veeva: SaaS used by many pharmaceutical businesses
- Infor: SaaS used by manufacturing businesses
Vertical SaaS Pros
Vertical SaaS is new, but it’s gaining popularity very quickly. Lots of developers are abandoning the traditional horizontal model in favor of a vertical approach. The following are some of the most noteworthy reasons why they’re doing this:
Meets Industry Standards
Vertical SaaS products are specially designed for a particular type of business or industry. Because of this, they must meet that industry’s standards and requirements for safety, security, etc.
This is a major selling point for Vertical SaaS vendors. If they can make it clear to their potential customers that their product is unique because it’s specifically made to check all their boxes, they’ll have an easier time closing the deal and making a sale.
Highly Targeted Products
When developing a product using the Vertical SaaS model, SaaS vendors have to do a deep dive into their target audience’s needs. Rather than trying to learn a little bit about every potential client who might use their software, they get to focus on a specific niche and get to know it very well.
In most cases, these deep dives lead to a highly targeted and usable product that clients will actually want to incorporate into their workflows.
Great for Late Adopters
The SaaS industry is huge, yes. However, there are still plenty of outliers who have been slow to jump on the bandwagon, preferring to use in-house applications (if they’re using technology at all).
These businesses might not be swayed by more generic, horizontal SaaS products. However, a highly targeted option created with only their industry in mind may be more enticing and convince them to get on board.
Higher Customer Retention Rates
Vertical SaaS developers tend to have higher customer retention rates than vendors who use the Horizontal SaaS model.
Because Vertical SaaS products are super-targeted, it’s hard for customers to find another comparable software. There’s less competition, which means customers are less likely to jump ship and try to find another software to use instead.
In other words, why would they want to stop working with a vendor who provides a niche-level experience just to partner with a company that offers a more generic solution?
Vertical SaaS Cons
At the same time, there are some downsides to Vertical SaaS. Here are a few potential cons to keep in mind:
Acquiring Leads Is Harder
Before diving into the world of Vertical SaaS, it’s important to note that it can be harder to acquire leads at the beginning.
Since your audience, as a whole, is smaller and more specific, it can be more challenging to get in touch with the right people (at least to begin with). It may also take multiple attempts to sell customers on the benefits of your software, especially if they’re resistant to the idea of Software as a Service as a whole.
Customers May Not Want to Switch
When selling Vertical SaaS, you’ll have to get very good at explaining what the differences are between your product and the Horizontal SaaS someone is already using.
If you can’t articulate these differences and explain the advantage of using a product designed specifically for their industry, it’ll be hard to convince them that they ought to jump ship and start using your software instead.
What Is Horizontal SaaS?
While vertical SaaS goes “deep” and focuses on customers in a specific niche, horizontal SaaS caters to a wide range of customers. People across multiple niches can use this software to run their businesses more efficiently.
Horizontal SaaS Examples
Most well-known SaaS companies use the horizontal SaaS model. Because they have a larger reach, it’s easier for them to expand and build brand awareness.
The following are some examples of horizontal SaaS vendors:
- Salesforce: SaaS often used for Customer Relationship Management solutions
- Office 365: Software used for project management and productivity management
- Quickbooks: Software used for online accounting
- Slack: SaaS used for easy online communication
- Hubspot: Software used for marketing management
Horizontal SaaS Pros
What kinds of advantages can Horizontal SaaS developers experience? Here are some benefits of choosing this model for your business:
Bigger, More Accessible Market
Horizontal SaaS allows you to go broad with your marketing rather than deep. Since you’re basically selling your product to everybody, you have access to a wide range of potential clients when you take the horizontal approach.
These people are often easier to reach than those who are members of a particularly niche industry, too.
Get Products to Market Faster
Horizontal SaaS products often don’t require as much preliminary research as Vertical SaaS products since they’re not as highly targeted. This means that you could get your product to market faster and start earning revenue from it sooner.
Recognition and Customer Trust
Customers are more familiar with Horizontal SaaS products (who doesn’t use Slack?). As a result, they may be more willing to trust a developer who’s selling this type of product, rather than one that’s geared toward one specific niche.
Horizontal SaaS Cons
If you go with Horizontal SaaS, you may be setting yourself up for some potential obstacles, too. Here are some common cons Horizontal SaaS vendors report:
Higher Customer Acquisition Cost
In general, Horizontal SaaS developers face higher customer acquisition costs than Vertical SaaS developers. This has to do with the amount of competition they’re dealing with.
There are far more businesses using the horizontal model than the vertical one. This means you will likely have to spend more money to differentiate yourself from your competitors and convince people to try your software instead of another one.
Lower Customer Retention Rates
In addition to spending more money to attract their customers, many Horizontal SaaS companies find that they have lower customer retention rates.
There’s always a new SaaS product entering the market, especially now that Vertical SaaS is becoming a more popular option. If your software doesn’t offer features that are specific to the customer’s niche and unique business needs, they might be less inclined to stay loyal to you.
Harder to Establish Leadership
Not only is it harder to differentiate yourself from competitors in the Horizontal SaaS space, but it can also be harder to establish yourself as an industry leader. Where there are so many other developers offering products that are similar to yours, it’s easy to get lost in the fray.
Vertical SaaS vs Horizontal SaaS: Which Is Right for You?
With Horizontal SaaS, you have access to a larger market, but it can be harder to differentiate yourself, and you may spend more money trying to do so. With Vertical SaaS, it can be harder to generate leads initially, and you may have to be more persistent when selling your product to potential customers.
Now that you know more about the differences between Horizontal SaaS and Vertical SaaS, which model do you think will work better?
Whichever option you’re leaning toward, keep these pros and cons in mind. They’ll help you make the best decision for you and your business.