In the dynamic realm of Software as a Service (SaaS), mastering the various available models can revolutionize your business strategy. As the industry continues to expand and diversify, two key approaches have emerged: Vertical and horizontal SaaS. These models show different ways to deliver software solutions, each with its own benefits and challenges.
Understanding the differences between these kinds of SaaS will help any new startup developing a product strategy as well as an established company considering a change in direction. Read on if you want to delve deeper into the differences between these two strategies. This article explores how each model works, its specific benefits, and the opportunities it offers.
Understanding SaaS Growth:
The Shift to Cloud-Based Solutions and Subscription Services
The Software as a Service industry experienced 20% growth in 2020, largely due to the impact of the pandemic. And it’s not surprising since users can access SaaS products from anywhere with an internet connection, with no need to install them on individual devices. Additionally, software-focused companies use a subscription-based model, where users pay a fee for access to the software.
Not only is subscription management software convenient, but it is also growing in popularity because it helps enterprises streamline operations and offer customers flexible pricing options.
All of these rapid developments have changed the SaaS industry, and now we have both vertical and horizontal SaaS companies. Users are more aware of the different options available. This shows that the market is ready for new products and services to meet changing needs and demands.
Vertical vs. Horizontal SaaS: Key Differences and Market Implications
To understand Software as a Service, it’s important to know the difference between vertical SaaS and horizontal SaaS. What sets these two types of SaaS apart, and how do their business models compare? These questions are essential to understanding SaaS. Here’s a quick summary:
Horizontal SaaS
Horizontal SaaS is a type of cloud-based software designed to cater to a diverse array of businesses across various industries. It has a long-standing presence in the market and is specifically tailored to meet the specific requirements of companies rather than individual consumers.
Some prominent horizontal SaaS examples include:
QuickBooks (accounting)
Salesforce (CRM)
HubSpot (marketing)
Horizontal SaaS companies offer a wide range of services that are suitable for many types of businesses. They use SaaS solutions to decrease the costs of acquiring customers. Recent insights from trustworthy sources such as Nerdwallet, Forbes, and PCMag have pointed out the abundance of high-quality accounting software options for small businesses.
Among these options, QuickBooks is a standout as a leading horizontal SaaS solution designed to meet the needs of businesses across various industries. Similarly, platforms like Salesforce for CRM and HubSpot for marketing provide comprehensive services that help to reduce customer acquisition costs for horizontal SaaS businesses.
When considering the target industries for a horizontal SaaS, it’s important to address the marketing and sales strategies that would require significant resources and tools. These might include cold email software, automated marketing emails, various campaigns, ad server tools, and other inbound marketing strategies. Companies utilizing horizontal SaaS are likely running multiple simultaneous marketing campaigns tailored to different target audiences.
Slack uses different marketing approaches to appeal to various industries. The company runs paid ads featuring stories from different types of businesses, agencies, and nonprofits that use their software. This helps them connect with a wide range of potential customers by sharing relatable success stories.
Vertical SaaS
Vertical SaaS solutions are different from horizontal software because they are designed for specific industries or niches. This type of SaaS is relatively new and less mature than the horizontal model. Many experts think there are lots of opportunities for new vertical SaaS providers because this trend has only recently emerged.
Some examples of vertical SaaS include:
BioIQ (MedTech)
Health Assurance Plan (dental software)
Guidewire (insurance)
Vertical SaaS providers focus on specific industry verticals instead of trying to cover a wide range of products for everyone. Since this software is designed for specific industry niches, it may limit the potential market size—but ensures a more tailored and targeted solution for those industries.
Vertical SaaS tools are often created by people who know a lot about the industry they work in. For example, a dental practice made a Health Assurance Plan for itself. It worked well for them, so they thought it could help other people too. This tool helps with the specific problem in the dental industry of providing dental plans to people who might not be able to get or pay for regular insurance.
Vertical specialized software focuses on a specific industry, requiring fewer resources compared to horizontal software models, which cater to a wider market. This specialized approach allows for a more targeted marketing strategy.
Exploring “On Top” SaaS
How Building on Existing Platforms Fuels New Opportunities
Companies are finding new ways to build software on top of existing platforms, known as “On Top” SaaS.
These specialized tools can be tailored to specific industries or work with multiple platforms. For example, Zapier works with Xero, Salesforce, Slack, and others. This approach allows companies to avoid starting from scratch and enables collaborative opportunities within specific industries. It also opens the door to co-marketing efforts. Companies are using PaaS (Platform as a Service) to create their own software ecosystems, making it easier for SaaS businesses to enter specific markets and align with established brands.
The Contrast Between Horizontal SaaS Giants and Emerging Vertical SaaS Opportunities
Horizontal SaaS providers are usually more established in the market. They have already dealt with the challenges of creating awareness and informing potential customers. These are often big companies that dominate, like Salesforce in the platform space and Asana, Basecamp, Trello, and Zoho Projects in project management. It’s hard for new companies to make a name for themselves in these established markets, but it’s not impossible. New technologies or approaches could shake things up.
Horizontal SaaS offers the advantage of reaching a larger potential market compared to vertical SaaS. This implies that there is greater opportunity for various SaaS products in the horizontal market, making it less likely to become saturated quickly.
When looking at vertical SaaS companies, a big challenge is that they focus on specific industries with conservative business practices or operations in non-digital areas. These companies need to educate professionals in fields such as healthcare, insurance, finance, construction, and manufacturing about the need to move from traditional solutions to modern ones.
Right now, vertical SaaS is almost what horizontal SaaS was 6–8 years ago. Vertical SaaS models provide the chance to dive deep and offer focused solutions tailored to the specific needs of individual industries, which helps to build customer loyalty. As a new market, it’s hard to call any particular vertical SaaS solution “dominant” in any industry at this point.
According to Blossom Street Ventures, vertical SaaS has many advantages. It can be up to 8 times cheaper to acquire new customers because it focuses on specific markets. It also tends to have higher valuations and is more adaptable to customer needs. Additionally, it has lower customer turnover and more opportunities for upselling.
Finally, How You Can Focus on Your Goals for Optimal Success
When making the decision between vertical and horizontal SaaS, remember to focus on your goals and the potential benefits. It’s important to recognize that the market for well-executed SaaS solutions is still thriving, with startups receiving funding and gaining popularity. Partnering with a leading software development company to create a top-notch SaaS solution can help you stand out and succeed.
