Rapid growth in the software-as-a-service (SaaS) industry shows no sign of slowing down, with research firm OpenView Labs forecasting a 21.5 percent increase to $71.2 billion by the end of 2018, and the cloud market overall to hit $187.3 billion.
The vertical SaaS segment in particular remains a significant driver of that growth, powered by an influx of digital businesses that focus on a specific industry. Unlike their horizontal counterparts – whose software suites are available to a much broader audience to maximize revenue and support scale – vertical SaaS companies maintain a narrower focus.
Horizontal SaaS offers a certain suite of service tools, such as data analytics, finance, budgeting and reporting, or marketing automation, and sells across a vast spate of industries. Vertical SaaS, on the other hand, tailors to a particular business community, such as legal, manufacturing, real estate, or hospital networks, to name a few.
Less Competition in the Vertical SaaS Space Equals Greater Opportunity
One of the main challenges that horizontal SaaS businesses face is the sheer volume of competition in the space. Whether it’s a start-up company, a small- to mid-size enterprise, or a global software juggernaut with near unrivaled brand value, any SaaS business that offers a similar slate of products is competing for the same customer dollar.
Likewise in the horizontal space, once a company achieves a certain reach and scale, the market is more easily cornered, and the top companies have access to exponentially more resources to keep their competition at bay. In short, it’s difficult to break through. Think Microsoft or Adobe.
Although they traffic in a much smaller market, vertical SaaS businesses develop a product that’s far more tailored to the needs of their target audience. Each industry requires software that molds to a customized set of processes (workflows, databases, etc.), and delivering a more precise product offering enables a SaaS business to retain loyal customers and carve out a niche in their marketplace.
And, more generally, there are far fewer players within a given segment, which supports opportunity for increased brand value for any one vertical-focused company.
Benefits Gained From Rich Customer Data
One of the benefits of operating an ecommerce business versus a physical store is the accumulation of rich customer data over time. SaaS companies are able to segment and analyze this data to better understand client behavior and improve upon the product in particular and the client experience in general.
In order for a horizontal company to deliver on an industry’s specific needs long-term, the software would need to be highly customizable to all industries it serves, and be able to quickly adapt as those needs change and evolve. Maintaining breadth at the horizontal level while simultaneously delivering depth at the vertical level is a significant challenge, even for the larger companies.
For vertical SaaS companies, customization based upon a deep understanding of the needs and challenges of the industry it serves is essentially hardwired into the software’s design. No ad hoc customization is needed, so not only is the SaaS product designed specifically for the business, data and insights gained can be leveraged to solve specific problems that their clients are facing. In this scenario, it’s far easier for a vertical SaaS company to foster loyalty from their client base, create opportunity for upsells, and – ultimately – build long-term partnerships.
There are certainly benefits and challenges for both horizontal and vertical SaaS businesses alike, and each SaaS company should tailor themselves to their specific goals. The recent surge in ecommerce companies with a vertical approach, however, likely portents more changes to come.
Kyle Shamorian is the content marketer for cleverbridge.