The Growth and Evolution of Software as a Service (SaaS)

Understanding the difference between vertical vs. horizontal SaaS may significantly improve your business growth strategy. The tech industry is, by nature, very prone to change, and this includes the thriving SaaS industry. The clearer your understanding of this important concept, its market, the different service models, and what users want, the better your chances of succeeding.

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If you are wondering what the difference between vertical SaaS vs. horizontal SaaS is, this article is for you.

The Growth and Evolution of Software as a Service (SaaS)

By now, virtually everyone has some knowledge or experience using the software solutions that SaaS products offer. The SaaS industry remains a rapidly growing one, with 20% growth in 2020 as a result of the pandemic, and it is expected to grow even more.

SaaS stands for Software as a Service, and it consists of the use of software tools that are hosted on a cloud platform. This means that users can access them everywhere without having to install them on their computers as long as they have an internet connection. Normally, SaaS companies operate under a subscription business model where users pay a fee to access the software.

These days, there is more to SaaS than when it began. Business models have changed to reflect new priorities, including the formation of both vertical and horizontal SaaS companies. Also, users are now more aware of the different alternatives in the market. In other words, the market is now more mature and ready for new products and services.

Vertical SaaS Vs. Horizontal SaaS

To really understand the fundamentals behind Software as a Service, you need to grasp the vertical SaaS vs. horizontal SaaS differences. How is vertical SaaS vs. horizontal SaaS constructed? What makes them different from each other? Do they follow a different business model? These are some of the most important questions behind the SaaS philosophy. Here’s the quick overview:

Horizontal SaaS

Horizontal SaaS is a type of cloud software solution that is targeted to a wide audience of business users, regardless of their industry. Between vertical and horizontal SaaS solutions, the latter is the more mature model in terms of market share; the model has been around for well over a decade. Because of its scope and business model, horizontal software focuses on satisfying business needs rather than individual consumer ones.

Some prominent horizontal SaaS examples include:

  • QuickBooks (accounting)
  • Salesforce (CRM)
  • HubSpot (marketing)

Horizontal SaaS companies aim to provide a broad service that can cover a wide breadth of the market through multiple industries. There are many different types of businesses in multiple niches that choose to use SaaS solutions, including the insurance industry, supply chains, retailers, and manufacturers. This helps a horizontal SaaS business lower its customer acquisition costs.

When thinking about the industries a horizontal SaaS might want to reach, marketing and sales strategies might require considerable resources and tools, such as automated marketing emails, campaigns, and other inbound marketing strategies. They are probably running several parallel marketing campaigns, trying to target different target audiences individually.

Slack is one example of this varied marketing targeting. The company runs paid advertising made to appeal to different types of industries. You can see on their customer stories that they highlight stories of very different businesses, agencies, and nonprofits that use their software.

For this type of SaaS provider, it is important to gather a variety of stories because they want to ensure that their potential target audience can find something they can relate to.

Vertical SaaS

In contrast to the horizontal software model, vertical SaaS solutions include software that is targeted to a particular niche or industry-specific standards. This is a more recent trend in the development of the SaaS market, so it is not as mature as the horizontal model. In fact, there are several commentators who feel that there may be more opportunity for new vertical SaaS providers today due to them being a more recent phenomenon.

Some examples of vertical SaaS include:

  • BioIQ (MedTech)
  • Health Assurance Plan (dental software)
  • Guidewire (insurance)

The vertical SaaS provider doesn’t aim to be all things to all people or cover a broad product category. Instead, vertical software focuses much more narrowly on specific industry verticals. Since vertical software is purpose-built for clear industry niches, it narrows the size of the potential market.

It is often the case that vertical SaaS tools are developed by people with expertise in the specific industry it targets. For example, Health Assurance Plan was developed by a dental practice initially for its own use. They discovered that it worked so well in their own practice that it would be something that others could put in place too. It solves a very industry-specific problem of being able to offer dental plans to those who either can’t afford insurance or don’t have it available as an option.

The vertical SaaS model takes a much more narrow approach to marketing than its horizontal counterparts. This requires fewer resources since it is a small market that focuses on a single industry.

A Third Model: On Top SaaS

In an article for Digital Current, Sam Hurley notes a third model of SaaS that is trending – the “On Top” SaaS. He describes these as:

“Targeted and/or industry-neutral software that is built to integrate with an existing solution, or multiple solutions (e.g., Zapier that works with Xero, Salesforce, Slack, etc.)”

The strength of on top SaaS tools is that they harness the already considerable power of existing SaaS platforms without having to build everything from scratch. This opens the door to co-marketing initiatives and to opportunities within verticals.

To do this, brands have started building proprietary software ecosystems, known as PaaS (Platform as a Service). By using PaaS platforms, SaaS businesses can build new products on top, helping them enter specific verticals while working side by side with a consolidated brand.

Final Thoughts on Vertical SaaS vs. Horizontal SaaS

As stated earlier, a horizontal SaaS provider tends to be at a more mature stage of the market. As such, they have already come through the challenges associated with creating awareness and educating possible customers.

Their customers are already aware of the benefits that a good SaaS tool can bring them, so a big focus has been on the concept of customer success. This promotes the ability for the customer to achieve whatever their desired outcomes are for the product. In turn, a focus on customer success is hoped to lead to better retention rates for the horizontal software. Customers tend to have a number of options they could go with (for example, there are now multiple SaaS offering project management solutions), so their ability to survive will rely on them attracting more leads and retaining enough of “their” people.

We also see among horizontal SaaS that big players commonly remain dominant in their given market. For example, Salesforce is a platform unto itself, while any new players in the project management space will find it challenging to carve out their own area next to Asana, Basecamp, Trello, or Zoho Projects. (“difficult” is not the same as impossible – there will always be the possibility of disruption should significant new technologies or approaches be developed).

On the other hand, a horizontal SaaS has the obvious advantage of targeting a much wider possible market. This means that there is more room for different SaaS, as compared to those which target a narrow vertical. It will take longer for the horizontal market to become completely saturated.

When we look at vertical SaaS companies, one of the first challenges that stands out is that many of them are targeting specific industries that are conservative in their approach to business or operate in a non-digital niche. They have their work cut out for them, educating the health professionals, insurance companies, banks, construction companies, or manufacturing businesses as to why it’s time for them to make a change from their traditional solutions.

Vertical SaaS is right now somewhere around the point that horizontal SaaS was 6-8 years ago. Vertical SaaS models offer the opportunity for the SaaS to go deep, to offer laser-focused solutions that answer very specifically to the problems of an individual vertical, and build loyal customers. At this stage, it is hard to describe any specific vertical SaaS solution as “dominant” in any industry because it’s still a relatively new market.

According to Blossom Street Ventures, there are a few other advantages to pay attention to when it comes to vertical SaaS:

  • They can realize up to 8 times cheaper acquisition costs since their service caters to a specific niche.
  • Lately, they are achieving higher valuations than horizontal SaaS.
  • Able to adapt to customer needs more easily than horizontal ones.
  • Decreased churn and increased upsell opportunities with its customer base.

What is your goal when it comes to vertical vs. horizontal SaaS? Would you even consider an “on top” SaaS solution? Have you done extensive research? The market is still hot for well-executed SaaS solutions, and SaaS startups are still getting funded and growing in popularity.