1. Deeper Business Value: Horizontal solutions often struggle to deliver industry-specific insights and functionalities. A generic CRM might manage leads, but can it optimize industry pricing? Vertical solutions, on the other hand, are designed with the intricacies of a specific industry in mind. They understand the jargon, the workflows, the pain points. This translates to higher productivity, improved decision-making, and ultimately, higher ROI.
2. Shallower Competitive Landscape: The horizontal SaaS market is a deeply entrenched – and scarred – battlefield. 30K+ companies fight for mindshare and market dominance, leading to price wars and feature fatigue. We’ve seen the result in the last 18-24 months as SaaS growth – and retention – rates have plummeted. Verticals, however, offer a less crowded playing field. Their smaller addressable markets (more on that in a bit) keep competition at bay, allowing vertical solutions providers to establish strong customer relationships and build defensible moats around their niche expertise.
3. Differentiation & Sustainability: Investors are increasingly drawn to businesses with clear differentiation and proven value propositions. Vertical solutions tick both boxes. Their targeted approach resonates with specific customer segments, leading to faster adoption and higher customer lifetime value. This makes them attractive investment targets, especially in a market where generic “me-too” solutions are losing their shine.
Vertical SaaS also appeared at the top of CompTIA’s list of 10 SaaS Predictions for 2024. The article states “There will likely be a surge in vertical SaaS solutions tailored to specific industries. This trend will be driven by the growing demand for customized software that caters to the unique needs of different sectors such as healthcare, finance, education and manufacturing.”
Of course, “going vertical” is non-trivial – and much easier said than done. Deep industry domain knowledge takes time – and experience – to build, and generally requires a much more expansive delivery model.
The funding model also changes – for nearly all verticals. The Total Addressable Market (TAM) is by definition significantly smaller than a horizontal comparable. Under the historic venture capital model, a smaller TAM is a major red flag – a major reason why there are so few vertical SaaS companies currently – because VCs have been skeptical that vertical markets are large enough for venture-sized returns. Of course, as tech investors have more recently sought to reorient their investment criteria toward profitability vs growth, there has been some change in perception at least, though it remains to be seen whether VCs will have the same success applying their growth-oriented models to smaller TAM vertical markets.
