SaaS has given rise to a number of specialised solutions tailored to specific industries—known as vertically specialised SaaS (vertical SaaS or vSaaS for short) in the past fifteen years.
Unlike horizontal SaaS platforms, which cater to a broad range of industries, vertical SaaS solutions focus on the nuanced needs of a particular market, such as healthcare, legal, accountancy or hospitality. As the demand for tailored software grows, vSaaS is becoming a powerful force in the software space.
If you're a SaaS founder looking to grow your business, now is an ideal time to consider going vertical. This post explores what vSaaS is, the advantages it offers, and why it's an exciting time to invest in this growth model.
What is Vertical SaaS?
Vertical SaaS refers to software solutions designed specifically for a particular industry. These products address the unique pain points, workflows, and regulatory requirements of that industry, making them more appealing than general-purpose tools.
For example, Toast is a vertical SaaS platform designed for restaurants, providing point-of-sale (POS) systems, inventory management, and payment solutions specifically for that sector. Other examples include Clio for legal practices and ServiceTitan for HVAC and home services businesses.
The main difference between vertical and horizontal SaaS is focus. Horizontal SaaS platforms like Salesforce or Slack target a narrow piece of software at a wide range of industries, providing general tools that can be adapted to various use cases. In contrast, vSaaS is laser-focused on specific markets, allowing them to offer broader software with deeper integrations, industry-specific features, and customisable workflows.
Why Vertical SaaS is Thriving Today
1) Tailored Solutions for Complex Needs
One of the key benefits of vertical SaaS is its ability to solve highly specific problems. Horizontal platforms often fail to meet the precise demands of industries with unique regulations, workflows, or customer interactions. vSaaS offers an industry-specific solution, which enhances efficiency and customer satisfaction.
For instance, Toast doesn’t just provide payment processing; it includes solutions that address the unique challenges of restaurant management, such as kitchen operations and front-of-house management. The result? A platform that seamlessly integrates into the daily workflow, delivering greater value than a one-size-fits-all horizontal platform.
This type of specialisation can be particularly valuable in highly regulated industries like healthcare and finance, where compliance requirements are strict and nuanced.
2) Higher Customer Loyalty and Retention
Businesses using vertical SaaS are more likely to stick with the product long-term. This is because it is difficult to switch to a horizontal solution once the vSaaS has become deeply embedded in their operations. By offering a solution that fits seamlessly into the industry’s existing processes, vertical SaaS platforms have the advantage of high customer stickiness.
For vSaaS companies, this translates into high net revenue retention rates (NRR). When customers continue using and expanding their use of the product, it leads to stronger lifetime value (LTV) and reduces churn.
3) Market Leadership Potential
While horizontal SaaS companies often struggle to capture more than 20% market share, vertical SaaS businesses can dominate their niche, achieving market shares of over 40% (Tidemark Equity).
Why? Because they are perceived as "built for" the industry they serve. For instance, Toast is well-known among restaurant owners as the go-to software for restaurant management.
As more businesses within a vertical adopt a specific platform, the software becomes the industry standard. This network effect is particularly powerful in sectors like healthcare and legal services, where businesses rely on word-of-mouth recommendations within tight-knit communities.
4) Lower Customer Acquisition Costs (CAC)
Acquiring new customers is one of the biggest expenses for SaaS businesses, but vertical SaaS benefits from local brand awareness and network effects. Once a company gains a foothold in a local market, referrals from existing customers help drive growth organically. This is a significant cost advantage compared to horizontal platforms, which often have to spend aggressively on marketing and sales.
Additionally, with a smaller, more targeted audience, marketing efforts can be more focused and personalised. This results in lower CAC and higher conversion rates.
5) Expansion Opportunities within the Value Chain
Vertical SaaS companies can extend their reach by offering additional products and services that cater to their existing customer base. These businesses can move "up" or "down" the value chain, providing complementary solutions to both customers and their suppliers.
For example, once a vSaaS platform gains traction, it can start offering financial services such as lending, payroll, and insurance, or even expand into the broader ecosystem by integrating with suppliers and distributors. This allows for a larger total addressable market (TAM) and increases the platform's value to its users.
6) Data Leveraged for Industry-Specific Insights
With deep access to industry-specific data, vertical SaaS platforms can offer powerful analytics and insights that help their customers improve their operations. In sectors such as healthcare or retail, where businesses are highly data-driven, this can provide a significant competitive advantage.
This data also allows vSaaS providers to continually refine their products, offering features that are most valuable to their customer base, improving the platform over time.
Why Now is the Best Time to Build a Vertical SaaS Business
The SaaS market is currently undergoing a transformation, driven by the need for more industry-specific solutions, and the rise of artificial intelligence. Here are a few reasons why it's the right time to dive into vSaaS:
1) Less Competition
While horizontal SaaS markets are crowded, vertical markets are often overlooked by big players. Many investors once considered vertical markets "too small" to warrant attention. This perception is only slowly changing as more vSaaS companies demonstrate that they can dominate their verticals and achieve impressive profitability.
Fewer competitors mean it's easier to gain traction and become the market leader, particularly when the software is tailored specifically for the industry's needs.
2) COVID-19 Has Accelerated Digital Transformation
The global pandemic has forced organisations to adopt digital solutions at a faster rate than ever before. Many industries, especially those in healthcare, retail, and hospitality, are now looking for specialised software to help them navigate new challenges. This has created fertile ground for vertical SaaS platforms to thrive.
3) Access to Capital for Software Targeted at Specific Verticals
Investors have started recognising the potential of vertical SaaS, and capital is becoming more readily available for companies in this space. With growth equity firms like Tidemark focusing specifically on vertical SaaS, now is an opportune moment to found or grow a vertical SaaS business.
Conclusion
Vertical SaaS has evolved to be a dominant force in the software industry. By offering tailored solutions, creating strong customer loyalty, and dominating specific markets, vSaaS businesses are well-positioned to thrive.
If you're a SaaS founder weighing your growth options, there's never been a better time to consider focusing vertically. The opportunities for growth, expansion, and market leadership are significant, and with the right strategy, your business could become the industry leader in your chosen vertical.
By focusing on the unique needs of specific industries, vertical SaaS companies are not just building software—they’re transforming the way entire sectors operate. Whether you're thinking of launching a new product or shifting focus in your existing SaaS business, the vertical model is one worth exploring.
