Vertical SaaS vs Horizontal SaaS - Key differences and Examples

SaaS (Software As a Service) is one of the fastest-growing fields in the industry these days. Software as a service originally began back in the 1960s, but then it was known as utility computing or time-sharing. Business applications hosting was centralized. Companies like IBM offered services like database storage and computing power to enterprises. Later in the 1990s, with the help of the internet, utility computing evolved into a completely new vertical called application service provider.

An ASP provides applications and related services that can be accessed through the internet by any individual or enterprise. These services were called “Apps-on-tap”. To put things into simple terms, the saas is the evolution of the ASP model where a customer has to pay for the software hosted by a company on a remote computer. One of the best examples of the saas-based company is Netflix. Saas business model has been growing exponentially as it is cost-effective and provides greater flexibility for the customers. Depending on the services required, the saas model is effectively differentiated as Vertical Saas and Horizontal Saas.

Gartner anticipates that saas solutions have generated revenue closer to $150 billion in 2020 alone.

From now to 2023, it is forecasted that the worth of the global saas market will be $60.36 billion and is expected to register a 9% CAGR within four years.

What is Vertical Software as a Service (SaaS) Platform?

Vertical saas is a software solution that looks towards the needs of specific companies such as retail, banking and healthcare. The vertical saas model takes a more conservative approach to market their product as they target narrow market segments.

What is Horizontal Software as a Service (SaaS) Platform?

Horizontal saas models have been in the business for more than a decade. This model is used across multiple industries that have different end-goals and needs. The horizontal saas model also requires sufficient resources for marketing as it targets different industries individually while also running several marketing campaigns parallelly.

Key Differences between Horizontal and Vertical Saas Platform Providers

Before building a saas product, it is necessary to know the difference between vertical saas and horizontal saas. Choose the model that is best suited for the business, so that the products can be created accordingly. The key differences between horizontal and vertical saas are listed in the below table:

Benefits of Vertical and Horizontal Saas Platforms

Vertical saas is a good business idea. The number of problems solved is directly proportional to the value and depth of data. Vertical saas covers companies that offer higher chances of lead conversion. The total cost invested in customer acquisition and marketing is low. The vertical saas model fulfills the industry-specific standards and requirements. Companies that adopt vertical has more customers due to the expertise they offer.

Horizontal saas is not product-specific and is open to all industries that cover various functions and features. But as a result of this, the revenue acquired also is very huge. Horizontal saas has greater chances of acquiring greater market share than vertical saas.

Major Challenges in Implementing Vertical and Horizontal saas

Although both vertical and horizontal saas provides specialized software solutions to companies, there are some challenges involved in implementing them.

Challenges in Horizontal SaaS:

Horizontal saas has a lower customer retention rate as they don’t always meet industry-specific needs.
Establishing leadership in specific companies is difficult.
Huge investments must be made in customer acquisition and marketing.

Challenges in Vertical SaaS:

Acquiring leads is difficult as marketing is based around a small group of audience.
It is difficult to find convincing prospects to migrate from horizontal to vertical saas if the company already uses horizontal saas.

Choosing between vertical and horizontal saas platform for your business

The right type of saas model depends totally on the long-term goal. If the business motive is to serve customers across multiple industries, then choose horizontal saas. If the motive is to serve one industry, then choose a vertical saas platform.

Here is how creating vertical saas products is different from creating horizontal saas products:-

Vertical saas companies are more cost-effective due to their narrow range of target audience. But they have to consider industry-specific compliance issues for better data governance and improving efficiency.

The Transformation from Horizontal to Vertical SaaS

As companies start to recognize the value of industry-specific and personalized data to succeed in today’s competitive world, they no longer work the way they did five years ago. Technology has evolved from monetizing the biggest opportunities across industries to creating vertical-specific saas solutions. Some of the steps for implementing vertical saas in the business module are mentioned below:

Pick the right vertical
Focus on one vertical at a time
Ensuring if the product offers industry-centric compliance tools
Understanding the challenges of target customers
Product promotion

Pick the right vertical

As mentioned above, vertical saas solutions aren’t open to all industries. Instead, it tackles the industry-specific problems pretty well. Hence it is important to pick the right vertical.

The first step is to conduct market research in picking the right vertical. Once the right vertical has been decided, narrow down the list to the top 10 companies in terms of both vertical and horizontal saas and check the pricing and features they offer.

The next step is to determine how to differentiate your product from theirs. If there are not enough things to make the product, then it is better to choose another vertical.

Focus on one vertical at a time:

One of the best benefits of focusing on one vertical is that the industry-specific metrics can be acquired and aggregated. This data can then be monetized via value-added solutions like benchmarking and marketing reports.

As must compelling it can be to jump to another vertical because the client doesn’t have common issues or you are looking to improve the customer base. It is better to avoid that as each vertical requires product customization to a certain extent which will limit the capabilities of offering a solution.

Ensuring if the product offers industry-centric compliance tools:

Targeting a single market segment helps in providing industry-specific compliance tools and standards. The more the industry-specific tools offered, the better the product is. If the company serves global customers, it is important to know the laws and standards of different countries. For instance,

If a company serves healthcare customers, built-in HIPAA (Healthcare Information Probability and Accountability) compliance options can be provided.

If the company serves financial customers, financial services compliance options can be provided.

Understanding the challenges of target customers:

It is essential for saas companies to provide solutions that completely address the industry’s issues. This increases the chances of attaining and retaining customers.

Insiders can provide deep insights into the company with clear details. This helps in improving the product. Another advantage of engaging with industry insiders is that it enables in quickly understanding and adapting to the market changes. The insiders could be anyone who has been in the company for a long time such as customers and researchers.

Product promotion

Even if the product is efficient and solves customers’ problems, if the product is not known, the customers cannot buy it. Another important factor to promote the product is to make the customers choose your product over the competitor’s product. In order to make the customers choose your product, building trust with tailored marketing is important.

Factors to take into consideration while promoting the product:

Conducting keyword research to identify the products easily.
Creating a site that is mobile friendly and it loads quickly.
Make the product unique by writing attractive descriptions.
Create valuable content to showcase industrial expertise.
Run targeted PPC ads on platforms like google.
Getting the product into third-party review sites like GetApp.

According to a study, the global saas workloads are expected to reach 380 million by 2021 while the mobile market is set to reach 7.4 billion.

The next generation of software businesses is offering vertical platforms to customers who require industry-specific features. It has been noted that vertical saas is growing faster than traditional horizontal saas. In order to build a successful software business, knowing the target industry at a deep level is very essential. Additionally, knowing the customer’s needs and providing collective data on customer behavior plays a dominant role in the business by offering more than a generic approach.

Expersight offers expert insights in knowing the needs of software, SAAS and other online services. Expersight helps in ensuring that your software business succeeds by providing insights that can increase sales and the development of your business.