27.4.2015 | Markus Manninen
Vertical SaaS vendors sell software as a service for a specific industry like life sciences, construction, financial services, etc. Horizontal SaaS vendors on the other hand sell software as a service for functional areas like sales, finance, HR, etc.
Cloud has changed the software industry but the change is nowhere near ending. Before the cloud era software was basically too expensive to build for niche markets. In those days the horizontal focus was usually the winning strategy and biggest vendors dominated the industry. Then about ten years ago cloud and SaaS emerged. Lots of small SaaS providers started to disrupt the market. The SaaS products of this first wave were typically horizontal SaaS like the famous and nowadays gigantic online CRM vendor Salesforce.com.
In 2015 about 85% of all new software is SaaS. This means that SaaS is no longer a differentiator. Customers are looking for more suitable SaaS solutions that do not need customizations. This is why SaaS apps are specializing in specific industries and the shift is happening fast. Vertical SaaS is one of the top SaaS trends this year globally.
The narrower focus makes it easier for vendors to create better products and improve them. It also makes getting new customers less expensive. The customer acquisition cost (CAC) of SaaS is typically about 1-2x the annual contract value but with vertical SaaS it can be as low as 1/4x the annual contract value. This leads to a fact that vertical SaaS businesses are more profitable likelier and faster than horizontal SaaS businesses.
From the customer point of view the biggest measurable benefit of vertical SaaS is probably that an industry specific solution eliminates or significantly reduces the need to customize. This not only saves money but more importantly creates business results faster.
This last one is the most important thing to understand. Choosing a niche market and specializing in a specific industry does not mean small business opportunities. You might think, for example, that designing and selling an online CRM solely for life sciences companies can be a nice but limited market.
But let´s look what Veeva Systems has done in this niche market. Veeva was founded 2007 and in the end of 2013 its enterprise value was about $5,8B which is about 35 times its revenue. To understand those numbers better Salesforce.com was founded 1999 and in the end of 2013 its enterprise value was about $34,8B which equals to about 10 times its revenue. What is also notable is that Veeva was already profitable before going public in 2013. This is extremely rare for publicly traded cloud companies.
We build SaaS on PaaS for our clients and we think that focus is the key to success whether it is a vertical or horizontal SaaS. If this subject is close to your heart also just let us know and we will be happy to have a chat with you.