Growth of Vertical SaaS Challenges Market Leaders, Benefits Startups

Devs have been championing the benefits of the SaaS (software as a service) model of application delivery for years now.

The main thrust of the argument for SaaS is that it can free businesses from costly upgrade cycles, reduce on-site IT needs, and slash upfront spending.

All of those things are of course, true.

When SaaS first started to gain traction, though, vendors focused on delivering horizontal SaaS solutions. Offerings like Intuit's QuickBooks Online, Microsoft's Office 365, and Salesforce are excellent examples of that. Today, however, there's a big shift underway to more vertical SaaS offerings, particularly within the business-to-business space.

The idea is to create and provide hyper-specific SaaS solutions suited for individual industries – and it's a trend that's gradually taking over the market. Here's an overview of everything you need to know about vertical SaaS.

Horizontal vs. Vertical SaaS

To get started, it's first necessary to understand the difference between horizontal and vertical SaaS – because it's not just jargon. Horizontal SaaS refers to internet-delivered software meant to serve one specific set of business needs. In the above examples, QuickBooks handles business accounting, Office 365 takes care of word processing, spreadsheets, and data management, and Salesforce is an all-in-one CRM system.

What's important is to realize that they're the kind of solutions that aren't industry-specific. For example, small businesses of all stripes use QuickBooks, and just about everyone on Earth has used Microsoft Office at one time or another. SaaS solutions like those have their purposes, and they market to the widest possible audience.

Vertical SaaS, by contrast, aims to provide all-in-one solutions for specific lines of business. In other words, they want to handle all of a business's software needs in one place. In the world of vertical SaaS, narrow audience targeting is the norm. For example, you can find SaaS gym management software that handles every aspect of managing a fitness-related business. It's the kind of thing that's insanely useful for such a business, but wouldn't be much good to anyone else.

The Advantage of Vertical SaaS

From a development perspective, it might sound like you'd be limiting the number of possible subscribers by pursuing a vertical SaaS model. In some respects, that's true. The benefits, however, are vast. One of them is the fact that a vertical SaaS system can include things like industry-centric compliance tools and integrations with existing industry-standard software. A vertical SaaS solution for the healthcare industry, for example, could have built-in HIPAA compliance options because it's worth the developers' time to add it. A horizontal solution, by contrast, likely wouldn't bother because there wouldn't be enough healthcare industry customers to make it a viable option.

On top of that, vertical SaaS solutions have the ability to be far more nimble in their development. By targeting a single industry, they are much more able to add new features that users want because their entire user base would have a need for them. The companies that provide such solutions can also spend far more time and resources on their software since they don't need to worry about marketing their product to several disparate industries. For the companies that use the software, that means a more attentive provider that intimately understand the industry they're serving.

Where the Market is Headed

For the last few years, it's hard to argue that big horizontal SaaS providers have been anything less than dominant. Backed by some of the largest and most well-capitalized businesses in the world, they have the resources to push their way into multiple industries without breaking a sweat. At the same time, however, vertical SaaS providers have seen an explosion in growth and investment activity. All signs point to it becoming the hotter of the two approaches in the coming years.

As their growth continues, some of those natural advantages mentioned earlier should help vertical SaaS businesses cement their positions as the go-to solutions in a variety of industries. At that point, their momentum and in-industry word-of-mouth should propel them to even greater heights. From a pure business perspective, that's great news. It means that no matter what industry you're involved in, there's likely to be a targeted, useful SaaS solution that can handle every aspect of your company's software needs.

The Bottom Line

The key takeaway here is that we're about to see some new players emerge in the SaaS space, and they're likely to come in the form of vertical solutions. It's an indication that software industry entrepreneurs are starting to see the value of capturing whole vertical markets and serving them to the greatest possible extent. That should also make it possible for all kinds of new startups to get up and running in a variety of industries with fewer technology costs and less planning time – because much of the work will already be done for them. Any way you look at it, it's a positive development for everyone involved, and should lead to a new renaissance of new business development economy-wide.

Photos licensed via contributor's Adobe Stock subscription, by Tierney, wladimir1804, and WrightStudio.