The Difference Between Vertical and Horizontal SaaS
SaaS stands for “software as a service,” and refers to primarily subscription-based apps that you can use online, like Salesforce, Slack, or Zoom. Because SaaS businesses typically employ a “pay as you go” model, their clients are able to easily integrate their services at minimal upfront cost.
There are two main approaches to starting a SaaS business - the horizontal and vertical SaaS models. This article breaks down both styles of SaaS business into simple terms, and lays out the differences and reasons to consider each.
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What is SaaS (Software as a Service)?
SaaS, or “software as a service,” refers to businesses that offer a web-based application. SaaS apps are easier to get started with than traditional software that you have to install onto your computer, since you can access them in your browser just by logging in. Also, typically updates to the service are added automatically, and you don’t need to pay for a newer version of the program.
Well-known examples of SaaS include Dropbox, MailChimp, Google Apps (G Suite), and Docusign.
What is Vertical SaaS?
Vertical SaaS refers to services that target a specific industry only, and aim to solve problems that are unique to that sector. Compared to horizontal SaaS, this is a relatively new approach.
Vertical SaaS Examples
ClearCare - an app for private healthcare providers to manage their patients in a CRM, track changes in their patients’ conditions and predict health outcomes, and market their agency
Textura by Oracle - an app that is used to manage payments in the construction business.
Guidewire - offers a tool called InsuranceSuite, the “industry standard” for insurance companies, that can be used to create a personalized claims experience and manage billing electronically
Vertical SaaS Pros and Cons
Vertical SaaS is still a new concept and there are fewer established SaaS that have taken this approach. This means you can potentially stand out by offering a niche solution rather than catering your solution to all sectors. Meanwhile, your unique positioning means that there are fewer competitors to compete with as well.
Easier to Take the Largest Market Share
Since there are less competitors to spar with, and you will be entering a niche market, it’s much easier to become the leading provider of your service and take the No. 1 market share. This can give your company a reputation as the authority in your field, and help you attract new customers in the early stages.
Less Risk of Customer Loss
Again, due to the lack of competition, there is less concern for customers canceling their contract and switching to a different service. Especially seeing as your service is designed for their exact industry, even if they are not 100% satisfied, they’re likely to assume that there is no better option out there and stay with your company.
Difficult to Scale and Expand
Even if you can quickly acquire the largest market share, your business could be difficult to scale up depending on how niche your target is. There is always a limit to the number of viable customers, afterall. Note that if you do thorough market research before starting your business, you can ascertain whether there are enough potential customers in a specific segment or not.
Hard to Improve Brand Awareness
Because your customer base will all be from a single industry, it will be harder to get your company name recognized outside of this one vertical. The user-generated content and word-of-mouth references will likely all be within this one sphere, so it will likely take longer for the public to become familiar with your brand.
What is Horizontal SaaS?
Horizontal SaaS is the distribution model that came before Vertical SaaS, in which a cloud-based service is designed for a wide range of users, regardless of their industry. Horizontal SaaS tools solve common problems in business, and include CRMs, human resource management tools, attendance tracking, marketing automation, website builders, and communication tools.
Horizontal SaaS Examples
Slack - a web-based app for smooth communication between teams online, used across pretty much all sectors
Salesforce - a CRM (customer relationship management tool), that makes it easier to keep track of sales progress, follow-up on customers, and analyze sales performance
Quickbooks - accounting software for small businesses that makes it easier to publish quotes and invoices, and can be useful in most all industries
Horizontal SaaS Pros and Cons
Large Pool of Potential Customers
In the horizontal SaaS model, your service is designed for a diverse array of users, and making to possible to sell to customers from a wider pool. This means you can go broad with your marketing, rather than tailoring all your content and ads to a single niche. It may be easier to reach new viable customers this way, whereas sometimes niche targets are harder to access.
Easy to Grow Brand Awareness
Since horizontal SaaS apps are used across many different fields, customers become more familiar with a brand faster, making it easier to sell to new users. This means you could achieve wide brand recognition and start generating faster.
Many Long-Established Competitors
Since the horizontal approach has been around longer and is used by most tech companies, you will be facing a handful of competitors that are already well-established as a provider of your service. You won't have any unique positioning to set you apart in the beginning, which may make it hard to get into a place where you can really contend with the leading brands.