The Growth of Vertical SaaS
The world of B2B SaaS continues to explode. Yet, it is hard to believe that it is already over 10 years since Marc Andreessen famously claimed that “software is eating the world”.
The origins of SaaS are bound by the simple mechanics of internet speed. For those of us old enough to remember ISP’s such as Freeserve (UK) and AOL (US), initial experiences of the Internet were framed by 56k dial-up in the early-mid 1990s. In this world, B2B SaaS was simply not possible.
The Emergence of SaaS
As the internet “sped up” the range of applications grew exponentially and one major shift in the broader software industry was the shift from CPU-based software loaded from a DVD to software delivered via a browser. Of course for younger generations, many will not be familiar with the concept of “software in a box” yet that was how software was delivered in a pre SaaS world.
Another major trend in the early days of SaaS, was the dominance of horizontal applications. This meant a focus on applications that were industry agnostic and were designed without any specific industry use case in mind. These tended to align with back-office functions that were similar across different industries e.g accounting software like Xero, project management tools like Teamwork or customer support applications like Zendesk.
In recent years, as SaaS has gone more mainstream and has “Crossed the Chasm” from ‘early adopters’ to ‘the majority’, and we are now witnessing the emergence of Vertical SaaS, an idea that this article will explore in more detail.
What is Vertical SaaS?
Vertical SaaS refers to the notion of creating software with one specific use case (or industry sector) in mind.
For many, it runs completely counter to the ‘horizontal-first’ approach of the B2B SaaS sector to date. For a start, VC activity in B2B SaaS is high as the unit economics dictate that investment is often needed to fund the start-up phase, coupled with an opportunity of outsized returns for scaleups. VCs are often focused on the Total Addressable Market (TAM), and thus deliberately choosing to constrain your market by narrowing on a particular niche would have up until recently been considered a complete no-no. But what if the niche was sufficiently large to deliver the customers, growth numbers and requisite exit multiples VC’s desire?
Choosing to start a vertical SaaS company is a strategic bet with an important trade to consider: a focused customer base which brings better sales efficiencies, narrower product scope, and potential winner-take-all-dynamics in exchange for a smaller theoretical market size. Understanding these —dynamics are critical for crafting a vertical SaaS companies go-to-market.
Given there has already been a number of successful Vertical SaaS exits it now represents a credible strategic option as entrepreneurs look for their source of ‘unfair advantage’. In increasingly competitive B2B SaaS markets could a vertical SaaS offering help you cut through the noise and to capture a disproportionate slice of a smaller (but sufficiently large) cake?
Differences Between Horizontal and Vertical SaaS
The traditional B2B SaaS model has been a horizontal one, and that approach has dominated for many years. The motivations for this approach were primarily related to accessing as large an addressable market share as possible (with no self-created constraints on the market).
With a horizontal market, there is no need for domain expertise per se, multiple ideal customer profiles (personas) can exist and as you grow you can align around dominant use cases.
With a Vertical SaaS lead approach the route has to be different. You are constraining market size deliberately on the assumption that the product you will build will be a lot stickier as it should more closely resemble the requirements of a sector you know well (ideally the founders come from the vertical they are targeting). This domain knowledge coupled with access to a specific vertical represents additional sources of competitive advantage and thus supports a vertical saas decision in some instances.
What we came to learn through investments like Shopify, Procore, Toast, ServiceTitan, Mindbody, nCino, Disco, and many others, is that vertical software companies could grow to be much larger than we expected. By focusing on a vertical market, these companies are able to trade market size for market share and in some cases achieve 50%+ market penetration. In vertical markets, one or two vendors often dominate and capture most of the value. Today, every industry runs on software, making the vertical software opportunity more valuable than ever before.
Vertical SaaS Examples
One example is Contento, a B2B SaaS content platform (content management system) where I am CEO. On the one hand, the market for content management systems is completely saturated, but as anyone who has worked in marketing or IT will attest, the experiences most have with the main CMS solutions is far from satisfactory. Up until now, most CMS’ have been built with no specific use case in mind. By building a Headless CMS, specifically for B2B SaaS companies, we believe we can carve out a viable niche - offering a vertical SaaS play in the guise of a B2B SaaS focused offering.
Another example would be Shopify, an e-commerce platform for online stores and retail point-of-sale systems.
Benefits of Vertical SaaS
So what are some of the benefits of a Vertical SaaS strategy? In theory, you are able to reduce your cost of acquisition, increase your conversion rates and retention rates by being better able to serve the specific needs of a niche you know well (in contrast to the one-size-fits all approach of typical horizontal offerings).
There's a massive opportunity for those who recognize industry-specific pain points and can create sleek solutions. Solve a problem that everyone in the industry complains about, and you’re sure to earn lots of fans—and some healthy recurring revenue. This is doubly true if your product meets compliance needs not met by more generalized horizontal SaaS subscription businesses.
— The Rise of Vertical SaaS and the Niche Subscription Business Model by Daniella Ingrao
When it comes to Contento, we believe the following are routes for us to thrive as a vertical saas offering.
Founders coming from this vertical (domain expertise) ✅
Large growing niche/ TAM (with a problem to solve) ✅
Common challenges faced by personas from this vertical we can fix ✅
Founder access to relevant audiences ✅
Purpose built software for a specific use case ✅
Building a Vertical SaaS application
When it comes to building a vertical SaaS offering, the choice of the vertical is a key decision made in the formative years of the business. An ideal scenario is one where the founders have experienced the pain first-hand and are thus building a solution to a known issue which they have experience with. They may also have access to the target personas as they are probably one themselves, which again lends itself to a more closely aligned product-market fit. As the feature set matures, lock-in is more likely too as the product road map should be built on strong foundations and continue to be designed with a core use case in mind.
A fundamental strategic advantage of vertical-focused enterprise software comes from improving workflow efficiency in major industries by structuring, integrating, and analyzing big data for knowledge workers — a product strategy that can only be accomplished by being vertical-focused.
Summary and Conclusion
In summary, there is no doubt that vertical saas has finally arrived. It now represents a compelling strategy for B2B SaaS entrepreneurs looking to raise capital and create an application that meets the needs of a particular vertical. The days where the only route to investment (and ultimate success) was via as big a Total Addressable Market (TAM) as possible, and a SaaS offering designed to cater for everyone are coming to an end.
Rather than wasting resources on generalized marketing and sales funnels, verticals enable SaaS business leaders to focus on a receptive target audience and increase perceived value. This leads to more conversions, higher retention, and ideally a lower barrier to customer acquisition, fueling success.
— The Rise of Vertical SaaS and the Niche Subscription Business Model Daniella Ingrao
Alan Gleeson is the CEO and Co-Founder of Contento, a B2B SaaS content platform that helps B2B SaaS companies scale via a best-of-breed website.