Grow faster with a vertical SaaS strategy
Vertical software-as-a-service products target an industry or business model niche. They are vertical because they go deep by solving problems at multiple layers of their customers’ technology stack. For example:
- Shopify is a vertical SaaS product that targets ecommerce businesses. They go deep and solve many different problems for this market, from payments and shipping to inventory management and marketplace integrations.
- GitHub is vertical because they focus on solving the various problems software engineering teams face.
- ServiceMax is vertical because it caters to the various needs of field service companies.
- Toast provides various solutions for hospitality businesses, making it a vertical SaaS company.
- JustGiving is vertical because it narrowly focuses on charities and fundraising endeavours.
Horizontal SaaS products are horizontal because they target a wide range of businesses that are trying to solve a common problem, regardless of their industry. For example:
- Slack is a horizontal SaaS product that solves the communication problem commonly experienced by all businesses. They don’t target any specific vertical and only aim to solve challenges within the communication domain. They cast a wide net from a customer acquisition perspective.
- QuickBooks is a horizontal SaaS product that aims to handle the bookkeeping needs of all small and medium-sized businesses.
- HubSpot is horizontal because they help sales forces within all industries to grow and manage their work.
- TaxJar solves the sales tax problem for businesses of any business vertical, from online retailers to SaaS companies, making it a horizontal product.
Most SaaS businesses need to make an explicit decision between the two models before they stumble into a vertical or horizontal SaaS strategy. Otherwise, you may experience a lot of operational pain because the best way to build and grow these businesses varies greatly. By understanding the differences between vertical and horizontal SaaS strategies, you can better position your company for long-term success.
Growing a horizontal SaaS product is typically more difficult, but the long-term total addressable market is much larger. Horizontal SaaS products have more significant addressable markets because they solve a problem experienced by many more businesses. Growing a horizontal SaaS business is difficult because there is usually more product competition (if most businesses experience your problem, many others have likely had the idea to fix it) and even more marketing competition (because your target customer is extremely broad, your marketing team must compete with companies selling completely unrelated products). So, while you are much less likely to succeed with a horizontal product and growth strategy, if you do, you can build a much larger and more valuable business.
It is easier to build and grow a vertical SaaS product because:
- Your target customer is more clearly defined.
- This means your customers likely have a lot more in common, which makes it easier to build features that many of your customers will use. Customer feedback is much more valuable and actionable in vertical SaaS businesses. Strategy is easier.
- It also means your marketing efforts can be more targeted, which leads to lower customer acquisition costs with better return on investment.
- You will face less competition. This allows you to grow quickly with an imperfect product, because imperfect solutions are better than no solution at all.
- This also protects you from Big Tech disruption. Large companies like Microsoft and Google typically only enter very large markets and cannot justify delivering niche solutions. If your product isn’t sufficiently niche, a larger company could disrupt you by shipping a worse but cheaper version of your product (see: Microsoft Teams).
- You can likely charge more. If you focus on a niche, you can thoroughly solve big problems. You can charge more for your solutions if you deliver a lot of value.
- Horizontal companies often compete on price. As you succeed, others will enter your market with a worse but cheaper product, eventually causing a pricing race to the bottom.
Most SaaS businesses set out to solve a specific problem and grow by either solving more problems for their early customers (i.e., scaling vertically) or trying to sell their solution to more diverse businesses (i.e., scaling horizontally). When startups struggle to scale beyond initial product-market fit, it’s often because they are trying to scale horizontally when a vertical focus makes more sense.
Horizontal versus vertical is more of a spectrum than a binary state. Markets contain solutions with varying levels of niche, existing somewhere on the spectrum between horizontal and vertical. For example, one startup might focus on all businesses who need a payment provider, another might focus on SaaS businesses, while a third might focus very specifically on SaaS businesses with usage-based pricing. In these markets, the more niche product will easily win deals that fit nicely within their niche, while the more horizontal company will absorb those with simpler needs or whose niche has yet to be catered to.
While gradually going more horizontal can make sense for a startup that is starting to exhaust its’ original target market, many startups do this prematurely. Early-stage startups often struggle to reject prospective customers who don’t fit within the niche they are targeting. By onboarding these customers, they gradually expand their target market before their product or growth strategy is ready and lose focus on satisfying their ideal customer, which can slow growth.
Whether you choose a vertical or horizontal strategy, focus is still critical for a startup. Horizontal startups need to focus on the core problem they are trying to solve, while vertical startups need to focus on their niche market. It pays dividends to have a clear idea of who you want to target, what problem you want to solve, and what distractions you want to avoid. Otherwise, your product could end up too shallow to satisfy your nich,e and too narrow to cater to a broad market, which could trap your startup in stasis.
6 November, 2022
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