The Software-as-a-Service (SaaS) industry continues to exhibit high-powered growth from the last decade, becoming a foundational business model for companies across the globe.
Two years ago, the SaaS market exceeded $273B. By 2022, projections are expected to be over $1T.
This momentum comes for businesses (of all sizes) needing to improve day-to-day operations for a specific industry and set of business functions (often in multiple regions and market segments).
As a result, SaaS applications have evolved towards two major categories: Vertical SaaS and Horizontal SaaS — each with its own advantages and opportunities.
Let’s explore below:
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Definitions for Vertical SaaS and Horizontal SaaS (including key differences);
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Examples of both categories;
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Demand for embedded finance the rise in Vertical SaaS;
Vertical SaaS & Horizontal SaaS (Definitions, Differences)
Vertical SaaS provides cloud-based solutions that are customized to solve specific needs of a target industry/niche/vertical.
As more smaller categories of businesses adopt the latest technology into daily operations, vertical SaaS platforms are designing solutions that optimize how to address operational challenges, regulations, and economic dynamics — eliminating manual reviews, automating tasks, reducing overhead, and creating more overall efficiency.
For a healthcare-focused Vertical SaaS firm, a bundled offering can include functionality for managing patients, storing medical records, creating reports for regulators, and processing billing payments. Prior to SaaS, a hospital needed to contract with multiple companies for these services OR build their own application from scratch (at a high cost and long development cycle).
Horizontal SaaS takes a broader approach and providers solutions that can be utilized in various industries/verticals.
High-level functions that all businesses must manage are offered, which include billing, payroll, marketing communication, human resources, and accounting. The same foundational need is applicable — no need for differentiation when approaching different niches.
Horizontal SaaS platforms are able to capture a wider scope of clients with the same solution.
Key Differences Between Vertical and Horizontal SaaS
From these definitions, business leaders can quickly assess across four key categories which option makes the most sense for their company:
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Target Audience:
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Vertical SaaS: Focus in a specific industry with specialized functions that solve unique needs of that sector/vertical.
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Horizontal SaaS: Applicable to a broad range of industries by offering general capabilities/functions.
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Customization:
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Vertical SaaS: In-depth customization that captures industry-specific operational needs (i.e. workflows, compliance).
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Horizontal SaaS: Standard set of features available to all business clients (regardless of niche, size, market).
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Market Reach:
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Vertical SaaS: For a narrower segment, which benefits market share in that niche but reduces the total addressable market (TAM).
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Horizontal SaaS: Available to a wide market, but lack of specificity can minimize ability to penetrate the market.
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Integration:
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Vertical SaaS: Built to integrate easily with commonly utilized programs (such as ERP, bookkeeping), which delivers a faster path to implementation and usage.
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Horizontal SaaS: Customization would be needed to fit the broad solution into a company’s existing operations, which can increase costs and time to deployment.
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Based on what an organization needs, one model would outshine the other in terms of preference.
The buzz around Vertical SaaS created a flood of new platforms that are all competing for a niche market size. Buyers will need to research and short-list a group of providers on their own — diving into product documentation, demos, pricing sheets, and due diligence calls — which can be time-consuming.
Here’s a quick look at actual companies in the space and what they provide.
Examples of Vertical & Horizontal SaaS
The differences come to life in the following examples.
For those at tech-focused companies, Salesforce and Slack are commonly used tools in daily work life — compared to Procore and Toast, which would only apply to companies in construction or restaurants, respectively.
Vertical SaaS:
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Veeva Systems: Provides cloud-based solutions tailored to pharmaceutical & life sciences, including applications for regulatory compliance and clinical trial management.
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Procore: Construction management software for contractors & builders — with multiple functions such as project management, budgeting, and scheduling.
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Toast: A full-suite platform for restaurants that delivers point-of-sale (POS) hardware, inventory management, and customer engagement solutions.
Horizontal SaaS:
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Salesforce: The enterprise leader in customer relationship management (CRM) is widely used utilized across various industries to manage customer relationships, sales processes, and marketing campaigns.
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QuickBooks: A well-established brand in accounting software, Quickbooks supports businesses of all sizes & industries with bookkeeping, invoicing, and payroll processing.
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Slack: A household name in workplace solutions & productivity, Slack facilitates communication & collaboration for an assortment of industries. ‘Work from home’ fueled its growth in the last 5 years.
Embedded Finance in Vertical SaaS
Embedded finance refers to the integration of financial services into non-banking platforms, which allows customers to access financial products within an existing web/mobile platform (provided by a SaaS firm).
The characteristics of Vertical SaaS solving multiple problems for a specific industry blends well with the ability to add banking, payments, and card issuance capabilties.
For Horizontal SaaS, adding finance capabilities to a generalized solution is likely to fall flat. Business clients are already accustomed to using multiple vendors to solve various business functions — including a separate banking relationship. Embedded banking would have minimal impact to how customers operate continue to operate.
Making the leap to banking is worthwhile for Vertical SaaS companies with comprehensive platforms as it comes with the following benefits:
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Increased Revenue Streams: Embedded finance opens new streams for monetization through transaction fees, interest from lending services, or premiums from insurance products offered within their platforms.
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Enhanced Customer Experience: Vertical SaaS providers can offer a more seamless & convenient experience for their users by integrating payments, accounts, or cards directly into their platforms. No need for customers to navigate between multiple platforms/logins to manage business banking transactions.
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Improved Customer Retention: Offering a comprehensive suite of business solutions & financial products bolsters the value proposition for a Vertical SaaS company. Increased value creates more customer loyalty and reduces churn rates (i.e. the pace at which a customer closes their account).
A few leading examples of embedded finance in Vertical SaaS emerged in the last years across diverse niches.
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Toast (Vertical – Restaurant): Initially focusing on POS systems for restaurants, Toast expanded its platform by adding payment processing and lending. Through data analystics on transaction history, Toast offers customized financial products (such as loans to restaurants), which helps improve cash flow from month-to-month.
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Mindbody (Vertical – Wellness): Targeting businesses in the wellness industry (e.g. salons, fitness studios, spas), Mindbody offers embedded payment solutions alongside bookings so that owners can service customers and collect funds all within the same platform.
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Shopify (Vertical – eCommerce): An enterprise that stood out in its space, Shopify goes beyond payment solutions and offers account management and lending (through Shopify Capital). Merchants are able to qualify for loans based on sales data and receive faster payment settlement through native deposit accounts.
As more examples in Vertical SaaS emerge in new categories (such as field services, healthcare, human resources, logistics), better frameworks and processes will be developed to improve the implementation of embedded finance.
Outlook for Vertical SaaS, Horizontal SaaS, and Embedded Finance
The distinction between Vertical and Horizontal SaaS lies in their target audiences and the specificity of their solutions.
Horizontal SaaS provides versatile solutions applicable across various sectors, emphasizing scalability and broad applicability. Vertical SaaS offers tailored applications for specific industries, providing deep customization and addressing unique challenges.
The integration of embedded finance into Vertical SaaS platforms represents a significant evolution in the SaaS landscape.
By incorporating financial services directly into their offerings, Vertical SaaS companies can enhance customer experiences, unlock new revenue streams, and solidify their position within their respective industries. As the SaaS market continues to grow, the convergence of specialized software solutions and embedded financial services is poised to redefine how businesses operate and deliver value to their customers.
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