Vertical SaaS vs. Horizontal SaaS: 7 Key Differences

SaaS adoption is snowballing. A recent Harvey Nash survey revealed that SaaS was voted the most important technology in helping achieve business goals. BetterCloud research found that organizations with more than 1,000 employees use over 150 SaaS applications.

Products within the SaaS industry serve an immense number of functions. While some are intended to cater to the specific needs of a particular group of users, others help a hugely diverse client base, providing solutions to a broader market. This critical distinction has resulted in two key SaaS models: vertical and horizontal.

If you’re thinking of becoming part of the SaaS industry, you’ll need to clearly understand these two different models and determine which one is right for your business. Simply put - the better your understanding of these services, the higher your chances of success are. We're here to provide you with all the information you need to understand vertical and horizontal SaaS, what makes them different, and which one will best suit your business.

What is Horizontal SaaS?

Horizontal solutions target a wide audience, regardless of the industry, and focus on satisfying the needs of most businesses rather than trying to solve more distinct and individual challenges. Apps operating in horizontal SaaS aim to be relevant across different industries. These solutions include CRMs, human resource management tools, email marketing tools, website builders, and communication software.

Horizontal SaaS is the more entrenched model since it has been around for over 10 years and dominates the SaaS landscape, as seen in G2’s list of best software companies for 2022. One of the most famous examples of horizontal SaaS is the widely used productivity software Microsoft Office 365. Other famous examples are Slack, Quickbooks, Salesforce, and Hubspot.

What is Vertical SaaS?

Vertical SaaS solutions refer to software targeted at specific industries or niche. These businesses are purpose-built but by no means do they aim to cover broad categories. This type of SaaS focuses on specific industry verticals such as retail, automotive, or insurance, among others. Because of this, vertical SaaS companies have a much narrower market than horizontal software.

The vertical SaaS company looks to solve problems unique to a specific industry or to meet custom needs. Developing solutions within this model differs because it requires the involvement of experts having insider knowledge of common pain points. For example, a motor-vehicle specialist could develop an appointment system built specifically for the car-servicing industry. They would have first-hand experience with the challenges those in the automotive industry face when managing appointment administration and could more easily aim to find an effective solution. In the same way, an expert part of the healthcare industry could craft a vertical solution fit to answer the needs of this specific niche, providing users with SaaS applications packed with targeted features.

But Vertical SaaS is newer and, therefore, less familiar to most people. A successful example of vertical SaaS is the restaurant-management software HotSchedules. Some other prominent examples of vertical SaaS are ClearCare, Textura by Oracle, BioIQ, Health Assurance Plan, and Guidewire.

The 7 Key Differences Between Vertical and Horizontal SaaS

1. Scope of Industries and Market Size

Obvious from the definition, the major difference between vertical and horizontal SaaS rests within the industry and the potential market they target. As we’ve pointed out, Vertical SaaS looks to solve the pain points of a specific group of customers in a precise industry making, their market much smaller than horizontal SaaS. Think of someone who creates a product that is an accounting solution for fitness centers. The customer base this Vertical software can reach is limited. However, horizontal SaaS companies service a broader industry and have a much greater potential reach. To follow that same example, a general accounting solution can be used across multiple industries by different businesses.

2. Business models

The vertical SaaS business model is an end-to-end solution designed for the needs of a specific sector. These solutions' software features are specially designed to streamline particular industry operations. On the other hand, horizontal SaaS solutions are less industry-personalized and more problem-oriented. Their increased applicability across several industries sets them apart from horizontal SaaS.

3. Customer Acquisition and Retention Approaches

In the vertical SaaS model, acquiring customers takes less time and effort than in horizontal SaaS. As you can imagine, if only a few businesses offer solutions to a niche problem, customers will likely choose a business and stick with it. Make sure you have a look over our SaaS customer acquisition guide, as it might come in handy.

With a broader industry scope, customers have many solutions and can be more discerning about which suits them best. With this level of competition, retaining customers in horizontal SaaS can be much more challenging due to the number of options available to them. Vertical SaaS businesses must focus intensely on customer success to keep customers paying over the long term to retain loyal customers.

4. Sales and Marketing

The marketing focus is also very different for vertical and horizontal SaaS. For horizontal SaaS businesses, the goal is to encourage as many customers as possible to use their software. A popular marketing strategy is to offer the product for free or at a low cost and then charge for premium features. Horizontal SaaS businesses rely heavily on customer feedback to ensure they are marketing the product correctly with a strong focus on adoption and usage.

On the other hand, vertical SaaS provider focuses their marketing efforts on building strong personal relationships with their existing customers. They can customize their marketing campaigns for their niche. It’s easier to find out what customers like or dislike and what marketing channels or tips are most effective with this group of users.

For the vertical SaaS solution, the intention is to encourage customers to stay with the business and renew their subscriptions. So, they also generally have lower lead-generation spending. One common tactic for customer retention is offering potential customers free trials. This ensures that when they sign up for the paid product, they have had a chance to try it out and are more likely to stay with it over the long term.

5. Competition Levels

Vertical SaaS has lower levels of competition because it’s a newer, smaller model with fewer big players. Horizontal SaaS comes with greater competition since it has been around for a while and has more established players. Because the scope is vast, it makes sense that more horizontal SaaS businesses compete for customers.

6. Growth Prospects

Horizontal SaaS has the upper hand regarding growth potential. It’s much easier to scale a horizontal SaaS business because they can sell their product to anyone in various industries. Vertical SaaS businesses are less likely to grow at the same rate as horizontal SaaS because they can only sell to specific customers with particular needs.

7. Manageability and Scale

Vertical SaaS businesses may only need a small team to build their minimum viable product and maintain their software. This is because the software is often easier to manage, and it’s more adaptable and scalable because it has a narrow product scope.

On the contrary, horizontal SaaS is more complex to manage and scale due to the vast scope of the products and the many different industries they may be servicing. Read our SaaS scaling guide to learn more about the steps to ensure your business achieves sustainable growth.

Learn the pros and cons of each SaaS model on PayPro Global's Blog.