Understanding The Vertical SaaS Product Stack

If you’re thinking about launching a Software-as-a-Service (SaaS) company, there are two different ways to approach the market.

  1.  Horizontal SaaS: These companies aim to create a product that services a specific type of employee, function or division across all industries. Examples of horizontal SaaS companies include Salesforce, which sells cloud software for sales teams, and Adobe, which targets the marketing department with its marketing cloud suite.
  2.  Vertical SaaS: These firms try to service as many function as possible within  companies within a single industry. An example of a vertical SaaS company from Mucker’s portfolio is ServiceTitan, which sells software for home-service contractors.

Earlier this year, investors were concerned about the long-term viability of vertical SaaS companies for two primary reasons:

  1. Would they be able to fend off large public companies with vast resources from encroaching into their space?
  2. Could they continue to grow revenue at the necessary rate for success given the limited total addressable market (TAM).

As it turns out, these concerns were somewhat misguided, and vertical SaaS companies are a lot more resilient than previously thought. You only need to look to the stock market for proof. Over the past year, the share price of Veeva (VEEV, NYSE), a pharmaceutical industry software maker, has risen from $63 to more than $93 (+48 percent). Guidewire, which caters to insurance companies, has risen from $77 to $93 (+21 percent), and MindBody, which services the wellness sector, has jumped from $28 to $33 (+18 percent).

So what’s behind this resiliency? One reason is that vertical SaaS firms continue to beat horizontal behemoths to new deals due to their specialized feature set, lower implementation cost (no need to customize), lower total cost of ownership, industry word of mouth, and faster time to market.

Vertical SaaS companies also see less churn – customers dropping their product – because their products are so hyper-targeted that customers become unable to live without it. Contrast that with horizontal SaaS companies, whose Achilles heel has always been that their products are so generic that switching cost is lower than expected.

As a result, there is a corresponding boom in venture activity for vertical SaaS startups. Across verticals large and small — logistics, home services, construction, property management, and much more — there are entrepreneurs trying to build vertical SaaS companies.

TAM, of course, will always be a concern. That’s why entrepreneurs building vertical SaaS companies need to provide services and software that address a customer’s entire business operations – the “full stack” – in order to maximize total revenue opportunity and revenue per customer as a means of offsetting the cost of sales at a lower price point.

This is how they make their customers unable to live without their product.

But here’s the thing: That’s exactly what the customer is looking for in the first place! The time, effort, and money it takes to research and integrate new software makes it impossible for companies to cobble together different products. That’s why businesses strive to increase revenue by offering simple, full-stack solutions that lower the total cost of ownership and make their employees’ jobs easier.

The next SaaS unicorn might very well come from the vertical rather than horizontal bucket.

For some context, here are some different market categories vertical SaaS companies can enter. Keep in mind that successful ones often have platforms that address several.

Marketing Stack

  1.  Presence: Software that helps companies manage and validate their listings on websites and directories such as Yelp, Google, and YP.
  2.  Social/Reviews:Software that helps companies create pages on social media platforms such as Facebook and Twitter, as well manages postings and reviews on those sites.
  3.  Marketing Analytics: Software that helps companies track spend and performance across multiple channels, identifying how many customers they get from each one.
  4.  Marketplace:Most of the time, this means creating software that presents multiple vendors within a given industry to a single customer. Sometimes, these vertical SaaS companies might also create a brand that they outsource to their customers.

Operations Stack

  1. Mobile Workforce: Software that allows workers out in the field, such as plumbers, technicians, or even salespeople, to do their jobs better.
  2.  Customer Relationship Management (CRM): Software that creates a customer database — who they are, how much they spend, and whether it might be worthwhile to reach out and continue to maintain relationship, up-sell, and cross-sell.
  3. Workflow: A more generic bucket as different companies have different types of workflow. For example, calendar software for dispatching technicians or a scheduling service for doctors; blueprint sharing and approval software for construction work teams.
  4. Business Analytics: Software that helps businesses better understand their financial performance, i.e. cost/revenue per customer, via a dashboard.

Financial Stack

  1. Accounting: Software that helps companies better manage their books and financial statements.
  2. AP/AR: Accounts payable/accounts receivable software, often time including electronic billing, invoicing, and reconciliation.
  3. Payments: Payment processing software that enable companies to take credit card, ACH, and other payment types from customers both online and offline (ala Square). In many vertical SaaS businesses, these can become over 30% of the contribution margin - MindBody is a good example.
  4. Financing: Software that allows companies to electronically connect their customers to one or many  loan provider to finance their purchases. For example, home improvement loan, elective medical loan, and auto loans.  

Here are some examples of successful vertical SaaS companies and the market categories they inhabit:

Service Titan: “All in one” business management software solution for residential plumbing, HVAC, electrical and other home services companies in the United States and Canada. Their feature set includes:

  • Marketing analytics
  • Mobile workforce
  • CRM
  • Operations-workflow
  • Business analytics
  • AP/AR
  • Payments
  • Financing

MindBody: Cloud-based business management software and payments platform for small and medium-sized businesses in the wellness services industry. Their feature set includes:

  • Presence
  • Social / Reviews
  • Marketing analytics
  • Marketplace
  • CRM
  • Operations-workflow
  • Business analytics
  • Payments

BloomNation: A community marketplace for people to list, discover, and send floral creations by local artisans florists. Their feature set includes:

  • Presence
  • Marketplace
  • Payments

Procore Technologies: Cloud-based construction management software. Their feature set includes:

  • Mobile Workforce
  • CRM
  • Operations-workflow
  • Business analytics
  • AP/AR

DealerSocket: Customer relationship management and dealership training solutions for auto dealers throughout the United States, Canada, and Australia. Their feature set includes:

  • Presence
  • Marketing analytics
  • CRM
  • Operations-workflow
  • Business analytics
  • AP/AR
  • Payments
  • Financing

PatientPop: A marketing platform for growing a medical practice. Their feature set includes:

  • Presence
  • Social/reviews
  • Marketing analytics
  • CRM
  • Operations-workflow
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