If you’re thinking about launching a Software-as-a-Service (SaaS) company, there are two different ways to approach the market.
Earlier this year, investors were concerned about the long-term viability of vertical SaaS companies for two primary reasons:
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.
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:
MindBody: Cloud-based business management software and payments platform for small and medium-sized businesses in the wellness services industry. Their feature set includes:
BloomNation: A community marketplace for people to list, discover, and send floral creations by local artisans florists. Their feature set includes:
Procore Technologies: Cloud-based construction management software. Their feature set includes:
DealerSocket: Customer relationship management and dealership training solutions for auto dealers throughout the United States, Canada, and Australia. Their feature set includes:
PatientPop: A marketing platform for growing a medical practice. Their feature set includes: