A vertical market software is characterized by being software designed specifically for a niche industry. Due to the fact that it is a vertical solution, it offers solutions and tools designed specifically for that niche. Investors often shy away from investing in vertical market software. Due to the fact that the total addressable market is much lower when compared with horizontal solutions.
However, vertical market software has several advantages, with the most important being the fact that it is designed and built specifically for a purpose. This means that it will be highly useful for companies in that particular industry. Since it is built in order to satisfy their specific needs.
What are the advantages and disadvantages of vertical market software?
Advantages of a vertical market software
Due to the fact that it is built upon specific needs, vertical SaaS companies have a number of advantages. It is able to serve its customers in a better way. Since it understands the exact industry in which they operate. For the consumers, it is a solution built around their needs, and this makes it a more complete and detailed platform. A vertical software is designed to meet specific industry needs and therefore tends to be very useful for business owners.
Due to their ability to generate value for one specific industry, vertical market software tends to have higher recurring revenues, and it is able to retain customers easily. This in turn leads to higher recurring revenues, and it is also more difficult to disrupt.
This type of software is also characterized by having high switching costs. Which makes the company that owns it stand out among the competitive landscape, as it is able to build a moat. Due to this, they have a lower customer acquisition cost and do not have to spend as much on marketing in order to generate sales.
Disadvantages of a vertical market software
There are some disadvantages that vertical SaaS companies face, especially when we compare it with horizontal market software. The main difference is the total addressable market is completely different between both.
Horizontal market software is known for having a large total addressable market. As a consequence of this, it becomes far more enticing for investors to look for companies with a higher possibility to grow. So they end up focusing on horizontal market software solutions.
Due to the difference in market size, vertical SaaS companies will most likely never reach a very high market valuation. However, they seem to be a niche solution for industries and stand out as highly competitive. While horizontal market software needs to focus on several markets, customers, and industries this poses a challenge. It requires a high-quality solution that can be slowly improved upon. Due to their deeper understanding of the business, they are also more desirable, due to their competitive resilience.
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