When choosing the SaaS subscription business model for his own company, Peter Gassner wanted to avoid the obvious. The former Senior Vice President of Technology at Salesforce had always had a knack for going against the grain, and he wasn’t about to stop now.
“In 2007 I had this idea: I’m going to make something very specific to an industry in the cloud,” he explained in an interview with SaaStr’s Jason Lemkin.
Many people thought he was making a big mistake, but he disagreed. “When you’re a rational person, and you think it’ll be great and 99 out of 100 people think it’s bad, that’s when you have an opportunity.”
Gassner went on to found Veeva, one of the most successful software-as-a-service (SaaS) platforms available today. Focused on products and services for the pharmaceutical industry, Veeva went from an IPO market cap of about $4 billion in 2017 to $45 billion in 2021.
What does Gassner attribute Veeva’s success to?
At least in part, it’s thanks to a vertical SaaS subscription business model.
What is vertical SaaS?
Until recently, most highly successful SaaS products provided generalized solutions to cast as wide a net as possible for maximized recurring revenue. Think subscription models such as Slack, Calendly, and Zoom; businesses in just about any industry can use these tools. This is a horizontal SaaS subscription model.
Vertical SaaS, by contrast, hones in on a niche industry. A subscription business model based on vertical SaaS might provide solutions to specific problems in areas like:
…to name just a few.
A SaaS product or service designed specifically for one of these industries (or one we haven’t listed) comes with different business benefits than horizontal SaaS subscription businesses’ solutions. While they do require specialized knowledge in relevant fields, SaaS leaders with an insider understanding of an industry can leverage this insight to build a successful subscription business model.
A number of founders have already done exactly that. In addition to Veeva, Lufax, Procore, and nCino are all vertical SaaS businesses that have reached million- or billion-dollar IPO status and continue to grow.
We’ll share some more examples of successful vertical SaaS brands below. But first, let’s talk about why this subscription model has become so popular.
The Makeup of a SaaS Solution
SaaS offerings are so commonplace today that it’s difficult to imagine what it was like before them. Once upon a time, users had to buy a physical CD or, even further back, a floppy disk to get their Microsoft software installed on their desktops. By moving to a SaaS model, software companies like Microsoft introduced benefits like:
1. Accessibility. SaaS applications can be accessed from anywhere with an internet connection and a web browser. This promotes remote work and collaboration across different geographical locations.
2. Subscription-based pricing. Instead of purchasing a software license, users typically pay a subscription fee, often monthly or annually. That way, SaaS users can implement predictable budgeting and know how much they’re paying each month. (This is particularly useful for startups or small businesses that need to be more mindful of their capital and funds.)
3. Automatic updates. Since the software is hosted centrally, updates and new features can be rolled out seamlessly without requiring action from individual users. This ensures that all users have access to the latest version.
4. Scalability. SaaS solutions can be easily scaled up or down based on your needs. (Another useful component for startups who are sometimes in high-growth mode.)
5. Customization and integration. Many SaaS providers offer customizable features and integrations with other tools and systems. That way, organizations can tailor the software to their specific needs.
6. Security and compliance. SaaS providers invest in robust security measures to protect data and comply with relevant regulations. Great tech platforms also keep their apps updated with regular security patches and enhancements to prevent breaches and issues.
7. Maintenance and support. Maintenance, support, and hosting are handled by the SaaS provider. This relieves your organization of the need to maintain hardware and manage software on-site.
Vertical SaaS vs. Horizontal SaaS
Vertical Software as a Service and Horizontal Software as a Service represent two distinct approaches to delivering cloud-based software solutions. Both retain all of the benefits listed above. Their difference is almost exclusively in who they serve.
As hinted in the name, vertical SaaS solutions dive deep into the specific needs of whatever industry the SaaS platform has been designed for. Vertical SaaS is industry-specific. This focus allows for greater customization and alignment with industry regulations, trends, and pain points.
Vertical SaaS startups offer unique advantages, including:
- Tailored solutions. Developed with specific industry needs in mind.
- Regulatory compliance. Often includes features to help organizations adhere to industry-specific regulations.
- Efficient integration. Can seamlessly integrate with other tools and systems commonly used within the industry.
Horizontal SaaS solutions go instead for the broad stroke. Next-generation Fintech companies and luxury handbag eCommerce retailers could both benefit from the solutions horizontal Saas offers. CRM platforms like Salesforce, team communications tools like Slack, and financial services solutions like Quickbooks are relevant to all organizations.
Horizontal SaaS offers keys benefits, including:
- Broad application. Suitable for a variety of industries.
- Scalability. Often built to support growth across different sectors.
- Cost-effectiveness. Generalized solutions may offer more competitive pricing.
The marketing strategy of the horizontal SaaS industry is to go wide. This strategy paid off extremely well during the pandemic. Every business needed remote access to its workforce, organizational tools, and virtual meetings. The use cases for horizontal SaaS companies came in strong and helped to emphasize just how powerful SaaS is beyond its traditional applications.
5 reasons why vertical SaaS is on the rise
Before the promise of billion-dollar valuations, SaaS innovators interested in niche subscription business models saw a number of reasons to go vertical.
Pinpoint unique problems
There’s a massive opportunity for those who recognize industry-specific pain points and can create sleek solutions. Solve a problem that everyone in the industry complains about, and you’re sure to earn lots of fans—and some healthy recurring revenue. This is doubly true if your product meets compliance needs not met by more generalized horizontal SaaS subscription businesses.
Vertical SaaS tends to require less capital to quickly capture a market share in a specific industry. Smaller niche markets are more accessible with well-designed solutions, even when those solutions are affordably offered to smaller companies.
Integration and scalability
Because a niche subscription product is built for one industry, it’s often quicker to implement than a more general solution. It also can be designed to integrate easily with popular software solutions in that industry. Once implemented, it naturally grows with the kind of changes expected for a growing business in that vertical.
High level of innovation
Solving evermore niche problems with SaaS requires creativity and, usually, advanced artificial intelligence. For tech leaders motivated by the challenge, the call is irresistible. The more creativity and leading technology on your side, the higher your chances of being able to identify and leverage opportunities quickly.
Rather than wasting resources on generalized marketing and sales funnels, verticals enable SaaS business leaders to focus on a receptive target audience and increase perceived value. This leads to more conversions, higher retention, and ideally, a lower barrier to customer acquisition, fueling success.
There’s no denying the success of the subscription revenue model and the recurring revenue it generates. Niche down into a specific industry, and you may discover an opportunity to create a highly effective solution that provides consistent, ongoing revenue for your subscription business.
Vertical SaaS: Companies That Go Deep
To better understand how the latest business model evolution of SaaS is unfolding, let’s explore some examples of high-performing niche subscription business models:
Serving the construction industry, Procore developed a $11 billion publicly traded business. With a deep focus on the construction industry, they could create specialized features that addressed the unique challenges and needs of this sector. Its unified platform connects people, applications, and devices through a centralized hub that helps construction professionals manage risk and build quality projects safely and on time.
Identifying a gap in personal lending and wealth management, Lufax established itself as a leading technology-empowered personal financial services platform. It offers peer-to-peer (P2P) lending, retail lending, and wealth management services to individual investors and borrowers. In 2020, it went public on the New York Stock Exchange, demonstrating how to successfully merge traditional financial services with modern technology to meet the evolving demands of today’s entrepreneurs.
Giving Lufax a run for its money in the fintech sector, nCino has focused on integration, compliance, and customer experience in banking. Its flagship product, the nCino Bank Operating System, covers various aspects of banking operations, including lending, deposits, analytics, and customer engagement. In July 2020, nCino went public on the NASDAQ and, as of 2023, is valued at $3.25 billion.
Valued at $1.6 billion, Clio provides small law firms with legal practice management, client intake, and legal CRM software. With more than 150,000 customers across 100 countries, many of which are smaller and solo practitioners, Clio’s changing the way lawyers and clients connect and do business.
Not one to be left behind on a tech trend, IBM acquired insurance SaaS provider Genelco in 2014. The primary product, IBM Genelco Insurance Administration Solution, “helps the insurance industry process business while meeting regulatory compliance and internal marketing needs.”
In the restaurant industry, Toast is turning heads. The platform began as a point of sales system but quickly evolved to include online ordering, inventory, employee management, payroll, capital, customer review management, and marketing. Toast generates $494 million in annual recurring revenue and has a 118% annual growth rate.
Striving to bring hundreds of thousands of auto repair businesses into the digital future, Shopmonkey helps independent shop owners manage workflows, inventory, customer communications, invoices, and payment collection. The SaaS subscription business recently raised $25 million in Series B financing in a bid to capture some of the $800 billion expected to be generated by auto repair by 2026.
In the booming global wellness industry, Mindbody has supported SMBs like yoga and fitness studios, spas, and wellness centers with an all-in-one business solution that includes scheduling, point-of-sale, staff management, and reporting. Through the Mindbody app, consumers can discover, book, and pay for wellness services in their area. In 2019 Mindbody was bought by Vista Equity Partners with a valuation of $1.9 billion. In 2023, it’s looking to IPO.
These are just a few of the dozens of vertical SaaS subscription businesses quickly growing into big tech contenders. With the current SaaS market estimated to be worth $197 billion, rising to $232 billion in 2024, the market appetite for SaaS solutions is well and truly there, and industry niches are ready to be revolutionized.
What makes a niche subscription business model successful?
According to Lemkin, there are two questions he asks before investing in a vertical SaaS product:
1. Will everyone in the industry use it?
2. Is the app so core, they can charge $20,000+ a year for it?
If the answer to #2 is no, all hope isn’t lost. Lemkin goes on to explain that it’s possible to make up for lower subscription pricing with a larger customer base. Keep this in mind when gauging the potential of your vertical subscription model.
In addition to product-market fit and value, executing a niche subscription business model requires a certain level of pricing and catalog flexibility.
While a SaaS brand grows, the market around it simultaneously evolves. Increasing numbers of customers also introduce new demands and challenges. Together, these and other factors create a need for agility.
When a customer needs change, how quickly can you adapt? When the market creates demand for a new type of product, are you able to roll out and charge customers for it seamlessly?
An adaptive subscription billing software solution can support your product and business flow to allow you to best serve your target market. No matter what customers demand of your business, your catalog should be flexible enough to allow you to deliver.
Know the Market, Know the Opportunity
You don’t have to know the future to design a vertical SaaS solution. You just have to know your total addressable market (TAM) and the metrics to get it off the ground. If you had all the resources in the world at your disposal, how many customers could get value from your SaaS product? Multiply that by the amount these customers would be willing to pay for your product, and you’ve got the figure to qualify your concept.
If the profitability potential looks good, what about your customer acquisition costs? What’s the average churn rate for software solutions in your industry? How can you upsell customers once they’re on board? Knowing your industry’s problems and being the best solution to solve them is far more powerful than providing better productivity to the entire professional community.
Bring this sort of knowledge to investors like Lemkin, and you’ve got the right recipe to take your slice of the $197 billion SaaS sector. Going niche gets you access to reliable market insights not so readily available in the broader horizontal SaaS space.
Go Vertical to Achieve New Heights
For innovative SaaS leaders with industry-specific knowledge, focusing on a vertical can yield impressive outcomes. To do so, they’ll need a good market fit, high-value solutions, and the ability to evolve as new industry demands emerge.
Fortunately, all of those things are within reach with the right talent and technology. All you need is an idea: the right solution—and the right business models—for the right problem.
FAQs about Vertical SaaS
Q: What is a vertical SaaS subscription business model?
A vertical SaaS subscription business model focuses on a specific niche industry, so their features and capabilities are tailored to select verticals.
Unlike horizontal SaaS, which offers generalized solutions for a wide range of industries, vertical SaaS targets a particular sector—e.g., healthcare, finance, or construction.
Q: What are the benefits of a vertical SaaS subscription business model?
As a business model, vertical SaaS gives companies a narrower focus and approach to sales, marketing, and product development.
As such, these types of SaaS companies can often serve their users extremely well. In some cases, they can also charge more premium rates compared to generalized software solutions. In the same way that medical specialists and industry experts can charge more for their services, vertical SaaS companies can capitalize on their specialized software.
Q: What are some examples of successful vertical SaaS businesses?
There are so many great examples of vertical SaaS companies. Some of the notable ones include:
- Procore (construction)
- Lufax (personal lending and wealth management)
- nCino (banking)
- Clio (legal practice management)
- Toast (hospitality)