Software as a service (SaaS) is a cloud-based delivery model that allows businesses to access and use software applications over the internet. SaaS businesses can choose between two main business models: vertical and horizontal. By dividing the market into distinct groups, businesses can better meet specific customer needs. In this article, we’ll explore these strategies to help you determine the right fit for your SaaS company’s growth and success.

Understanding Vertical and Horizontal SaaS Models

Vertical SaaS

The vertical-focused business model involves targeting a specific industry or market vertical such as healthcare, finance or education with a tailored SaaS solution. This approach allows companies to deeply understand the unique pain points, challenges, and workflows of a particular industry. By specializing in specific verticals, SaaS companies can develop highly specialized products that cater to the specific needs of customers within that industry. Evaluating metrics such as Lifetime Value to Customer Acquisition Cost (LTV/CAC) ratio and churn rate within specific verticals can offer valuable insights.

Advantages:

1. Specialization: Vertical SaaS companies become industry experts, building trust and credibility and creating a competitive advantage by engendering greater customer loyalty.
2. Customization: Tailored solutions attract customers willing to pay a premium for a product that perfectly fits their requirements, resulting in higher average contract value (ACV) and pricing power.
3. Network Effects: Positive word-of-mouth within the industry can drive further growth.

Challenges:

1. Limited Market Size: Targeting specific industries may limit the customer base compared to a broader approach.
2. Resource Intensive: Understanding and keeping up with industry complexities require significant research and resources.

Horizontal SaaS

In contrast, the horizontal-focused model involves offering a versatile SaaS product that serves multiple industries or customer segments. Instead of specializing, the company aims to attract diverse customers benefiting from the product’s general features and functionalities. Examples of horizontal SaaS businesses include Salesforce (CRM), HubSpot (marketing automation), and Slack (team communication). Horizontal SaaS businesses have a larger addressable market, but they also face more competition.

Advantages:

1. Larger Market Potential: By catering to multiple industries, horizontal SaaS companies access a larger addressable market.
2. Scalability: A product with broad applicability can rapidly scale and achieve widespread adoption.
3. Flexibility: A diverse customer base provides resilience against industry-specific downturns.

Challenges:

1. Intense Competition: Operating in a broad market exposes companies to more competition from established players and new entrants and consequently lower customer loyalty.
2. Lower ACV: A generalized product may result in lower average contract value due to a broader customer base.

Which business model is right for you?

The best business model for your SaaS business will depend on a number of factors, including your target market, your resources, competitive landscape and growth potential.

Here are some things to consider when choosing between a vertical and horizontal SaaS business model:

• Target market: Who are your ideal customers? If you have a deep understanding of a specific industry or niche, you may be well-positioned to start a vertical SaaS business. If you have a broader understanding of business needs, you may be better suited to a horizontal SaaS business.
• Resources: Consider your company’s resources, including talent, funding, and expertise. Vertical SaaS often requires deeper industry knowledge, while horizontal SaaS may demand a broader skill set in software development and marketing.
• Competitive Landscape: Analyze the competition in your chosen field. If you opt for a vertical model, assess the level of competition within that niche. In a horizontal model, consider the number of players offering similar solutions and how you can differentiate your product.
• Growth Potential: Evaluate the growth potential of your chosen model. Vertical SaaS companies may experience slower initial growth but can achieve high customer retention and lifetime value. Horizontal SaaS companies can scale rapidly but face fierce competition.

Hybrid Models

It’s worth noting that some SaaS companies adopt a hybrid approach, combining elements of both vertical and horizontal models. They may start by serving a specific niche and then gradually expand into adjacent markets or industries. This approach can offer the benefits of specialization and scalability.

Summary

The key to SaaS success lies in understanding your target customers’ needs and delivering value through your product. Whether you choose vertical or horizontal segmentation, align your strategy with your company’s strengths and market demands to position your SaaS business for long-term growth and customer satisfaction. By carefully evaluating your resources, competitive landscape, and incorporating relevant metrics, you can implement the most appropriate segmentation strategy to drive success in the dynamic SaaS industry.