Vertical SaaS vs Horizontal SaaS: A Thorough Guide to the Differences

SaaS (Software as a Service) is an extremely valuable way for companies to distribute software — especially for small and medium-sized businesses that want to avoid the cost of maintaining their own infrastructure.

However, not all SaaS models are built the same way. Most SaaS models follow one of two main approaches: horizontal (known as Horizontal SaaS) or vertical (known as Vertical SaaS). This article explains various aspects of these two types, including their definitions and characteristics.

1. What is SaaS (Software as a Service)?

Software-as-a-Service (SaaS) is a software distribution model in which a third-party provider hosts applications and makes them available to customers over the internet. SaaS is one of three main categories of cloud computing, alongside infrastructure as a service (Infrastructure as a Service, IaaS) and platform as a service (Platform as a Service, PaaS).

The SaaS model offers several benefits for companies that choose to use it. Because the vendor hosts the SaaS application, users don’t need to install or run the application on their own computers or data centers. User companies also don’t need to buy a license for every device that runs the application.

Rather than requiring a large upfront payment, SaaS providers can offer users a monthly subscription plan, making it easy for new companies to get started. Some vendors let customers use a basic version of the application for free and only charge for premium features or extra storage space.

Common examples of SaaS include webmail, customer relationship management (CRM), messaging, video conferencing, and office software suites provided by Microsoft or Google.

What is SaaS?

References:
What is SaaS (Software as a Service)?
What is IaaS (Infrastructure as a Service)?
What is PaaS (Platform as a Service)?

2. What are Vertical SaaS and Horizontal SaaS?

Vertical software is a specific solution for problems faced by a particular industry or business type. Horizontal software, on the other hand, is designed to be used across a wide range of industries and businesses.

2.1. Types of SaaS: Vertical SaaS

Vertical SaaS (Vertical SaaS) is a type of solution built to address the needs of a specific industry. These meet the needs of industries with specialized requirements, such as healthcare institutions or government agencies.

For example, Vertical SaaS for the healthcare industry includes patient management and billing systems designed to handle complex insurance regulations across different states and insurers. Government agencies may need vertical software with features such as voter database management, which is irrelevant to most other organizations.

Vertical SaaS Landscape Map

This is the latest Vertical SaaS Industry Landscape Map published by One Capital.

Companies selected for this map meet the following criteria.

・Provides an industry-specific SaaS solution.

・Is a domestic startup listed on SPEEDA (formerly INITIAL). (Companies with a "research completed" status or subsidiaries of listed companies are excluded.)

Vertical SaaS Landscape Map (Reference: One Capital)

2.2. Types of SaaS: Horizontal SaaS

Horizontal SaaS (Horizontal SaaS) is designed to be used across a wide range of industries and businesses. These solutions address common problems faced by all organizations, regardless of industry or size. Examples include email marketing tools, social media management platforms, cloud storage services, and CRM systems.

The key difference here is that vertical solutions address the needs of a specific type of organization, while horizontal solutions can be applied to many different types of organizations at once.

Horizontal SaaS Landscape Map

Following the recent publication of the "Vertical SaaS Landscape," One Capital also created and released the "Horizontal SaaS Landscape 2024." Companies covered must meet the following criteria.

・Provides a SaaS solution that is not limited to a specific industry.

・Is a domestic startup listed on Speeda (formerly INITIAL). (Companies with a "research completed" status or subsidiaries of listed companies are excluded.)

Horizontal SaaS Landscape Map (Reference: One Capital)

3. Comparing Vertical and Horizontal SaaS

When it comes to software, "vertical" and "horizontal" are not development directions. They are business models, and the difference between them is significant. Below is a primer on both, and why you need to know the difference.

Horizontal SaaS is built to be used across a variety of industries as a service, while Vertical SaaS is built for a single industry. Horizontal SaaS is more widely used because it can be applied to almost any company, but both have their advantages and disadvantages.

When you hear about SaaS, there is a good chance it is Horizontal SaaS, because Horizontal SaaS can be used by almost any company in any industry. If you have ever considered buying business software, you have probably looked at Horizontal SaaS products such as Salesforce, Google Analytics, or Adobe Creative Cloud. Salesforce alone has around 150,000 customers across industries ranging from finance to education.

Horizontal SaaS is generally easier to sell because it can be applied to multiple industries right out of the box.
Vertical SaaS companies focus on solving specific problems within a specific industry — for example, a law firm using specialized practice management software.

Comparing Vertical and Horizontal SaaS

So what is the decisive difference between Vertical SaaS and Horizontal SaaS companies? Let’s take a closer look!

3.1. Business Model

A business model drives a business toward success, and this holds true for SaaS business models too. A business model is the concept of what problems a company solves and how it earns profit from its products or services.

The Vertical SaaS business model focuses on solving the needs of a specific industry, such as real estate or healthcare.It provides an end-to-end solution addressing the needs of a specific sector.Photoruction and Amata+ are good examples of Vertical SaaS companies. They provide solutions for the construction and education industries.

The Horizontal SaaS business model provides solutions for everyday needs across a variety of industries.It offers services that can be used by many different types of businesses across every industry, such as accounting, marketing, and HR. Examples include SmartHR and Money Forward.

3.2. Target Market

A target market is the group of consumers most likely to buy the product you are selling. When creating a target market analysis, you define the ideal customer for your product or service. Defining a target market is not about limiting your customer base — it is about identifying who buys from you, and why.

Vertical SaaS refers to applications targeted at a specific industry, such as healthcare or banking.Because Vertical SaaS has a limited target audience, its marketing costs tend to be lower. The key here is finding a niche market where the software solves a major problem.

Horizontal SaaS companies offer general products or services useful across a wide range of industries.They serve a diverse customer base, and the barrier to entry for new customers is usually low.

3.3. Competitive Landscape

Competitive analysis is an important part of a SaaS company’s overall product strategy.

For Horizontal SaaS companies, competitive analysis can be done relatively quickly.Google Alerts and SEMRush, among other standard tools most companies use. These tools let you track competitors’ rankings, keywords, and traffic volume over time.

Horizontal SaaS companies need to monitor traditional factors that affect the industry, such as product features, pricing, brand value, and customer reviews.

Vertical SaaS companies need to analyze the competitive landscape of their niche market.For example, if you use real estate software, you’ll want to understand the search queries used by potential buyers and sellers. You should also understand the advertising options available on relevant feeds, such as Facebook or Instagram.

3.4. Marketing

When it comes to marketing strategy, Horizontal SaaS focuses on user acquisition, while Vertical SaaS focuses on customer retention.

The goal of Horizontal SaaS is to acquire as many users as possible for the software. As a result, they can gain a high market share and eventually charge more for an established product. They often offer the product for free or at a low price, then charge a premium for additional features that users must pay extra to access.

They rely heavily on user feedback to adjust the features they offer and how they sell the product. Their key metrics are user adoption and how often users opt in to use the software.

Vertical SaaS products are built for a specific industry or group, such as real estate agents or hospitals. So the goal is not necessarily to attract as many new users as possible, but to build trust with existing customers so they remain loyal to the service over time.

To maintain this trust with customers, Vertical SaaS companies sometimes offer free trials, allowing potential customers to try the software before purchasing it.

3.5. Capital Efficiency at IPO

Horizontal SaaS companies can keep customer acquisition cost (CAC) lower than vertical companies because they benefit from economies of scale.This means horizontal companies can usually reduce the amount they spend on marketing per client. Vertical SaaS companies, on the other hand, cannot benefit from economies of scale the way horizontal companies can, so they may have a much higher CAC at the time of their IPO.

3.6. Growth Outlook

When it comes to growth outlook, Horizontal SaaS companies come out ahead. Here’s why.

Horizontal SaaS companies sell their products to everyone in an industry. They are not limited by the needs of any specific client — they can meet almost any demand. In other words, there is no limit to their number of potential customers!

Vertical SaaS companies, on the other hand, specialize in one segment of an industry and sell only to people with specific needs. This limits the number of potential customers they can have.

4. Summary

There is a lot of overlap between Horizontal SaaS and Vertical SaaS. Both are scalable and built to be easy for users. Both are also typically cloud-based and designed for business use.

The most important difference lies in how their functionality is applied. Horizontal systems apply to any business, while vertical systems apply to a specific industry. Vertical systems are also more likely to offer highly specialized, industry-specific features.

If you are interested in building a new service or platform for internal use or for clients, please feel free to contact Miichisoft.