What is Vertical SaaS? What strategy is required?

Zenport provides SaaS to solve the tasks of international trade (international logistics). This is an industry-specific SaaS and is classified as Vertical SaaS. This required strategy of Vertical SaaS is different from Horizontal SaaS, which is implemented regardless of industry type.

Let’s look at the strategy required for Vertical SaaS.

1. The difference between Vertical SaaS and Horizontal SaaS

First, let’s understand the characteristics of Vertical SaaS.

As mentioned earlier, SaaS can be broadly divided into two categories: one is Horizontal SaaS implemented regardless of industry type. Software that supports accounting, labor, marketing, sales, etc. fall into this category. Other examples include Intuit, Zenefits, Hubspot, and Salesforce.

The other is Vertical SaaS which implementation is industry specific. This is software which specializes in industries such as retail, construction, logistics, healthcare, and solves industry-specific problems. Veeva, Guidewire, etc. are examples.

Although Horizontal SaaS and Vertical SaaS have many things in common, their properties differ in several respects, so the strategy required for a startup also changes.

The three characteristics of Vertical SaaS:

  • Winner Takes All

It is said that SaaS takes up about a share of 20% of the total addressable market. Even with Salesforce, considering their 20% share in the CRM market, there might be some truth to this theory.

The reason for this is attributed to the vast diversity of tasks required according to industry and scale.
Consider sales. Even for the same activity, the tasks required for an enterprise and an SMB are different. The tasks are further differentiated with contrasting business types. The users at the receiving end of the business will also play a factor in determining tasks. BtoBtoB and BtoBtoC require different tasks.)

This complexity inhibits Horizontal SaaS from being dominant in the market.

However, this assumption does not apply to Vertical SaaS. As mentioned earlier, since Vertical SaaS is particular to a specific industry, the homogeneity of users is significantly increased, making it possible to hold shares beyond 20%.

As a result, e.g. Veeva in pharmaceuticals, Infor in manufacturing, and so on, a winner-takes-all situation can be seen in the Vertical SaaS Industry.

· Better Cross-selling & Upselling

The ability to upsell is also a characteristic of Vertical SaaS. For example, after entering one industry as a CRM tool, it is easy to cross-sell and upsell in the form of providing marketing and finance functions.

High ability of SaaS deployment in the marketplace is also a characteristic of SaaS. The nonfragmented users of Vertical SaaS and the strong relationship between product providers and users increase the ability to match user demands to business solutions and services.

Because Vertical SaaS is specialized according to industry, the market is likely to be smaller than Horizontal SaaS. It is certainly small if you look at only the initial SaaS function. But even if the entrance looks small, the Big market beyond is expanding. This can be certain from looking at the market capitalization of Veeva, a representative of Vertical SaaS, passing that of Box or Hubspot.

· Lower CAC

High target homogeneity inevitably means that efficient marketing measures can be taken. When Horizontal SaaS is offered, mass marketing measures such as TV commercials become necessary due to fragmented target segments, resulting in soaring CAC.

On the other hand, since Vertical SaaS is focused on a particular target segment, efficient marketing becomes possible. In one survey, the CAC of Vertical SaaS is 8 times cheaper than Horizontal SaaS.

For example, Veeva raised only $ 7 M before listing, which is also thought to be due to being able to keep the CAC low.

We have looked at the three characteristics of Vertical SaaS and we will discuss what strategies should be taken based in the following sections.

2. Vertical SaaS Overseas Players

Before moving on to strategy, let’s introduce the world’s leading Vertical SaaS players. The Japanese Vertical SaaS industry is still in its beginning phase, but big players over $ 1b are appearing one after another in the world.

  • Veeva (Pharmacy)
    SaaS of pharmaceutical management. Current market capitalization is over $ 8.2B.
  • Opentable (Restaurant)
    SaaS of reservation management of restaurants. In Japan, Treta offers similar services.
  • Textura (Construction)
    SaaS of construction management. Bought by Oracle in 2016 for $163M.
  • Guidewire (Insurance)
    SaaS of property insurance. Current market capitalization is about $ 5.8B.
  • Fleetmatics (Inland logistics)
    SaaS of vehicle allocation management. In Japan, Movo offers similar services. Was bought for $ 2.4B in 2016 by Verizon.
  • Infor (Manufacturing)
    SaaS of manufacturing industry (on-premise also provided). Market capitalization already exceeds 10B $.Infor is also funded by the reputable Cork Industries. More info on Cork Industries, read this article (Japanese only).Also, although it may not be familiar to people other than the international logistics industry, GT Nexus, which is one of the three strengths of Shipping portal, is a subsidiary of Infor (acquired in 2015).

Those are the main players of the world’s Vertical SaaS. Although the names may not be familiar, you will notice that there are a lot of players who are producing great results.

3. Strategizing with Vertical SaaS in Japan

Let’s move on to the discussion of strategy. It has become clear that there are three points to be conscious of in the development of Vertical SaaS.

As mentioned in Section 1, to Vertical SaaS, having the opportunity to cross-sell or upsell is paramount to the business’ success. In this case, it is important to be able to acquire data, which can be used as an anchor.

Although varying from industry to industry, in many cases data will be that of payments and commercial distribution. Movement of a transaction (ownership) and the accompanying movement of money is like the main artery in the body and tells us a lot.

Also, such data become hooks, which also has the effect of lowering the churn rate.

On the other hand, this information is not easy because it is also in part, handled by the core system. As will be described later, in the seed stage, it is better to avoid data coordination with the backbone system if possible. The ability of data acquirement in such circumstances will highlight the management’s skills.

It is also important in which department of the company the service is used. As mentioned earlier, cross-selling and upselling is required for Vertical SaaS. However, even if you are planning to aim for cross-selling/upselling, if the department that initially adopted the service is a department in a lower position, expansion to other departments may be difficult.

Put short, it is better to have a department with a strong position within the company adopt the service first.

In Japan, the strength of the sales department, which is directly linked to the increase in profit, is strong and weakens as we go to the back office. Therefore, if possible, it is key to develop a product that can appeal to the top line growth rather than the reduction of costs.

Even while offering the same product, be mindful of the fact that the way of implementation and expansion can greatly impact the end results.

In implementing Vertical SaaS, the coordination with the core system inevitably present itself as a stumbling block. In the case of medium-sized enterprises and above, the majority have already implemented a core system, and essential data such as finance and product master is accumulated in it.

Also, the types of core systems are various, such as SAP, Oracle, Orbic. Not only that, in many cases, customization is carried out according to company needs, and thus tuning is necessary for API coordination.

In conclusion, making coordination with the core system a requirement in the seed stage is not necessarily a backbreaking strategy. Not only will it require a lot of resources, but it leads to the situation where a third party will grasp some of the deciding factors of lead-time in implementation. This predicament for a startup, which has to complete PMF with limited resources, is best avoided.

Therefore, Vertical SaaS is required to create a MVIP (Minimum Valuable & Independent Product). In other words, at the very least, the product needs to be one that users would be willing to pay for and offers value independently without coordination with the core system.

Although it is necessary to make a MVP (Minimum Viable Product) during seed of startup, it can be said that in terms of Vertical SaaS, the creation of a MVIP is required more so than a MVP.

Summary

I wrote how to strategize with Vertical SaaS. However, the content written this time is a general theory, and it should be noted that there are exceptions.

The views and opinions expressed in this article are my own. Please feel free to contact me for further discussion. I would be more than happy to talk with you through my social media below.

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ToshihiroKaseda/加世田敏宏

Written by

CEO at Zenport, the global trading mgmt platform. Write about Global Trading, Vertical SaaS, Trade Finance, Human History, Japanese Globalization and Blockchain