Vertical solutions rise in 2024

2023 was a challenging year, to say the least, for our industry – and software/SaaS vendors were hit particularly hard. As was clear from our recently conducted CIO.com poll, buyers strongly believe that they have overinvested in “point” solutions and are taking steps to consolidate vendors.

Although there are signs of general economic recovery including lower inflation & interest rates and higher growth as we navigate early 2024, there’s little evidence to suggest that buyers will suddenly return to their old ways. Going forward, the landscape will be more challenging and competitive than ever.

I do believe we are seeing the start of a return to growth – but that the future will be quite different from the past. One characteristic of most of the SaaS industry today is that the vast majority of solutions are horizontal – there are functional SaaS solutions for Sales & Marketing (one of the most crowded and ripe-for-consolidation subsegments), for Finance, for HR, and of course for IT.

However, what has been less common up to this point – and where I believe the value and growth will be going forward – is in more industry-focused solutions. Solutions that not only span functions, but also have industry-specific features and benefits that provide more value by supporting and enabling users to be productive and more competitive in specific industries.

For example, a financial services company might seek a solution that can help them manage risk, comply with industry-specific regulations, and provide better customer service. A healthcare company might need a solution that can help them improve patient care, reduce costs, and comply with HIPAA regulations. A manufacturing company might need a solution that can help them improve efficiency, reduce waste, and stay competitive in the global marketplace.

Industry-specific business value

Vertical solutions of course are not necessarily new – the recent Medium post “Vertical SaaS, Flipping the Playbook” states that there are already nine public vertical SaaS companies with more than $1B in revenue – so why do I expect them to become so much more popular in 2024 (and beyond)? Here are three key reasons:

1. Deeper Business Value: Horizontal solutions often struggle to deliver industry-specific insights and functionalities. A generic CRM might manage leads, but can it optimize industry pricing? Vertical solutions, on the other hand, are designed with the intricacies of a specific industry in mind. They understand the jargon, the workflows, the pain points. This translates to higher productivity, improved decision-making, and ultimately, higher ROI.

2. Shallower Competitive Landscape: The horizontal SaaS market is a deeply entrenched – and scarred – battlefield. 30K+ companies fight for mindshare and market dominance, leading to price wars and feature fatigue. We’ve seen the result in the last 18-24 months as SaaS growth – and retention – rates have plummeted. Verticals, however, offer a less crowded playing field. Their smaller addressable markets (more on that in a bit) keep competition at bay, allowing vertical solutions providers to establish strong customer relationships and build defensible moats around their niche expertise.

3. Differentiation & Sustainability: Investors are increasingly drawn to businesses with clear differentiation and proven value propositions. Vertical solutions tick both boxes. Their targeted approach resonates with specific customer segments, leading to faster adoption and higher customer lifetime value. This makes them attractive investment targets, especially in a market where generic “me-too” solutions are losing their shine.

Vertical SaaS also appeared at the top of CompTIA’s list of 10 SaaS Predictions for 2024. The article states “There will likely be a surge in vertical SaaS solutions tailored to specific industries. This trend will be driven by the growing demand for customized software that caters to the unique needs of different sectors such as healthcare, finance, education and manufacturing.”

Of course, “going vertical” is non-trivial – and much easier said than done. Deep industry domain knowledge takes time – and experience – to build, and generally requires a much more expansive delivery model.

The funding model also changes – for nearly all verticals. The Total Addressable Market (TAM) is by definition significantly smaller than a horizontal comparable. Under the historic venture capital model, a smaller TAM is a major red flag – a major reason why there are so few vertical SaaS companies currently – because VCs have been skeptical that vertical markets are large enough for venture-sized returns. Of course, as tech investors have more recently sought to reorient their investment criteria toward profitability vs growth, there has been some change in perception at least, though it remains to be seen whether VCs will have the same success applying their growth-oriented models to smaller TAM vertical markets.

A good example of this is Shaheem Hameed, CEO of CH Healthcare, on the recent “Practical Funders” podcast who told host Greg Head,

“I looked at funding a few years ago and talked to some investors. The first investors told us that the EHR market is saturated for small offices and there’s not much you can do there. At first, I found myself “cutting my feet to fit the shoe” of what VCs wanted to hear.”

In other words, SaaS companies have spent the last few years listening to investors, but going forward we should expect more attention to be spent on customers – and as that happens, more industry-specific solutions will rise to the fore.

What about the buyer?

This discussion is, of course, highly relevant to you as an IT executive and buyer. From a buyer’s perspective, the first implication is that IT and business buyers will become more closely connected than before.

IT can provide business buyers with the technical expertise they need to understand vertical solutions and make informed purchasing decisions. Business buyers can provide IT with the business requirements that vertical solutions must meet. By working together, IT and business buyers can ensure that vertical solutions meet the needs of the business and are compatible with the existing IT infrastructure.

In addition to working together during the procurement process, IT and business buyers should collaborate on the implementation and ongoing management of vertical solutions. This will help to ensure that vertical solutions are used effectively, and that the business realizes the full benefits of its investment.

IT and business buyers can ensure that vertical solutions are purchased, implemented, and managed effectively by working together. While IT / Business partnership is not a new concept, it will become even more critical in the future. This will help the business improve performance and achieve strategic goals. The organizations that will be most successful will be those with the strongest partnerships.