Vertical SaaS vs. Horizontal SaaS: Key Differences and the Role of Embedded Finance
The Software-as-a-Service (SaaS) industry continues to exhibit high-powered growth from the last decade, becoming a foundational business model for companies across the globe.
Two years ago, the SaaS market exceeded $250B — by 2032, projections are expected to be over $1T.
This momentum comes from businesses (of all sizes) prioritizing efficiency across a set of business functions (often in multiple regions & market segments).
As a result, numerous SaaS applications emerged and can be categorized into Vertical SaaS and Horizontal SaaS — each with its own benefits and opportunities.
Let’s explore below:
Definitions for Vertical SaaS and Horizontal SaaS (including key differences);
Examples of both categories;
Demand for embedded finance and its rise in Vertical SaaS;
Vertical SaaS & Horizontal SaaS (Definitions, Differences)
Vertical SaaS provides cloud-based solutions that are customized to solve specific needs of a target industry/niche/vertical.
As more business types adopt technology into their daily operations, vertical SaaS platforms are launching solutions that optimize management of operational challenges, regulations, and economic changes — eliminating manual reviews, automating tasks, reducing overhead, and enhancing overall efficiency.
For a healthcare-focused Vertical SaaS firm, a bundled offering can include functionality for managing patients, storing medical records, creating reports for regulators, and processing billing payments.
Prior to SaaS, a hospital needed to contract with multiple companies for these services OR build their own application from scratch (with a high upfront cost and lengthy development timeline).
Horizontal SaaS takes a broader approach by providing solutions that can be utilized in various industries/verticals.
High-level functions that all businesses must manage are offered, which include billing, payroll, marketing communication, human resources, and accounting.
The same foundational need is applicable for nearly every business type— no need for differentiation in approaching different niches.
Horizontal SaaS platforms are able to capture a wider scope of clients with the same solution.
Key Differences Between SaaS types
From these definitions, business leaders can make an assessment (across four key parameters) which option delivers the most value to their stakeholders:
Target Audience:
Vertical SaaS: Focus in a specific industry with specialized functions that solve unique needs of that sector/vertical.
Horizontal SaaS: Applicable to a broad range of industries by offering general capabilities/functions.
Customization:
Vertical SaaS: In-depth customization that captures industry-specific operational needs (i.e. workflows, compliance).
Horizontal SaaS: Standard, one-size-fits-all functionality available to all business clients (regardless of niche, size, market).
Market Reach:
Vertical SaaS: For a narrower segment, which benefits market share in that niche but reduces the size of the total addressable market (TAM).
Horizontal SaaS: Available to a wide market, but the lack of specificity minimizes the ability to deeply penetrate the market.
Integration:
Vertical SaaS: Built to integrate easily with commonly utilized programs (such as ERP, bookkeeping, payment systems), which delivers a faster path to production and customer usage.
Horizontal SaaS: Customization would be needed to fit a broad solution into a company’s existing operations, which can increase costs and time to deployment.
Based on what an organization needs, one model would outshine the other in terms of value-add.
After the last 5-7 years, the buzz with Vertical SaaS created a flood of new platforms that are all competing for a niche market.
Prospective buyers will need to research and short-list a group of providers on their own — diving into product documentation, demos, pricing sheets, due diligence calls — which can be a time-consuming process.
Here’s a quick look at actual SaaS companies (Vertical & Horizontal) and what they provide today.
Examples of Vertical & Horizontal SaaS
The differences in the two SaaS types really come to life with the following companies.
Example —> for those at tech-focused companies, Salesforce and Slack are commonly used tools in daily work life — compared to Procore and Toast, which would only apply to companies in construction or restaurant industries, respectively.
Vertical SaaS:
Veeva Systems: Provides cloud-based solutions tailored to pharmaceutical & life sciences, including applications for regulatory compliance & clinical trial management.
Procore: Construction management software for contractors & builders — with multiple functions built-in (project management, budgeting, scheduling).
Toast: A full-suite platform for restaurants that delivers point-of-sale (POS) hardware, reporting, inventory management, and customer engagement solutions.
Horizontal SaaS:
Salesforce: The enterprise leader in customer relationship management (CRM) is widely utilized across various industries to manage customer relationships, sales processes, and marketing campaigns.
QuickBooks: A well-established veteran in accounting software, Quickbooks supports businesses of all sizes & industries with bookkeeping, invoicing, and payroll processing.
Slack: A household name in workplace solutions & productivity, Slack facilitates communication & collaboration for an assortment of industries. ‘Work from home’ fueled its growth in the last 5 years.
For SaaS companies working to stand out from the crowd of competitors, offering embedded finance within their user experience is becoming a strong option.
Embedded Finance in Vertical SaaS
Embedded finance refers to the integration of financial services into non-banking platforms, which allows customers to access financial products within an existing web/mobile platform (provided by the SaaS partner).
The characteristics of Vertical SaaS solving multiple problems for a specific industry blends well with the ability to add more functionality (via banking, payments, and card issuance capabilities).
For Horizontal SaaS, adding finance capabilities to a generalized solution will fall flat (in terms of customer adoption). Business clients (leveraging Horizontal SaaS) are accustomed to using multiple vendors to solve various business functions — including a separate banking relationship. In this case, embedded banking has minimal benefit to how customers manage operations.
Making the leap to banking is worthwhile for Vertical SaaS companies with comprehensive platforms, as it comes with the following benefits:
Increased Revenue Streams: Embedded finance opens new streams of monetization through transaction fees, interest from lending services, and/or premiums from insurance products (offered within their platforms).
Enhanced Customer Experience: Vertical SaaS providers can offer a more seamless & convenient experience for their users by integrating payments, accounts, or cards. No need for clients to navigate multiple platforms/logins to manage basic banking activity.
Improved Customer Retention: Offering a comprehensive suite of business solutions & financial products bolsters the overall value proposition for a Vertical SaaS company. Increased value creates deeper customer loyalty and reduces churn rates (i.e. how often a customer closes their relationship).
A few notable examples of embedded finance in Vertical SaaS emerged in the last few years (across diverse niches):
Toast (Vertical - Restaurant): Initially focusing on POS systems for restaurants, Toast expanded its platform by adding payment processing and lending. Through data analytics on transaction history, Toast offers customized financial products (such as loans to restaurants), which help improve cash flow on a monthly basis.
Mindbody (Vertical - Wellness): Targeting businesses in the wellness industry (e.g. salons, fitness studios, spas), Mindbody offers embedded payment solutions alongside bookings so that owners can service customers and collect funds — all within the same platform.
Shopify (Vertical - eCommerce): An enterprise leader that stands out in eCommerce, Shopify goes beyond payment solutions and offers account management & lending (via Shopify Capital). Merchants are able to qualify for loans based on sales data and receive faster payment settlement through native deposit accounts.
As more examples in Vertical SaaS emerge across new categories (such as field services, healthcare, human resources, logistics), better frameworks and processes will be developed to improve the implementation of embedded finance.
Outlook for Vertical SaaS, Horizontal SaaS, and Embedded Finance
The distinction between Vertical and Horizontal SaaS lies in their target audiences and the specificity of their solutions.
Horizontal SaaS provides versatile solutions applicable across various sectors, emphasizing scalability and broad applicability.
Vertical SaaS offers tailored applications for specific industries, providing deep customization and addressing unique challenges.
Businesses looking to consolidate most (if not all) operational needs with a vendor would choose to work with a Vertical SaaS company (if available within their industry niche).
The integration of embedded finance into Vertical SaaS platforms represents a significant evolution in the SaaS landscape.
By incorporating financial services directly into their offerings, Vertical SaaS companies can enhance customer experiences, unlock new revenue streams, and solidify their position within their respective industries.
As the SaaS market continues to grow, the convergence of specialized software solutions and embedded financial services will redefine how businesses operate and deliver value to clients.
