New startups have a lot to sort through as they begin their journey to funding and growing their business. As a tech startup, some decisions are inherent to your business idea – such as which type of tech your startup specializes in, like communications or as a CRM, or whether you’ll sell your product or service directly to businesses (B2B) or target consumers in your market (B2C).
Businesses who operate as software as a service (SaaS) companies must also decide whether or not to approach their customers through verticals or horizontally, selling their software as a package specific to one industry, or to reach a variety of industries with one specific software to serve customer needs.
Each has pros and cons depending on your industry, which VCs you wish to work with, and whether or not you’re able to invest in sales and marketing at a rate to compete with larger players in your chosen market.
Vertical SaaS refers to software that meets the needs of one vertical, or industry, and intimately understands the needs of that market. It can be one comprehensive software or a suite of offerings, custom-suited for businesses or consumers in that vertical.
One example is Zillow, a B2C and B2B company that offers online software for the real estate industry. It features home search capabilities as well as mortgage and realtor-specific offerings, as well, but all within real estate.
Horizontal SaaS companies leverage their tech to a wide range of industries, serving a need common to many types of businesses through their unique software offering. Think Salesforce, a B2B, horizontal SaaS company that leverages their customer relationship management (CRM) technology to help a wide breadth of companies convert sales leads, agnostic of industry.
We’ve put together a quick reference guide to help your startup compare distinctions between each type of SaaS. Consider the following when choosing to be a vertical or horizontal company and honing your SaaS marketing strategy.
|Target Market||Companies or consumers within one industry serviced by software your company provides (can be one offering or multiple to suit industry needs)||Companies or consumers agnostic of industry with a need for a specific software service|
|TAM (Total Addressable Market)||Smaller due to focus within one industry and its vertical(s)||Greater because it captures potential customers across many industries and verticals, which yields more people|
|Competitors||Can have fewer large companies in the market competing, often multiple startups||Larger companies tend to have a wide reach, so your startup may compete against big tech to service your audience|
|Investor Appeal||Some prefer a narrow focus; mid-market funds may be best suited because less capital is needed to succeed and the path to IPO or exit is more efficient.||A greater TAM means higher potential revenue, but also means higher investment needed to compete against big companies in the market. Larger VCs could support all the way to IPO or exit with a higher investment.|
|Growth Potential||Easier to take up market share with the smaller, more defined market, so growth can happen faster. Also includes opportunities to up-sell and meet many customer needs through a suite of software for the industry, thus expanding growth.||Slower to grow because of wide reach and tougher competition, but can be strong due to the size of the TAM and strength of S&M messaging.|
|Sales & Marketing (S&M) Needs||Focused on just one industry and its needs, which helps refine messaging. S&M to revenue (how much a startup spends on sales and marketing vs. how much they bring in) can be lower due to lower revenue potential from the more limited market.||Increased competition and message fluctuation required for different markets means S&M budgets must be higher. Revenue is also potentially higher, so the ratios are greater if done well.|
Source: Flavor of SaaS Report
Finding Your Fit
So which is best for you? A good internal brainstorm with your executive team will help weigh the options and select the right fit for your tech startup. Consider the experience of Itay Sagie, a lecturer and startup adviser, who told Crunchbase:
“My experience also shows that some VCs tend to prefer vertical SaaS, as they require less capital to quickly capture a market share of a specific industry. The marketing and sales budgets are lower, the messaging is simple, their product is laser-focused to cater to a specific industry, and the competitive landscape includes smaller companies with a lower barrier to entry.
Horizontal SaaS companies, however, have their advantages as well; they have a much bigger addressable market which means they can grow to very large-scale companies with much higher company valuations upon exit.”
After you’ve found your fit, your marketing and product teams, or a tech marketing agency, can refine their messaging to effectively speak to the target audience and speak to the software’s benefits to that industry or to that broader need.
Does your tech startup need marketing help?
Swyft is more than just tech startup PR – we also specialize in fueling a startup’s marketing efforts to bring its brand to life and generate effective sales leads and drive conversions. Contact us to get started as your tech marketing agency and win your SaaS segment!