When choosing the SaaS subscription business model for his own company, Peter Gassner wanted to avoid the obvious. The former Senior Vice President of Technology at Salesforce had always had a knack for going against the grain, and he wasn’t about to stop now.
“In 2007 I had this idea: I’m going to make something very specific to an industry in the cloud,” he explained in an interview with SaaStr’s Jason Lemkin.
Many people thought he was making a big mistake, but he disagreed. “When you’re a rational person, and you think it’ll be great and 99 out of 100 people think it’s bad, that’s when you have an opportunity.”
Gassner went on to found Veeva, one of the most successful software-as-a-service (SaaS) platforms available today. Focused on products and services for the pharmaceutical industry, Veeva went from an IPO market cap of about $4 billion in 2017 to $45 billion in 2021.
What does Gassner attribute Veeva’s success to?
At least in part, it’s thanks to a vertical SaaS subscription business model.
What is vertical SaaS?
Until recently, most highly successful SaaS products provided generalized solutions to cast as wide a net as possible for maximized recurring revenue. Think subscription models such as Slack, Calendly, and Zoom; businesses in just about any industry can use these tools. This is a horizontal SaaS subscription model.
Vertical SaaS, by contrast, hones in on a niche industry. A subscription business model based on vertical SaaS might provide solutions to specific problems in areas like:
…to name just a few.
A SaaS product or service designed specifically for one of these industries (or one we haven’t listed) comes with different business benefits than horizontal SaaS subscription businesses' solutions. While they do require specialized knowledge in relevant fields, SaaS leaders with an insider understanding of an industry can leverage this insight to build a successful subscription business model.
A number of founders have already done exactly that. In addition to Veeva, Lufax, Procore, and nCino are all vertical SaaS businesses that have reached million- or billion-dollar IPO status and continue to grow.
We’ll share some more examples of successful vertical SaaS brands below. But first, let’s talk about why this subscription model has become so popular.
5 reasons why vertical SaaS is on the rise
Before the promise of billion-dollar valuations, SaaS innovators interested in niche subscription business models saw a number of reasons to go vertical.
- Pinpoint unique problems. There’s massive opportunity for those who recognize industry-specific pain points and can create sleek solutions. Solve a problem that everyone in the industry complains about, and you’re sure to earn lots of fans—and some healthy recurring revenue. This is doubly true if your product meets compliance needs not met by more generalized horizontal SaaS subscription businesses.
- Faster deployment. Vertical SaaS tends to require less capital to quickly capture a market share in a specific industry. Smaller niche markets are more accessible with well-designed solutions, even when those solutions are affordably offered to smaller companies.
- Integration and scalability. Because a niche subscription product is built for one industry, it’s often quicker to implement than a more general solution. It also can be designed to integrate easily with popular software solutions in that industry. Once implemented, it naturally grows with the kind of changes expected for a growing business in that vertical.
- High level of innovation. Solving evermore niche problems with SaaS requires creativity and, usually, advanced artificial intelligence. For tech leaders motivated by the challenge, the call is irresistible. The more creativity and leading technology on your side, the higher your chances of being able to identify and leverage opportunities quickly.
- Narrower audience. Rather than wasting resources on generalized marketing and sales funnels, verticals enable SaaS business leaders to focus on a receptive target audience and increase perceived value. This leads to more conversions, higher retention, and ideally a lower barrier to customer acquisition, fueling success.
There’s no denying the success of the subscription revenue model and the recurring revenue it generates. Niche down into a specific industry, and you may discover an opportunity to create a highly effective solution that provides consistent ongoing revenue for your subscription business.
How SaaS is evolving around vertical
To better understand how the latest business model evolution of SaaS is unfolding, let’s explore some examples of high-performing niche subscription business models:
Valued at $1.6 billion, Clio provides small law firms with legal practice management, client intake, and legal CRM software. With more than 150,000 customers across 100 countries, many of which are smaller and solo practitioners, Clio’s changing the way lawyers and clients connect and do business.
Not one to be left behind on a tech trend, IBM acquired insurance SaaS provider Genelco in 2014. The primary product, IBM Genelco Insurance Administration Solution, “helps the insurance industry process business while meeting regulatory compliance and internal marketing needs.”
In the restaurant industry, Toast is turning heads. The platform began as a point of sales system but quickly evolved to include online ordering, inventory, employee management, payroll, capital, customer review management, and marketing. Toast generates $494 million in annual recurring revenue and has a 118% annual growth rate.
Striving to bring hundreds of thousands of auto repair businesses into the digital future, Shopmonkey helps independent shop owners manage workflows, inventory, customer communications, invoices, and payment collection. The SaaS subscription business recently raised $25 million in Series B financing in a bid to capture some of the $800 billion expected to be generated by auto repair by 2026.
These are just a few of the dozens of vertical SaaS subscription businesses quickly growing into big tech contenders.
What makes a niche subscription business model successful?
According to Lemkin, there are two questions he asks before investing in a vertical SaaS product:
- Will everyone in the industry use it?
- Is the app so core, they can charge $20,000+ a year for it?
If the answer to #2 is no, all hope isn’t lost. Lemkin goes on to explain that it’s possible to make up for lower subscription pricing with a larger customer base. Keep this in mind when gauging the potential of your vertical subscription model.
In addition to product-market fit and value, executing a niche subscription business model requires a certain level of pricing and catalog flexibility.
While a SaaS brand grows, the market around it simultaneously evolves. Increasing numbers of customers also introduce new demands and challenges. Together, these and other factors create a need for agility.
When a customer needs change, how quickly can you adapt? When the market creates demand for a new type of product, are you able to roll out and charge customers for it seamlessly?
An adaptive subscription billing software solution can support your product and business flow to allow you to best serve your target market. No matter what customers demand of your business, your catalog should be flexible enough to allow you to deliver.
Go vertical to achieve new heights
For innovative SaaS leaders with industry-specific knowledge, focusing on a vertical can yield impressive outcomes. To do so, they’ll need a good market fit, high-value solutions, and the ability to evolve as new industry demands emerge.
Fortunately, all of those things are within reach with the right talent and technology. All you need is an idea: the right solution—and the right business models—for the right problem.