The Benefits and Drawbacks of Vertical Specific Software — an Entrepreneur’s Guide
By: John Tinkham
So, you’ve set out to start a software company. Fantastic. Next comes a critically important question that must be answered early in the development process. Should the product offer a specific business solution to a broad set of customers (horizontal software), or should the software be more robust and solve many customer needs in a single vertical (vertical software). Historically, most software companies have opted to provide horizontal software. Salesforce dominates CRM and serves a wide range of customers, QuickBooks is used for accounting in every end-market, and Microsoft’s 365 products are ubiquitous in office environments. More recently, however, software products are increasingly being geared towards single end-markets. Hudl offers video analytics, team management, recruiting, and a host of other features exclusively for sports teams. Cvent’s software is used solely for event management. Given the dominant market positions that many horizontal software products enjoy, the proliferation of vertical software products seeking blue ocean market niches should come as no surprise. In this article we will explore some of the benefits and drawbacks of vertical software platforms.
The benefits of vertical software are present in product functionality, data analytics, cost, and sales and marketing. From a functionality standpoint, vertical software products are afforded the opportunity to customize their solutions to better meet the needs of specific industries. This allows for the development of customized, industry specific tools as well as UI/UX that is more user-friendly. This customized functionality is especially important in providing data analytics solutions. Given the unique formats of data across differing industries, horizontal software is limited by its ability to normalize data that it ingests in different formats. Vertical software on the other hand benefits from the opportunity to develop highly specific data analytics use-cases. From a cost standpoint, vertical software reduces the overall technology cost for clients. Vertical software typically solves multiples customer technology needs such as CRM, ERP, and data analytics, thereby replacing multiple “point” solutions. Typically, the cost of a single more robust vertical software platform is less than the summed cost of multiple point products. Finally, vertical software sales and marketing efforts benefit from targeting narrow end-markets. This makes it easier to implement more targeted marketing strategies, increasing their effectiveness. Additionally, serving narrow end-markets makes it easier to cater to the needs of existing customers, driving up customer satisfaction.
While this all sounds good and well so far, vertical software suffers from several drawbacks. Most notably, Vertical software serves substantially smaller end-markets on average. The number of potential customers that could benefit from CRM software is exponentially larger than those that could benefit from event management software. Inevitably, given the narrow focus of vertical software, the success or failure of these companies is often tied closely to the health of the end-markets they serve. Retail software is a vertical market that suffers for this reason. Additionally, vertical software providers typically have higher customer education costs due to the entrenched nature of traditional business solutions and higher training costs associated with broader feature functionality. These more robust vertical platforms also result in more costly and disruptive customer implementation processes. Finally, from a shareholder’s standpoint, vertical software companies suffer from more limited exit opportunities (M&A) due to their narrower use-cases. Strategic software acquirers typically favor horizontal solutions unless they have specific reasons to target a specific vertical market.
Taken altogether, the decision whether to build a vertical or horizontal software product depends on the strength of the factors discussed above. Other factors not specific to either horizontal or vertical software including the competitive landscape should also be considered. If one does decide to develop vertical specific software, the advice of this author is to ensure that you target an end-market that is large and healthy enough to support your business. Additionally, ensure that the market has enough defining / unique traits that warrant creating highly customized tools and features. Unsurprisingly, the success of your vertical software product will ultimately depend on how attractive these features are to potential customers, and how many customers you can acquire and retain. Good luck!
