An Introduction to Vertical Software

25th October 2023
Web capture 25 10 2023 92657 - An Introduction to Vertical Software

Tom Matthews

In the ever-changing world of technology, a new trend is emerging: vertical software. This article explores the world of vertical software, its unique advantages, potential drawbacks, and why it is becoming the go-to choice for many organisations.

What is vertical software?

Vertical software a specialized type of software that is tailored for specific businesses or industries. Unlike horizontal software, which is designed to be used across a wide range of industries and applications, vertical software is tailored to the unique requirements of a particular end-market, such as education, healthcare, finance, government, etc.  This allows the software to provide more specialized features and functionality that are relevant to that specific industry, and can help organizations in that end-market operate more efficiently and effectively.

Vertical vs horizontal software

Horizontal software solutions are universal, with a broad feature set that is likely to appeal to a wide range of industries and organisations.  Examples include accounting software, CRM platforms, project management and communication software.  These products can be used by organisations in any sector to meet their bookkeeping, customer relationship management, lead generation, sales management, project management and internal communications requirements.

In contrast to the horizontal software model, vertical solutions include software that is targeted to a particular niche or industry vertical, such as retail, automotive, insurance, hospitality, logistics, etc.

The vertical software provider doesn’t aim to be all things to all people or cover a broad product category.  Instead, vertical software focuses much more narrowly on specific industry verticals.

What are the advantages of vertical software?

Vertical software solutions are becoming increasingly popular among businesses due to the numerous benefits they offer. By leveraging these advantages, companies can improve their operations while, at the same time, creating better outcomes for their customers.

  1. Product functionality and compliance with industry regulations.  Vertical software solutions are designed with a deep understanding of the industry they serve. This means they can offer features and functionalities that are highly relevant to their users, which can lead to increased efficiency and productivity.  Further, vertical software providers ensure their solutions meet industry-specific compliance standards and regulations.
  2. Deep understanding of customer needs.  By focusing on a specific industry, vertical software providers can gain a deeper understanding of their customers’ needs and challenges. This can enable them to innovate more effectively and deliver solutions that truly meet their customers’ needs
  3. Sticky, loyal customers.  Because vertical software providers understand their customers’ industry inside and out, they can offer superior customer service and support.  This in-depth industry knowledge can lead to stronger relationships, increased customer loyalty and retention
  4. Greater market penetration.  Vertical software providers can leverage their industry expertise to penetrate their target market more effectively.  By offering a solution that is tailor-made for a specific industry, they can differentiate themselves from the competition and capture a larger market share
  5. Sales and marketing.  Being niche-specific, vertical software providers gain valuable insight into what the inside of their target audience needs. They can position themselves as experts in their field, which can enhance their credibility and attract more customers. This makes it easier for customers to choose their product of choice.  Since word of mouth referrals work better in niche industries, it also reduces the customer acquisition cost as companies usually spend less on marketing and lead generation.

What are the drawbacks?

While this all sounds good and well, vertical software suffers from several drawbacks.

  1. Smaller end-markets.  Vertical software serves substantially smaller end-markets on average than horizontal software. The number of potential customers that could benefit from CRM software is significantly 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 financial health of the end-markets they serve
  2. Complicated growth.  It can be challenging to scale and expand a vertical software business. This is because there is a limit to your pool of potential customers. In a future article, I will cover how Pemba has helped some of the vertical software businesses it has invested in to achieve accelerated growth
  3. Difficult brand positioning.  Achieving widespread brand awareness is challenging in a vertical software business. Because the focus is only on one vertical, getting the company’s brand out beyond that specific vertical or niche industry can take more work and time
  4. Higher customer education costs.  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
  5. Costly and disruptive implementation process.  These more robust vertical software platforms can also result in more costly and disruptive customer implementation processes.

Pemba and vertical software

Vertical software is one of Pemba’s five key defensive growth sectors. We have a whole sector team dedicated to vertical software opportunities.

Pemba has been investing in vertical software in Australia for close to 10 years and has completed more investments in this sector than any other Australian growth investor.  Our experience in vertical software spans areas such as: education technology, workforce solutions for the stand-up economy, government software, pharma software, hospitality software and payments, defence technology and many others.

Final word

Vertical software is revolutionizing the way businesses operate and how they access industry-specific software solutions. My next few articles will cover the rise of vertical software, how Pemba has helped scale some of the vertical software businesses we have been involved in, and showcase some case studies of successful vertical software companies.

In the meantime, if you wish to find out more about Pemba’s experience in vertical software then please and I’d be happy to discuss further.

Related Articles.