The Great SaaS Verticalization
Some of the most ambitious and fastest-growing SaaS companies today—companies like Toast, Passport, and ServiceTitan—are part of a massive trend in the software industry: the rise of vertically-focused SaaS companies.
These businesses largely serve small and medium businesses (SMBs) in a particular industry (e.g., restaurants, parking, field service management) with highly tailored experiences and functionality. Vertical SaaS companies have quickly become the system of record for merchants within those verticals, providing a single platform for things like CRM, inventory management, accounting, employee management systems, etc. In short, dominating your market and delighting your customers by serving less of them in a more dedicated way is a winning strategy.
Software investors—who obsess over sales momentum, customer acquisition efficiency, and retention metrics—like what they see in the Great SaaS Verticalization. Over the last decade, the market cap of public vertical SaaS companies has grown by nearly 10x.
The Vertical SaaS Conundrum
But SaaS companies focused on a specific vertical are presented with a conundrum once they get to a certain scale. As vertical SaaS companies grow, the subscription-only revenue that fueled their early growth is constrained by the very nature of their narrow focus, limiting their future growth rates and their total addressable market (TAM).
As vertical SaaS companies grow, the subscription-only revenue that fueled their early growth is constrained by the very nature of their narrow focus, limiting their future growth rates and their total addressable market (TAM).
This conundrum is made worse by the additional challenges SMB-focused SaaS companies face. In general:
It’s expensive to acquire SMBs
SMBs don’t want to pay a lot
SMBs behave like consumers, churning easily
Avoid the Vertical SaaS Success Conundrum with Embedded Payments
One strategy we’ve seen numerous public and private companies employ to keep growing and avoid the Vertical SaaS Conundrum is embedding payments (and eventually other financial services) into their product.
Adding payments allows vertical SaaS platforms to:
Increase revenue: Move beyond the traditional subscription-only SaaS revenue model.
Cross-sell “for free”: Sell payments to existing SaaS customers with virtually no incremental customer acquisition costs.
Reduce churn: Over time, customers come to rely on payments and software, making it much less likely they’ll churn.
To read more about how vertical SaaS companies are leveraging payments to expand their business, check out our blog on payment strategies for B2B SaaS companies.
- BlogPublished 05.20.21
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