Some software applications have value for businesses in a wide variety of industries. These horizontal market software applications solve common problems, regardless of industry or business type. Conversely, vertical market software applications are designed for a specific market and answer industry-specific needs or support industry-specific workflows.
Which category does your software fall into — and are you sure?
The Horizontal Market-Vertical Market Gray Area
A seemingly simple example of classifying software as either “horizontal” or “vertical” is a basic invoicing application. All businesses need the ability to invoice, so it seems like invoicing software would apply to anyone. It should be a horizontal market application, right? But two businesses download the software, one a handcrafted toy manufacturer and the other, a fitness club — and it’s possible that both are soon frustrated with the application.
The toy company sells both to retailers and to consumers, so it needs to invoice specific products individually or discounted in bulk and add shipping and tax, when applicable. The fitness club offers memberships by the year for the first year and on a monthly basis thereafter. It also sells a variety of products, some taxable and some not, and it bills by the hour for sessions with personal trainers.
The software in our example fails to meet all of the needs of either company, so it would require the user to adapt their invoicing process to the software, which probably isn’t an option, or to find an application that’s right for their business. The prevalence of Software as a Service (SaaS) has made so many options available, most for monthly fees rather than upfront capital expenses, so trying different software is much easier than when software was sold primarily through a traditional, on-premises model.
If you carefully evaluate your application, you will probably see that it works best for certain types of businesses. It may work for a variety of businesses across industries, or maybe it’s best suited to a specific vertical. An honest evaluation may also reveal that you’ve been too narrow in your approach and your solution may actually also benefit businesses beyond the market you’ve been targeting.
The Importance of the Demo
Once you’ve confirmed that your application suits the needs of the businesses in your target market, whether horizontal, vertical, or niche, you will probably encounter customers or prospects that are also talking to your competition. If your application is flexible enough to meet the needs of different types of businesses, inevitably, your competition will do its best to convince your customers that their software built specifically for their industry will be the most beneficial to them. If you market your software as purpose-built for a particular market, your competition will tout the benefits of its software, which has been proven in a broader market and allegedly can be customized for any industry.
The best way to prove that your software is the right choice is an appropriate demonstration. For a simple application, a limited demo may be enough to show that your claims that the software is right for the business are true. For an application designed to play a bigger role in operational efficiency, however, allowing the prospect to use the full application on a trial basis may be necessary.
It goes without saying that everything you say about your software has to be true, as evidenced by the demo. It would not be wise to try to counter competitors by saying your software does something it doesn’t do. Your software is right for the right customer. Maintain that integrity.
Be All Things to the Right People
Your software won’t work for everyone. Accurately defining your market, whether horizontal or vertical, for your software application is crucial to business success. Incorrectly defining your target market will mean nothing but wasted time and resources attempting to sell your software to businesses that soon discover that it doesn’t support their operations. It’s also a more cost-effective way for an ISV to operate. Meridian Capital’s Software-as-a-Service Spring 2017 M&A Update reports that SaaS companies with a precisely targeted customer base can acquire customers eight times less expensively than those targeting broader markets, experience less churn, and develop relationships that can lead to upselling in the future.