Major PE/VC Investors
Major Funding activities
2017 SaaS Investments:
2016 SaaS Investments: 525 deals @ 46.7M
1. Vertical SaaS companies tend to have lower Customer Acquisition Costs (CAC) than Horizontal SaaS companies
Focusing on a more targeted customer base, vertical SaaS companies maintain their experienced sales teams to connect with industry professionals and make the sales. Although maintaining the sales teams requires more money, vertical SaaS companies ultimately spend less on marketing than its horizontal counterparts, who try to market products to a much broader market. According to Blossom Street Ventures, vertical SaaS companies can realize 8x cheaper CAC than horizontal SaaS companies.
2. Vertical SaaS companies tend to have lower churn rate, higher upsell opportunities, and more referral conversions, translating to higher revenue stream
Vertical SaaS companies tailor their products to meet specific-industry needs. Once a customer gets on board, it’s less likely for that customer to switch products, since the costs of moving businesses/operational platforms around is higher than those appear in the horizontal SaaS market. The upsell opportunities are also high for vertical SaaS companies, because industry professionals prefer to use an operational system that can meet all their needs rather than multiple individual services without much integration between them. Moreover, by establishing the reputation in the industry, personal referrals could replace part of the company’s sales efforts and further increase upsell opportunities. Based on Blossom Street Ventures, the median of all publicly traded vertical SaaS companies was at 6.8x revenue compared to 3.8x for horizontal SaaS companies. The mean EBITDA margin for vertical SaaS was 14%, compared to -3% for horizontal SaaS as of March, 2017.
Depending on the type of services offering, the competitive landscape in the software category (CRM, BI & Analytics, or HR, etc), and the market size of the business, horizontal SaaS companies adopt the following most common business models to increase customer base and revenue streams:
1) Freemium model
Freemium model refers to the strategy where the SaaS company offers its product to its customers for free and expects a portion of its customers to upgrade to the premium version. This business model typically works for SaaS companies that appeal to a broad market base and are in a competitive environment where product differentiation is limited. Companies that succeeded with this model include Dropbox, Cloudflare, and Evernote. These companies expect to dominate their respective market first and then slowly convert their free users into paying ones. However, this strategy doesn’t work on every SaaS company.
2) All-service-at-an-expense model
For other SaaS companies either offering somewhat differentiable products or are in a more narrow market, a good strategy to boost up their revenue is the all-service-at-an-expense model. By eliminating the free option, SaaS companies force their users to do more research before signing up their services. If the products that they offer can really differentiate themselves from other market competitions, customers will be willing to spend money for the better service. By offering everyone a limited service for free under the freemium model, SaaS companies are risking the chance of showing their customers the full services that they can get once they pay. First impression matters significantly in the competitive SaaS market, so if customers have a good experience using the paid service for the first time, they will be more likely to stick with the product in the future. This way, SaaS companies can enjoy steady revenue streams without worrying about supporting their large groups of free users. However, it is always easier said than done. Distinguishing which strategy is good for the SaaS startup is very difficult, but if a company struggles to get customers through freemium model and believes that its premium service offers much more, it might be time for that company to remove the freemium model for a try. After adopting the all-service-at-a-charge model, it is important to provide good added-value services and good customer service for customers to stick around. Examples of companies successfully earning more revenue by stearing away from the freemium model are demonstrated by Basecamp and Bidsketch.
3) Sophisticated and expensive enterprise offering model
For most vertical SaaS companies and some horizontal SaaS companies (such as Workday) offering sophisticated products tailored to big corporations, above two business models would not work. Since these SaaS companies are offering integrated solutions to a specific industry or some big corporations, software development, maintenance, and marketing expenses are all very large. Without experienced industry sales teams and strong connections to industry professionals, it is very hard for SaaS startups to convince their customers to move away from their traditional platform and adopt the new ones. These SaaS companies can charge very high monthly subscription fees to their corporate customers for tailored features and better integration with existing platforms.