Horizontal vs. Vertical software

In the world of software, broadly speaking, there are two types of products: horizontal and vertical. In this post, I’ll compare the two and explain why I lean towards the former when making purchasing decisions.

A horizontal product is one that serves many markets or industries. Examples include Microsoft 365, Zoom and Salesforce. They serve a broad need that is not tied to any particular industry. Horizontal doesn’t necessarily mean big: two small examples that spring to mind are Couchdrop (who specialize in making cloud storage accessible to legacy file transfer protocols) or OnDMARC (e-mail anti spoofing).

A vertical product is one that serves a particular industry with a use case that isn’t generalized. For example, Epic are a leader in medical patient information and billing: but you wouldn’t run a bakery using their software. Similarily for iLevel (portfolio monitoring and valuation) or Kyriba (treasury management).

Horizontal has a clear advantage out of the gate: the addressable market is many times greater than any vertical. Think of the growth of Zoom earlier this year: if they were positioned as a telemedicine platform they would have grown with Covid, but nowhere near the increased utilization we’ve seen.

That addressable market size brings other benefits:

• it’s easier to get funding and invest in the product
• more competition, which comoditizes pricing and incentivizes innovation
• a larger user base drives deeper investment in scaling and security

By contrast, vertical is all about occupying particular niches. My former employer specialized in these sort of products: software for which there is a clear but limited market: there will only be so many purchasers for a child support calculator.

The biggest challenge with vertical software is that, once you’ve created it and occupied a niche, the incentive to invest in the product diminishes: growth slows and product development dollars go on new bets

Put another way, the product quickly reaches the maturity phase of the curve. Fundamentally that’s why so much vertical software is not yet Software-as-a-Service (SaaS) and has a UI that would put Windows 3 to shame. There’s no viable business case to refresh the product.

While both have long existed (you could buy Word for DOS or a Point-of-Sale system for DOS) the move to SaaS as the predominant sales and distribution mechanism has exacerbated the difference. In the horizontal SaaS model of recurring revenue and competition there is incentive to continually invest in and refresh the product. It’s why Salesforce went Lightning, Microsoft refreshed SQL Warehouse as Synapse Analytics and is investing heavily in Teams. They have no choice.

All that results in highly configurable software, tested by thousands, that rapidly iterates (but not so fast as to cause churn) with mature, well documented APIs. If vertical software are the sharks of the oceans, horizontal SaaS software is the guppy, fast evolving, and that’s how I like it.

Title image CC lens-flare.de