Software Made for One Trade and Impossible to Leave
Vertical software serves a single industry deeply, understanding its specific needs better than general software. That depth wins customers, embeds the software in their operations, and makes it very hard to displace.
Depth Over Breadth
Vertical software serves a single industry deeply, building software tailored to the specific needs of, say, a dental practice, a restaurant, a law firm, or a construction company, rather than general software that serves every business broadly. The industry focus lets the software understand and serve the specific workflows, needs, and requirements of that industry far better than general software could, which wins customers and embeds the software deeply in their operations.
The strategy trades breadth for depth, serving one industry thoroughly rather than all industries generally, and this depth is the source of the advantage. By understanding an industry specific needs, the software becomes more valuable to that industry than general alternatives, wins its customers, and embeds itself in their operations, becoming hard to displace. Vertical software has become a powerful model, since the depth of industry focus creates value and stickiness that general software struggles to match, making vertical software companies attractive despite serving smaller markets than horizontal software.
General software does a hundred things adequately for everyone. Vertical software does exactly what one industry needs, becomes the way that industry works, and is nearly impossible to pull out once it is in.
Why Industry Focus Wins
Serving one industry deeply lets the software fit that industry needs far better than general software, which is the core advantage.
| Advantage | Effect |
|---|---|
| Industry specific features | Fits the industry workflows exactly |
| Understanding the industry | Serves needs general software misses |
| Deep integration | Embeds in the industry operations |
| Trust and focus | Credibility with the industry |
The industry specific features fit the workflows and needs of the industry exactly, rather than the generic features of horizontal software, and the deep understanding of the industry lets the software serve needs that general software misses. This makes the software more valuable to the industry, winning customers who prefer software built for them, and the software integrates deeply into the industry operations, handling their specific processes. The focus also builds trust and credibility with the industry, since the software maker understands their business. These advantages, from serving one industry deeply, make vertical software more valuable to its industry than general alternatives, winning customers through fit and understanding rather than breadth.
The Stickiness and the Moat
Vertical software becomes deeply embedded in the operations of the businesses it serves, handling their specific workflows and integrated into how they work, which makes it very hard to displace. Once a business runs its operations on vertical software tailored to its industry, switching would be disruptive and costly, since the software is woven into the specific processes of the business.
This deep embedding creates high switching costs and a strong moat, since the business depends on the software for its operations and switching would require re integrating everything, retraining staff, and disrupting the business. The industry focus reinforces this, since a competitor would need to match the deep industry specific fit, not just offer general software, raising the barrier. The combination of deep integration, high switching costs, and the difficulty of matching the industry specific depth makes vertical software very sticky, retaining customers who become dependent on it, which is a major source of its value. The stickiness, from the software being embedded in the industry specific operations, is what makes vertical software an attractive, durable business, since the embedded customers are hard to lose and hard for competitors to win.
The Expansion Opportunity
Vertical software companies grow by expanding what they offer to their industry, adding more software and services that serve the industry needs, deepening their embedding and increasing their revenue per customer. Having won an industry customers with core software, the company can add payments, additional features, financial services, and other offerings tailored to the industry, capturing more of the customer spending.
A powerful expansion is into payments and financial services, since the vertical software often handles the industry transactions, letting the company add payment processing and financial services that earn from the transactions flowing through the software. This embedding of financial services into vertical software, serving the industry specific needs, can substantially increase the revenue per customer, since the payments and financial services earn from the industry activity the software already handles. The expansion strategy, adding more offerings to the embedded industry customers, deepens the relationship and increases the value per customer, turning the vertical software from a core product into a broader platform serving the industry, which is a major driver of vertical software company growth and value, leveraging the deep industry embedding to expand what the company provides to its captive industry customer base.
The Bottom Line
Vertical software serves a single industry deeply, tailoring software to the specific needs of that industry far better than general software, which wins customers through fit and understanding rather than breadth. The software becomes deeply embedded in the industry operations, creating high switching costs and a strong moat, since switching would disrupt the business and a competitor would need to match the deep industry specific fit, making vertical software very sticky and its customers hard to lose. Vertical software companies grow by expanding their offerings to their embedded industry customers, particularly into payments and financial services that earn from the industry transactions the software handles, leveraging the deep embedding to increase revenue per customer, making vertical software an attractive, durable, and expandable business built on serving one industry deeply.