Vertical Software

When Vertical Software hits a Vertical Ceiling

Michael Upton


Vertical Software companies hit their stride, becoming a sizable player in their industry, then growth starts to slow as the market becomes tapped. What next? TAM stacking? Up/Down-Market movement? Product Consolidation?


Vertical software has a significant advantage over horizontal software due to its exceptional focus on a particular niche. This enables it to address the unique pain points of a specific customer type and use case--something horizontal players won't be able to compete against.

However, the downside of vertical software is that the total opportunity is limited by the size of that specific industry's Total Addressable Market (TAM). I imagine vertical players make this trade-off deliberately, choosing specificity over scale potential.

What options are available when sales slow and the vertical ceiling approaches?

Non-Mutually Exclusive Expansion Opportunities

TAM Stacking

Vertical software companies often face the challenge of market limitations. To address this, they often engage in TAM stacking and vertical versioning — strategies that involve entering adjacent markets where their primary product or service remains relevant.

Blackbaud, a leading figure in the nonprofit sector with annual revenues exceeding $1 billion, exemplifies this approach. Despite its stronghold in the nonprofit world, Blackbaud expanded into healthcare, faith communities, education, and other sectors by leveraging its core competencies in donor management, CRM, and ERPs.

While their deep industry expertise offers a competitive edge in their primary market, it also presents challenges when penetrating adjacent verticals. Consequently, companies like Blackbaud frequently resort to acquisitions, utilizing the expertise of industry insiders to facilitate their expansion into new markets.

Blackbaud Q4 2022 Investor Presentation

It's important to recognize that 'vertical versioning' varies significantly across industries.

Providers of horizontal technologies, like appointment scheduling software, often tailor their go-to-market strategies with industry-specific messaging, despite the core product being largely identical. This approach is evident in companies such as Boulevard, Zenoti, and Mindbody, each of which adopts distinct messaging for the different industries they serve.

Sometimes vertical versioning often entails complex challenges, particularly in areas like payment platforms where industry-specific regulations heavily influence product features. For example, educational payment systems may require integration with Student Information Systems (SIS), while nonprofit platforms might focus on features for year-end financial reconciliation. This highlights the need for deeper customization beyond simple messaging changes to meet distinct industry requirements

Geo Expansion

In late 2021, Toast, an industry leader in US restaurant payments and software, announced its intentions to expand globally after amassing over 57,000 US customers (Toast has approximately 99k customers today). Despite its efficient US sales machine, the company conceded that it has limited experience with international customers and selling abroad.

By May 2023, Toast formally entered English-speaking countries, including the Canadian, Ireland and U.K. restaurant markets. As more expansion is planned, language is only one barrier to navigate.  In large European countries, such as France, Germany, Italy and Spain, platforms must be fiscally integrated with the government.

Geo expansion is far from easy. Even though software companies are able to lift much of their industry expertise, companies are often surprised by how much they don't know.  Cultural differences (affecting both product and sales), language, and regulatory environments are all top culprits for failed geographic expansion efforts.

Toast announces international expansion

Up/Down-market Movement

Vertical software providers often further segment their market to focus on enterprise or SMB corners.  The classic movement is to start with SMB because large competitors often ignore this segment, create traction, and benefit from customer-provided funding. When the product is more mature and built out, move upmarket to enterprise clients with more complex needs. Jason Lemkin has a number of posts on this topic.

The less-than-traditional approach is to start as a point solution in the enterprise space and move downmarket. Atlassian made this move through its acquisition of Trello. MongoDB made a similar move when transitioning from a self-managed software vendor in 2017 to its SaaS offering, MongoDB Atlas.

Of the two directions, most people will agree that moving upmarket is an easier and more natural transition. In addition to product-need fit, the challenge of moving up- or downmarket has to do with building a sales model where the unit economics still make sense.  This extends beyond considerations with PLG motions or multiple stakeholder sales--it's a complete cultural shift internally.  Software providers that have sold to enterprise markets will have a tough time NOT giving white glove onboarding or providing dedicated customer success.  Similarly, going upmarket requires a mindshift change from frictionless signup to skilled AE and Account Management teams.

Product Consolidation

Often the best entry point to a market is as a point solution, providing one service better than competition.  For many providers, the next logical step is to build out your solution into a consolidated offering--effectively selling more stuff to the same group of customers.  

This consolidation is witnessed at the market level in a cyclical motion.  We've seen this in church management software (ChMS) starting 10 years ago. ChMS players focused exclusively on congregation management. At the same time, donation providers stayed in their lane, integrating transactions into various ChMS databases.  

As if it was coordinated, every major ChMS, mobile app provider, and payments provider started either an acquisition spree or building out solutions internally.  Providers aimed to be a one-stop shop for all church software needs. There were a few reasons driving this change, (1) churches hate change in general and would rather buy more products from a trusted, existing vendor and (2) churches valued seamless integrations between their software over best-in-class point solutions that required manual CSV uploads/handoffs.

After a heavy 5-7 years, today's major consolidation players include Tithely/Elvanto/Breeze, Pushpay/CCB/Resi, Ministry Brands portfolio, ACS/PDS/others, Faithlife/Proclaim, eCatholic/Gabriel, and others. as of 11/17/23

Timing Considerations

Growing companies, including those mentioned in this post, are deploying most expansion strategies in parallel, albeit at different speeds. This varied pace of expansion is often dictated by the competency and availability of their teams. Under-resourced initiatives are sure to fail.

It's also important to note that these expansion efforts take time to deploy effectively. Companies should start laying the groundwork for expansion before the need becomes pressing. This foresight allows for gradual implementation, which can be adjusted as market conditions evolve and feedback is gathered. Starting early also provides a buffer to refine strategies and pivot if necessary, reducing the risk of rushed deployments that may not align with market dynamics or company capabilities.

Final Thoughts

As we've explored through various examples in this post, expansion is a complex yet vital aspect of business growth, especially for companies in the vertical software domain. While mature companies may find the shift challenging, embracing a startup mindset — characterized by agility, experimentation, and rapid iteration — is key to navigating new markets and product areas. It's crucial to balance this exploratory approach with the retention of proven processes and strategies that have underpinned past successes.

Companies should begin their expansion efforts early, allowing time to adapt and refine strategies in response to evolving market conditions and feedback. This proactive approach, combined with a careful balance of maintaining core operations while exploring new avenues, paves the way for new (sometimes renewed) growth.

Ultimately, successful expansion is about thoughtful exploration and making bold bets without sacrificing what you've already built.

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