If you are familiar with Vertus Group and the larger ecosystem of our parent company Constellation Software Inc. (CSI), you have probably heard the term “vertical market software” often. Since its founding in 1995, CSI and its subsidiaries have typically focused on acquiring vertical market software businesses over horizontal ones. Today, CSI has acquired over a thousand companies across a hundred different niche vertical markets. So why the big focus on vertical market software?
What is Vertical Market Software?
First, let’s clarify what we mean by “vertical market software.” Simply put, it is a solution designed to address the requirements of a specific industry or market. From product development and R&D to IT and onboarding, these businesses operate with a focus on solving the unique challenges and needs of their niche.
Take Teachworks, Vertus Group’s most recent acquisition, as an example. Teachworks provides Tutor Management Software to education businesses of all sizes, helping them simplify, automate, and grow their operations. In this case, Teachworks operates solely in the Education vertical, and they have built their intuitive product specifically for the segment.
You can learn more about Teachworks here.
Conversely, horizontal market software offers solutions that can be adapted broadly across many different industries. Examples include word processors or spreadsheets, which can be used by almost any industry.
At Vertus Group, we have acquired businesses in six vertical markets:
· Club Management
· Hospitality
· Dispute Management
· Developer Tools
· Media Solutions
· Education
Let’s look at some of the “why” behind our focus on vertical market software and a few of the strategic advantages of these niche-focused businesses.
Market Expertise and Specialization
While the total addressable market (TAM) for horizontal software companies is always larger, the bulk of their development efforts go into making products flexible enough to support many different industries. Instead, by focusing on a specific industry, vertical market software businesses can spend more time understanding the nuances of their industry and developing a product that meets those specific needs. While this reduces the TAM, it builds credibility within the industry and offers a better chance for deeper market penetration. This can also result in higher barriers to entry as there are no easy substitutes for years of industry experience.
Strong Customer Relationships
Developing software that meets the specific needs of an industry allows for the development of strong, long-term customer relationships. Not only does your business have a tailored product for them, but also your employees speak their language and have a better understanding of their goals. Clients are more likely to view your business as a partner rather than just a vendor, often leading to reduced attrition and high customer loyalty.
Vertus Group’s Strategy and Acquisition Partner, Samad Rajan, said in an interview earlier this year, “In horizontal spaces, you often don’t see the businesses get close to the end user because they could be operating in any number of markets. With vertical market software, you get a real understanding of the end user, creating a healthy business with great customer relationships.”
You can read Samad’s full interview here.
An additional benefit that comes as a result of these relationships is word-of-mouth marketing. While horizontal market software companies often spend large amounts on sales and marketing to be known across the large TAM, most smaller niche vertical markets are quite well-connected. With a strong product and a focus on customers, a vertical market software’s brand reputation can become well-known in their niche with relatively less marketing effort.
Regulatory Compliance and Trust
Industries such as healthcare and finance are heavily regulated, requiring software solutions that comply with stringent standards. By specializing in a single industry, vertical market software companies are often well-versed in their industry’s specific regulations, thus building credibility and trust with their clients. This trust is a significant competitive advantage, as businesses with regulated industries are particularly cautious about their software choices.
A great example from the Vertus Group portfolio is Lean Industries which operates within the Payment Disputes Management industry. Within this highly regulated industry, Lean Industries employs a team of dispute operations experts who have created a product that ensures compliance and can be tailored to the needs of their customers. This has resulted in an exceptional ability to build both trust with their clients and credibility within their respective market.
You can learn more about Lean Industries here.
Strategic Partnerships and Ecosystems
Running a vertical market software business opens opportunities for strategic partnerships with other companies serving the same industry. As Vertus Group acquires businesses within verticals, it continues to grow an ecosystem of complementary, but still operationally autonomous, solutions. This can help a company’s market position and offers clients a more comprehensive suite of tools.
Vertus Group’s hospitality vertical, Jonas Hospitality, has leveraged this with the creation of the recently launched Jonas Unify brand which seeks to connect the many hospitality solutions in the portfolio via a unified Customer Data Platform, Unify CDP. Each company within the portfolio provides market leading technology for their specific segment, and now with Unify CDP, Jonas Hospitality is able to offer an all-in-one platform consisting of best-in-breed solutions to hotels. All the while, these businesses still retain their operational autonomy and their company’s brand remains untouched. This type of solution could only come to fruition within a vertical market software ecosystem, such as Vertus Group’s.
Learn more about Jonas Unify here.
At the end of the day, it comes down to businesses focusing their resources on being a solution for everybody or a tailored solution for a niche. While horizontal software companies certainly have their own advantages, here at Vertus Group we enjoy the customer-centricity and market expertise that is often found in vertical market businesses. As Vertus Group continues to grow its portfolio into new vertical markets, we look forward to learning from our businesses and expanding our knowledge in new niches.
