Dive Brief:
- Application software sales are expected to exceed $400 billion by 2023 with a compounded annual growth rate of 11.4% this year and next, according to a Forrester report released this month.
- Vertical software, the highest growth area of application software, is expected to reach a combined market capitalization of $650 billion, up more than 800% from $71 billion within a decade, according to the report.
- Over the next two years, close to half of publicly traded software companies are expected to see revenue growth between 10% and 20%, according to the report.
Dive Insight:
Prior to vertical software vendors, many businesses had industry-specific, on-premise applications. There were holes that vertical software applications could fill as businesses began to migrate to the cloud and modernize.
“[Cloud service providers] recognize this industry-specific strategy as a huge opportunity to replace legacy custom solutions,” Himank Joshi, forecast analyst at Forrester and one of the report authors, said in an email. “When it comes to building or acquiring new product, this also represents a greenfield opportunity for CSPs looking to expand into new markets.”
The relative newness of cloud-based vertical software strategy shows there is room to grow. For example, Microsoft announced that it would be launching industry-specific clouds for financial services, manufacturing and nonprofits in February 2021.
“Given the size and scope of CSPs they are in [a] good position to buy a product and cross sell to its existing customer base,” Joshi said. “[Mergers and acquisitions] can also help consolidate the market and get to the coveted market leadership position.”
In addition to cloud providers entering the space, vertical software companies are also spinning up industry-specific solutions. For example:
- innRoad is a cloud-based vertical software company for independent hotel owners touting its ability to streamline operations, optimize ADR and more.
- Lightspeed is another vertical software company that provides businesses with a point of sale system. The company covers several verticals, including restaurants, retail and golf courses.
- Tulip offers a vertically integrated software system for manufacturers.
It’s important for CIOs and tech leadership to look beyond large players, evaluate the vendor’s reputation and customer references, according to Joshi.
Companies will have to decide whether building a custom solution in-house will prove more valuable than a vertical industry solution. There may also be appeal in adopting a solution as part of a larger technology bundle. It all comes down to economics, according to Joshi.
