And in the middle of this AI-fuelled storm, investors and executives are asking a very pointed question: where is it safe to stand? If generative AI can write code, design websites, and automate customer service – a feat Klarna demonstrated by replacing 700 jobs with an AI assistant that boosted profits by $40 million – what traditional software business is truly safe? The answer, it turns out, is hiding in plain sight, in the unglamorous but incredibly lucrative world of vertical software.
What Exactly Is a Vertical, and Why Should You Care?
Let’s clear this up, because it’s a crucial distinction. Most of the software we use is horizontal. Think of Microsoft Office or Slack. They’re designed to be a one-size-fits-all solution for a huge range of industries. They’re like an off-the-rack suit; it fits most people acceptably, but it’s rarely a perfect fit for anyone.
Vertical software is the complete opposite. It’s the bespoke, Savile Row suit. This is software built from the ground up for the unique, often peculiar, needs of a single industry. Think of software for managing dental practices, logistics for freight forwarding, or compliance tools for law firms. These aren’t generic tools; they are the central nervous system of the businesses they serve. This specialisation is the very heart of the vertical software competitive advantage.
It’s all about domain expertise leverage. These companies don’t just know code; they know dentistry, or construction, or agriculture. They understand the specific regulations, the quirky workflows, and the day-to-day headaches of their customers. A generic AI simply cannot replicate this decade of accumulated, niche knowledge overnight.
AI Isn’t the Killer, It’s the Supercharger
So, if these vertical players are so special, does that make them “AI-proof”? Not exactly. That term is lazy. Nothing is “proof” against a technological shift this fundamental. The more accurate way to see it is that they are uniquely positioned to harness AI, rather than be replaced by it.
The major threat from AI is to the undifferentiated, horizontal players. Why pay for a generic project management tool when a powerful AI can build you a customised one in an afternoon? But for vertical software, AI presents an opportunity to deepen its moat.
This is where we need to talk about integration moats. The real defensibility of vertical software isn’t just its feature set; it’s how deeply it’s woven into the customer’s daily operations. It handles their billing, their scheduling, their compliance reporting, and their customer records. Ripping this software out isn’t like cancelling Netflix; it’s like performing open-heart surgery on your business. It’s costly, risky, and incredibly painful.
Now, imagine adding AI to that already indispensable system. This is what creates workflow-specific AI.
– A dental software that uses AI to analyse X-rays and flag potential issues the human eye might miss.
– A logistics platform whose AI constantly re-routes shipments in real-time to avoid traffic and port delays, saving millions in fuel.
– A legal tech tool that uses AI to scan decades of case law in seconds, finding precedents a paralegal might take weeks to uncover.
This isn’t replacing the dentist, the logistics manager, or the lawyer. It’s giving them superpowers. And it makes the software even stickier.
The Magic Number: 98% Retention
This brings us to the most telling statistic of all, highlighted in a recent Technobezz analysis. The best vertical software companies boast gross revenue retention rates of 98-99%. Let that sink in. This means they lose almost no customers, year after year.
In a world where customer acquisition costs are soaring, this level of loyalty is the ultimate economic advantage. These aren’t just customers; they’re partners locked in a symbiotic relationship. Their customer retention strategies aren’t based on flashy marketing or discount codes. They are based on being utterly essential.
When your software runs a company’s entire workflow, churn becomes a rounding error. The business literally cannot function without you. This creates a powerful flywheel:
1. Deep Integration: The software becomes the operational backbone.
2. Proprietary Data: The software accumulates years of unique, industry-specific data that a generic AI can’t access.
3. Enhanced Value: The company uses this data to train workflow-specific AI, making the product even more valuable and indispensable.
This flywheel is what protects them from the AI tsunami. A generalist model trained on the public internet has no access to the proprietary data held within a vertical provider’s system. And without that data, the AI is useless for specialised tasks.
The Coming $600 Billion Shopping Spree
The market is noticing. The big horizontal players and private equity firms are looking at these resilient, high-retention businesses with envy. According to one report cited by Technobezz, enterprise software M&A is forecast to surge by 30-40% to hit $600 billion by 2026.
Why? Because it’s a classic “build vs. buy” calculation. Is it easier for Microsoft or Google to spend a decade learning the intricacies of veterinary clinic management, or to simply acquire the company that already dominates that market? They’re going to buy. They’re going to acquire the customers, the data, and most importantly, the domain expertise leverage that is so difficult to build from scratch.
This also signals a necessary evolution in business models. The old SaaS model of charging per seat, per month is becoming outdated. As AlixPartners suggests, the move to AI-powered services could unlock 4-6 times the revenue, but it demands a shift towards value-based pricing. If your AI-powered logistics software saves a company £10 million a year, you should be charging a lot more than £100 per user per month. You should be charging for a piece of that value you create.
This transformation isn’t easy. It requires a fundamental rethink of product, pricing, and service delivery. But for those who get it right, the prize is immense. The vertical software competitive advantage isn’t just about defence; it’s about setting the stage for the next phase of growth.
So, whilst everyone is mesmerised by the headline-grabbing chaos of AI, the smartest money is looking at the quiet, resilient, and utterly essential businesses that are already preparing for the next decade.
What do you think? Which unglamorous industry is poised to produce the next great vertical software success story?
