What is a 'Vertical Market'?

A vertical market is a group of companies that serve each other's specialized needs and do not serve a broader market. A vertical market is tightly focused on meeting the needs of one specific industry. A company serving a vertical market is focused on a single niche, for example, creating payroll software for start-up Internet companies. In contrast, a horizontal market sells its goods and services in more than one industry and is, therefore, focused on a range of business segments.

BREAKING DOWN 'Vertical Market'

Vertical market providers are focused on specialized goods and services that meet the needs of a niche customer group. That customer group can be either a specific industry or a specific demographic. With a narrow target market, companies in a vertical market have advantages that more generalist providers forfeit.

Advantages of Vertical Markets

Operators in a vertical market can target a particular segment where they have a comparative advantage. A company in this environment also gains expertise in a particular industry such as its trends, terminology, regulations and the level of competitiveness. A company that specializes in a vertical can provide insight to clients and become an integral component of their business. In addition, with specialized products and services, a vertical company is justified in charging higher rates. 

The Practicalities of Vertical Markets

While vertical markets are concentrated on a specific industry or demographic, these concentrated markets can still have a wide customer base. A wide vertical market customer base is advantageous because the greater the demand for a specific product, the greater the revenue opportunity. In a vertical market, customers have a high level of spending power, which means that the market provider needs to focus on each customer relationship. This is crucial because of the market’s narrow focus. Customers within a vertical market typically rely on a single service provider to meet their long-term needs. Vertical market companies must also understand market trends and how events affect their clients. 

Example of a Vertical Market

One example of a vertical market provider is an automobile part manufacturer. An automobile part manufacturer belongs to a vertical market because its products are limited to specific auto manufacturers and mechanics. This manufacturer can focus its efforts on meeting the specific demands of the companies it serves.

A furniture manufacturer, on the other hand, belongs to a horizontal market because its wide customer base includes homeowners, apartment dwellers, offices, hotels and restaurants. This manufacturer must broaden its efforts and meet the more varied demands of its broad customer base. This can be challenging in terms of resources.

 

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