What Is a Vertical Market?
A vertical market is a market encompassing a group of companies and customers that are all interconnected around a specific niche. Companies in a vertical market are attuned to that market’s specialized needs and generally do not serve a broader market. As such, vertical markets typically have their own set of business standards. They may also have high barriers to entry for new companies.
- Vertical markets are focused on a specific niche.
- Companies in a vertical market provide targeted insight and specialized services.
- Focusing on a specific market vertical may help a company to realize higher profits through a narrower customer base and more cost-effective marketing campaigns.
Vertical Market Explained
The global business market provides a multitude of opportunities for all types of businesses. Vertical market providers are focused on specific goods and services that meet the needs of a niche customer group. These markets are the opposite of horizontal markets which sell their products and services across multiple industries with broader association among a variety of businesses and business segments.
A company operating or seeking to work in a vertical market will generally need to take somewhat of a different strategic approach than a horizontal market company. Vertical market businesses may be industry-specific or demographic specific. Regardless, they seek to target a narrow market that has its own idiosyncrasies. In some cases, business managers in a vertical market may find certain advantages over operating in a broader, horizontal market.
Advantages of Vertical Markets
Operators in a vertical market can target a particular segment where they have a comparative advantage. As these operators grow within a specified vertical market environment, they also gain expertise in their market’s trends, terminology, regulations and level of competitiveness.
Some of the most considerable advantages for vertical market businesses come in the savings from marketing expenses. Vertical market businesses have the benefit of targeting a narrower customer base. This narrow focus can lead to more streamlined and focused marketing campaigns which are less costly than those seeking to reach a wider mass audience.
Overall, a company that specializes in a vertical can provide targeted insight and specialized services to clients, becoming an integral component of their business over the long term. With specialized products and services, a vertical company can justify charging higher rates which can result in higher profits from a narrowed market focus.
The Practicalities of Vertical Markets
While vertical markets concentrate 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 higher the demand for a specific product is, the greater the revenue opportunity becomes. In a vertical market, customers usually have a high level of spending power, which often leads to requiring more attention in each customer relationship. This relationship building is often 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 are also usually better positioned to understand market trends and how events affect their clients.
Real World Example
In some cases, a particular market may be specific which leads to a unique vertical market in isolation. Generally, however, industries may include several market verticals comprehensively with some potential overlap.
Grocery stores provide an example of one industry. A company like Walmart (WMT) could be considered part of a horizontal market. Walmart serves nearly every market demographic and partners with a wide range of retailers. In comparison, a company like Whole Foods Market (WFM) focuses on organic grocery products. Whole Foods, therefore, has operations in the organic grocery vertical market, dealing primarily with organic grocery consumers and organic grocery wholesalers. Companies in the organic grocery vertical set their own business standards and create a specific market environment. Conversely, Walmart deals with a wide range of customers and suppliers, leading to more broadly varied business activities.