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.

 

RELATED TERMS
  1. Vertical Well

    A vertical well is a well that is not turned horizontally at ...
  2. Vertical Analysis

    Vertical analysis is a method of financial statement analysis in ...
  3. Horizontal Merger

    A horizontal merger occurs when companies in the same industry ...
  4. Vertical Spread

    A vertical spread strategy uses purchases and sales of the same ...
  5. Horizontal Analysis

    Horizontal analysis is used in financial statement analysis to ...
  6. OHLC Chart

    OHLC, or open-high-low-close, charts are a type of bar chart ...
Related Articles
  1. Small Business

    Vertical Integration

    Vertical integration occurs when a company buys and controls other businesses along its supply chain.
  2. Trading

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be widely used.
  3. Investing

    Tesla Bear Sees Shares Crashing 72% By 2019

    Gordon Johnson expects a spike in competition to put an end to TSLA's leadership in the EV space.
  4. Trading

    Bearish Engulfing Could Jeopardize Amazon Rally

    Amazon.com shares fell about 1.2%, although the long-term trend remains intact.
  5. Investing

    Is It Time To Buy Natural Gas? (UNG)

    Natural gas stands to benefit greatly from the next commodity complex recovery wave.
  6. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  7. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  8. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
RELATED FAQS
  1. What are the legal barriers to vertical integration?

    Learn how embarking on a vertical integration through a merger is liable to run into legal barriers if the integration is ... Read Answer >>
  2. What are the disadvantages of backward integration for a mid-sized business seeking ...

    Learn more about backward vertical integration and the disadvantages of this business strategy for some small and midsized ... Read Answer >>
  3. How long do oil and gas producers need to go from drilling to production?

    Discover the process of oil well production and learn how long it typically takes an oil producer to move from drilling to ... Read Answer >>
  4. What is the Difference Between an Industry and a Sector?

    The terms industry and sector are often used interchangeably, but they have slightly different meanings, with a sector being ... Read Answer >>
  5. Which businesses use market segmentation?

    Find out what types of businesses use market segmentation, and how this strategy helps companies market their products more ... Read Answer >>
Trading Center