What is a vertical market?
A vertical market is made up of companies that offer goods and services to meet the needs of customers in a specific industry or niche market. In a vertical market, similar products and services or compatible products and services are developed and marketed to a designated set of customers.
Examples of broader vertical markets are insurance, real estate, banking, heavy manufacturing, retail, transportation, hospitals and government. A financial application marketed to banks would be a product of such a vertical market.
Vertical markets sometimes focus on providing goods and services to a niche customer group. That niche customer group may be a specific demographic or belong to a narrow industry group.
How do vertical markets work?
There are three types of vertical markets, which are defined by how distribution channels for businesses within that market are controlled. Distribution channels are the network of organizations involved in moving a product or service from the producer to the customer. The three types of vertical markets include the following:
- Corporate vertical markets. These vertical markets are ones in which one member of the distribution channel owns all of the others. This means all the parts of the distribution channel are under the leadership of one organization. Participating in a vertical market this way enables an organization to have complete control over the direction of a good or service.
- Administered vertical markets. In these vertical markets, a member of a distribution channel is big enough in size to control the activities of other distribution channel members.
- Contractual vertical markets. These are vertical markets where all companies in a distribution channel are independent and operate separately, but they work together and form partnerships to be more efficient. Businesses may have contractual relationships with one another to make this possible. For example, producers and wholesalers might contract with distributors to serve specific markets.
Similar regulatory compliance requirements also characterize vertical markets. For example, healthcare is a highly regulated industry where providers and the companies that provide products and services to them must meet various regulatory requirements or they risk fines. Among those regulations are the Health Insurance Portability and Accountability Act, also called HIPAA, and the Health Information Technology for Economic and Clinical Health Act, also called HITECH.
Advantages of a vertical market
There are a number of benefits to vertical markets and the relationships that develop around them. These include the following:
- Specialization. The ability to target specific customer segments and specialized niches allows an organization to customize its product or service to the specific needs of its customers.
- Higher value products and services. Providing targeted or specialized products and services means companies in a vertical market can charge more for them.
- Cost savings. Targeting marketing campaigns at a narrower set of customers means an organization knows exactly who it is marketing to. This approach cuts business operating and other expenses. It also makes more efficient use of resources compared with marketing products and services to a broader market and a variety of potential customers.
- Reduced competition. Even though vertical markets can still be competitive, they often are not as populated or oversaturated with competitors when compared to horizontal markets.
Disadvantages of a vertical market
Vertical markets do have some downsides, however. These include the following:
- Limited customer base. Focusing on a niche market may mean an organization will have a more difficult time finding or expanding its customer base.
- Limited revenue. If a vertical market doesn't have a large customer base, it may be difficult for an organization to generate the revenue and profit it needs to operate.
- Niche market shifts. If the needs of a niche customer base in a vertical market change suddenly, a company catering to that vertical market could lose a significant part of its customer base in a short period of time. The closing of restaurants and bars during the COVID-19 pandemic is an example of a niche market shift.
Vertical market vs. horizontal market
Horizontal markets are ones that are diversified. Their products and services meet the needs of more than one industry and have a range of customers.
As an example, horizontal market products could include office productivity applications and databases that are marketed to a variety of industries. Horizontal marketing comes with its own set of challenges. Marketers must emphasize the generic aspects of the product that work well for everyone.
Unlike horizontal markets, vertical market products and services are aimed at a particular business in a particular industry. Developing marketing strategies are often easier when targeting vertical markets, because the target audience is smaller and has more in common.
Vertical marketing strategy
Vertical marketing is a key part of many companies in the IT channel industry. Channel companies such as value-added resellers and managed services providers often choose to specialize in one or more verticals.
To do so, these companies look to gain experience and expertise in their targeted vertical market. This would include developing an understanding of the unique needs of the customer base, their business models and challenges, as well as the market's important trends and terminology.
Additionally, companies that target vertical markets tailor their marketing plans and solutions to suit their targeted customer base.
In fine-tuning a vertical market strategy, an organization must identify and focus on its target market, defining the criteria that makes up the vertical. It should have a clear understanding of the following:
- what types of companies buy the products and services being provided;
- what similarities customers have to each other;
- what type or format of the product customers prefer; and
- how to best market to the customer base.
Examples of vertical markets
Some specific vertical markets include the following:
Law firms. Attorneys typically require specialized document management applications tailored to their specific processes. Law firms also often have greater printing needs than other companies, making them a good candidate for managed printing applications and services.
Grocers. Grocery stores are part of the larger retail vertical market, but some of them target specific niche markets within the larger vertical. For example, Whole Foods Market sells organic grocery items, and it caters to a more educated, well-off and demanding clientele. Distributors of organic and environmentally friendly products are likely to target Whole Foods and similar grocers in this niche. For example, Farm.One is a produce grower and distributor that has one Whole Foods Market growing its own produce on an aptly named vertical farm.
Retailers. All types of retail shops have similar needs. For instance, they all need point-of-sale (POS) systems. However, within the broad retail category, POS vendors cater to specific niche markets; a clothing store's POS system will have different features and capabilities from a supermarket's POS system.
Learn more about how vertical markets are targeted by organizations such as AWS in this article.