Vertical Market

A vertical market is one in which the seller provides goods and services tailored to a particular industry, business, or group of people with specific needs. Sellers in this market typically do not cater to the needs of the general public and instead focus exclusively on a particular type of industry or business group.

The vertical market strategy helps companies incur smaller expenses in terms of marketing and promotion as it is easier to cater to a particular group of people and even derive more profits for it for their specialized products or services. Moreover, these companies have high barriers to entry as existing players have a strongly built presence in the market.

1. A vertical market is one in which the vendor offers products and services for a given sector of the economy, type of company, or demographic.
2. Suppliers here tend to make products for an exclusive batch of people, instead of the region's general population, instigating biases and partiality within the masses.
3. Vertical markets are of three types corporate system, contractual system, and administered system.
4. A horizontal market is when the utilization of a certain industry is not restricted to the items developed by the participants. Nevertheless, they meet the demands of many sectors. 

Vertical market is a group of companies that cater to customers who are part of an interconnected niche. These companies employ their resources to deliver a specific set of people and do not concentrate on a general or broader market.

The customer base of the sellers in such a market is very limited. This also means that the need for advertising is limited, and the expenditure on marketing will also be limited. With a limited customer base, the marketing strategies can be more focused, which will prove effective for the seller.

The operators of the vertical market segments will be able to build up their brand as the focus will be on select kinds of customers.

When the participants focus and utilize their energies in a particular industry, they will understand the industry better, and they may come up with some new suggestions and improvements. In addition, they may solve the challenges faced by the businesses working in that particular industry.

Let us discuss the three major types of the vertical market segment through the explanation below.

#1 - Corporate System

In such a system, all the production and distribution functions are done by a single company. As a result, such companies need not depend on other persons for production and sales-related functions and are self-sufficient.

#2 - Contractual System

In such a system, there is a contractual agreement between the different production and distribution levels to complete the overall function. As a result, the participants of such a system enjoy economies of scale.

#3 - Administered System

In an administered system, one member of the production and distribution channel is dominant, and they are carrying out the entire functions of a vertical market in an informal manner. The dominant ones are those who are larger.

Let us understand the concept in depth with the help of a couple of examples. These examples would help us understand the intricacies of a vertical market strategy.

Example #1

XYZ Ltd., a software development company that develops software exclusively for retail. They curate systems that cater to the need of retail stores such as POS systems, inventory management for retail stores, and accounting systems that make billing faster to cater to customers at a faster pace.

This company can be a part of a vertical market as it only deals with a particular group of customers. They do not cater to large corporations with different segments or even wholesalers or dealers who supply to retail stores. Since they stick to providing solutions for retail stores, their vertical market segment is crystal clear and they do not incur large marketing costs as well.

Example #2

In March 2023, the multinational conglomerate Siemens announced its entry into a vertical market where it would cater to a specific segment of the market to provide digital transformation, safety, sustainability, and cybersecurity.

Using their wide network of resources, they announced that they would provide machine builders with a solution for the above-mentioned parameters through their TIA portal.

In spite of catering to a specific niche with specialized products, there are a few factors that act as a limitation for vertical market segments. Let us get to know them through the points below.

• The vertical market can lead to only some enterprises controlling the particular market, reducing the competition to a minimum level.
• The quality of the products is likely to be poor since the level of competition is low and the customers have limited choices.
• The sellers might be able to charge higher prices for their products since there are few sellers in the market.
• The products may lack innovation since there will be no motivation to design and develop the products with improved techniques and features.

Even though these concepts have been discussed hand-in-hand in conversations about market segments, it is important to consider the fundamental differences in these concepts. This comparison would help us understand vertical market segments in depth.

A vertical market is a kind of market where the customers belong to a particular industry. Thus, in a vertical market, you will not find sellers dealing in different types of industries. Instead, the sellers who operate among themselves sell in a specific sector. They deal with a select customer base.

On the other hand, in the case of a horizontal market, the products created by the participants are not limited to the use of a specific industry. Still, they cater to the needs of various sectors. This is because they are concerned with the overall market and do not depend on some select customers for their profits.

This has been a guide to what is Vertical Market. Here we explain its examples, compare it with the horizontal market, and discuss its types. You can learn more about from the following articles –

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• Auction Market Definition
• Labor Market Definition
• Market Indicators Definition
• Inefficient Market Definition