Vertical Market

What is a Vertical Market?

A vertical market is one that has a specific industry. Contrary to a horizontal market, which has players from a variety of industries, a vertical market is one that has customers in a narrow industry group. A great example would be the market for MRI scanners, which are primarily sold to hospitals. The goods and services in vertical markets tend to cater to the specific needs of the industry that they are serving. Companies in this type of market create goods and services that serve a designated niche of either business customers or consumers.

 

Vertical Market

 

The niche customer group that vertical market providers supply may be a certain demographic rather than a specific industry. For example, the cat food market serves a specific demographic of the population, cat owners.

 

Operating in a Vertical vs. Horizontal Market

Operating in a vertical market, by definition, means that you are catering to a specific set of needs of a narrow group of customers. While the customer base might be restrictive in the sense that they have a common unifying characteristic, it does not necessarily mean that there are a small number of customers. The example above of the cat food market, for instance, is a multi-billion dollar industry.

Vertical markets are often characterized by consumers having strong bargaining power, as the supplier generally depends on the narrow set of customers that they produce for. This is the opposite for suppliers operating in a horizontal market, who have a wide range of customers to sell to.

Developing a marketing strategy is a lot easier for a business operating in a vertical market. The narrower customer base facilitates the targeting of potential customers in marketing campaigns. With the rise of enriched data sets and big data, there has been an eruption of online targeted advertisements. A vertical market producer can, therefore, leverage their position

Vertical Markets Marketing

Vertical markets make marketing much easier for vendors. With a targeted core of customers and knowing exactly what those customers want and where they are, the tasks of creating ad campaigns and choosing venues to showcase goods and services are greatly simplified.

A streamlined market also means that it’s easier for companies to get their messages and goods from one customer to another through word of mouth. Because new potential customers are likely to be friends with, related to, or at least acquainted with current customers, it’s more likely that the core customers will share relevant shopping information with people they know who are looking for the same goods and services.

 

Disadvantages of Vertical Markets

Appealing to a vertical market makes it easier for a company to identify and target customers who most want and need its products or services. However, it puts a limitation on the scope of customers available to be reached. Focusing on too small a niche market can be disastrous. Niche marketing may make it easy to find the customers who appreciate the goods and services being offered by a company, but the company may discover that there are simply too few of those customers to generate sufficient sales revenues to maintain the company as a viable business.

Also, niche markets can shift, and sometimes dramatically. If companies are catering to customers in a trendy niche, if the trend should suddenly fall out of style, then the company’s pool of potential customers may rapidly dwindle to almost nothing. One example of this is the movie rental industry. Once a thriving industry, with large, well-known firms such as Blockbuster, the rise of “on-demand” movies available through cable and satellite television companies led to the virtual collapse of the industry within a relatively short period of time.

However, some companies managed to survive by providing just the right service in just the right manner. Redbox, by focusing on offering a relatively small selection of recent movies, and by placing their kiosks in strategic locations, found a way to craft a profitable business in a practically defunct industry.

Operating within a vertical market offers both advantages and disadvantages. It’s important for a company to understand how it may fit into one or more vertical markets, and to determine what core group of customers will enable it to survive for the long term.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To continue your development as a world-class financial analyst, these additional CFI resources will be helpful:

  • Inelastic Demand
  • Market Economy
  • Price Taker
  • Total Addressable Market

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!