Horizontal vs. Vertical Markets: Definitions and Differences

By Indeed Editorial Team

Published July 18, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Understanding market circumstances may be crucial to the successful development and marketing of a company. One method for analyzing these circumstances is to categorize market segments. Learning the difference between horizontal and vertical markets can help you understand the concepts better. In this article, we define horizontal vs. vertical markets, explain their differences, and outline the different types of business markets.

What are horizontal vs. vertical markets?

It's important to know the differences between horizontal vs. vertical markets as a part of analyzing market conditions. Here are their definitions:

Horizontal markets

Horizontal markets consist of companies that cater to a demographic or function, such as publishing companies that generate works for all ages and genres, diversified equipment makers, and general food providers. They may consist of several sorts of companies, many of which often collaborate since they aren't in direct competition. Horizontal markets are wider than vertical markets and so provide a chance to adopt marketing strategies for a broad audience. Understanding your horizontal market may help you place your goods within the scope of your consumers' wants and explore cross-product marketing strategies.

Related: What Is a Vertical Merger? (With Definition and Types)

Vertical markets

A vertical business market is a section of businesses that serve a particular purpose for clients, such as English textbook publishers, specialist agricultural equipment manufacturers, and baby food manufacturers. Consequently, vertical markets consist of a single kind of company or sector. These organizations are often in direct competition since they typically serve the same demographic demand. Because they comprise just one kind of organization, vertical markets are often more limited than horizontal markets.

Recognizing this function of the company in a vertical market and understanding how it impacts consumers can assist you in building a successful business and marketing operations, because you may be catering to a specialized group of clients. Besides informing your decision-making processes, familiarity with your vertical market may help you make relevant comparisons.

Why categorize markets in this way?

Understanding the difference between vertical and horizontal business markets may be an essential element of market analysis. This may be particularly useful when attempting to make business decisions. For instance, if you're extending your product line to include a new type of goods, it may be important to understand the competitive characteristics in both market types to choose if and how to implement the change.

In marketing, it might be crucial to be aware of the activities of competitors in vertical and horizontal marketplaces where your organization takes part. This may assist you in ensuring that your own marketing materials are successful and competitive.

Related: A Guide to Horizontal Integration for Business Growth

Differences between vertical and horizontal integration

Here are some differences between vertical and horizontal integration:

Operations

One of the primary differences between horizontal and vertical integration is how their respective goods get manufactured. As horizontal integration refers to integrating two organizations with the same product or service, their procedures are often comparable. In vertical integration, organizations often continue to operate within their various phases of manufacturing.

Objective

Horizontal integrations allow businesses to grow in scale, diversify their product offerings, minimize competition and enter new markets. The purpose of horizontal integration is to enhance the size and production scale of a company or organization. In vertical integration, a business seeks to achieve a majority or complete control of the supply chain, so enhancing its production and distribution processes.

Related: Horizontal vs. Vertical Scaling: Definitions and Differences

Types

It's not possible to divide horizontal integration into subcategories. But, you may subdivide vertical integration into backward integration, forward integration, and balanced integration, as described below:

  • Backward integration: Backward integration occurs when a business decides to acquire a company that manufactures items or provides services that precede its own in the supply chain. An example is when a restaurant chooses to purchase a farm that supplies ingredients for the restaurant's menu.

  • Forward integration: Forward integration is when a corporation acquires a business ahead of it in the supply chain and controls its post-production. A shoe manufacturer, for instance, may opt to purchase a shoe shop and sell its goods straight to the market at the same price as the store, without lowering the prices of the shoes to generate a profit.

  • Balanced integration: Balanced integration is a mix of backward and forward integration. In this situation, a company purchases its supply network predecessors and successors.

Purpose

Vertical and horizontal integration serve different goals for a business. The goal of vertical integration is to lower manufacturing costs, minimize wastage throughout the supply chain, and remove production and distribution issues currently affecting the organization. The primary objective of horizontal integration is to remove rivals or even obtain ownership of a competition, company, or client base. Additionally, companies may select horizontal integration to improve profitability, market share, and economies of scale resulting from mergers.

Self-sufficiency

Vertical integration allows a business to depend on itself in the manufacturing and distribution processes. This isn't always the case with horizontal integration. The reason for this is that its activities continue to rely on other businesses in the supply chain.

Capital requirement

Horizontal integration is less costly to implement because an organization shares expenses with the company it has purchased or merged with. But, the cost of vertical integration is greater. This is because the business is to cover all costs associated with acquiring other companies in the supply chain.

Profit margin

A corporation that has horizontally integrated may boost its profit margins by reducing competition from other businesses. Vertical integration promotes a company's profit margins by cutting expenses and eliminating waste. It's vital to realize that profit margins may be smaller than for vertical market companies.

Control

In vertical integration, an organization seeks to dominate the whole industry. Horizontal markets are often more inclusive and, so, more extensive than vertical markets. When an organization uses horizontal integration, it often seeks market dominance.

Related: The Definition and Benefits of a Vertical Marketing System

Risk

Despite the fact that both horizontal and vertical integration have their advantages, an organization that has integrated vertically may face greater risk than one that has integrated horizontally. In vertical integration, a business controls all or the vast majority of the supply chain. Whenever an issue arises at one phase, it impacts the other processes.

Types of business markets

Here are the various types of business markets:

Business-to-consumer market

In a business-to-consumer market, companies advertise and sell their goods directly to consumers. Typically, many people consider the business-to-consumer market as the largest sort of company market since it serves the broadest pool of prospective customers. This is because organizations that employ a business-to-consumer market construct their efforts with the overall public or certain demographics, such as various age groups, genders, or special interest groups.

Business-to-business market

Companies that use business-to-business marketplaces instead of marketing directly to consumers promote and sell their products or services to other companies. The purchasing company often reuses or resells products and services supplied in a business-to-business market. Some businesses that operate in a business-to-business market may also sell to consumers, but the vast majority focus primarily on selling their goods and services to other businesses.

Industrial market

If a company provides goods or services used in industrial or manufacturing initiatives, it works in the industrial market. Many businesses that use an industrial market promote and sell their products and services to other businesses as opposed to consumers. This is because industrial items and services are normally highly valuable to businesses that can repurpose them for other projects and aren't for private use. People sometimes regard the industrial market as a small business market since its goods and services serve fewer customer populations.

Services market

A services market is when a company promotes and sells services rather than physical goods. Companies operating in a services market may also operate in a business-to-business or business-to-consumer market, depending on to who they mainly offer their services. This may vary according to the kind of service a company offers, such as whether it assists individual consumers or whole businesses.

Related: What Is Horizontal Analysis and Why Is It Important?

Professional services market

A professional services market promotes the marketing and selling of specialized professionals' services. Due to the specialized nature of the work provided by enterprises in the professional services industry, their businesses and employees are often certified to work in their respective fields. Certain organizations in the professional services market may offer services that might benefit both businesses and individual customers.

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