What Are Vertical Markets? (With Types and Benefits)

By Indeed Editorial Team

Published June 26, 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.

Businesses can opt to use either the vertical or horizontal market system to produce and sell goods and services to their clients. Vertical markets or verticals involve establishments targeting a specific group or niche of clients. Understanding how the vertical market system works and its benefits can help you decide whether to adopt this system. In this article, we define vertical markets, explain the three types, review the advantages of these markets, compare vertical vs horizontal markets, and include five steps on how to choose one for a business.

What are vertical markets?

Vertical markets typically comprise companies that cooperate to satisfy the needs of their clients in a specific industry or niche. In a vertical market, corporations develop comparable or compatible products and services which they avail to a chosen group of clients. Businesses practising this system usually target a niche market, which can be a certain demographic or a narrow industry group. A vertical market system can allow one company to determine the production system, distribution network, and selling of goods and services. Examples of industries in this type of market include:

  • insurance

  • real estate

  • banking

  • heavy manufacturing

  • retail

  • transportation

  • hospitals

  • government

Related: A Guide to Marketing As a Career

Types of vertical markets

There are three types of verticals whose classification depends on the distribution channel the system adopts. The three types include:

Corporate markets

In this market, one company owns and controls all the others. This company provides leadership of all the activities in the movement of goods from production to the consumer. The business produces goods and services and markets and sells it to consumers without relying on anyone.

Example: Dawson Bottlers processes and packages drinking water. It then markets, distributes, and sells bottled water to its clients.

Administered markets

In this type, one company is in charge of the activities of other distribution companies as it's bigger than the rest. The bigger company has more power, which enables it to organize the distribution network with no formal agreement. Smaller companies work under the terms of the bigger company regarding pricing, stock, and branding.

Example: As Dawson Bottlers grows, it opens several stores in various locations. Each store distributes bottled water in its location under the terms set by Dawson Bottlers.

Contractual markets

These types of markets comprise businesses which operate independently in their distribution network but cooperate as partners in order to increase their efficiency. In this setup, companies can work on a contractual relationship where a producer can contract a wholesaler to distribute products to retailers or directly to customers. By working together, companies can reach more clients, reduce overhead expenses, and provide competitive prices. Businesses operating in this market may be subject to regulatory compliance depending on the industry, which, if they don't adhere to, may lead to fines or penalties.

Example: Dawson Bottlers contracts John's Distributers, which distributes and sells bottled water. John's Distributers decide its distributions process and budget.

Related: What Is Product Differentiation? A Complete Guide

Advantages of adopting the vertical marketing system

The following are some advantages of this system:

  • Specialization: In the vertical market system, companies target a special niche or specific group of consumers. This enables businesses to customize their products to satisfy the needs of particular clients.

  • Higher value goods and services: As these companies target a specific group of clients, it can increase the prices of their products and services.

  • Cost saving: Businesses using the vertical system know the clients they are marketing to, reducing operating expenses and other costs. It also allows effective use of resources, unlike marketing to a wider client base or to diverse prospective clients.

  • Reduced competition: In contrast to the horizontal markets, verticals are less saturated with competitors. Offering specialized products enables businesses to customize their products, making it difficult for new entrants to the market, reducing competition.

  • Effective sales and branding: By focusing marketing on a narrow client base, sales and marketing become more easy and effective. Offering specialized services also enables companies to become experts in a particular field which enhances its brand.

  • Increased efficiency: When producers, suppliers, and retailers cooperate to attain a common goal, it enables entities to create improved and competent systems.

  • Enhances communication and improves relationships: When businesses work together, communication between them may get better. They contact each other regularly and abide by the same guidelines in the distribution network, which might lead to satisfied clients and higher profits.

  • Better innovations: When companies sell specialized products to a specific group of customers, they get the chance to understand the needs of those customers and come up with new products and services to satisfy those needs.

Related: What Is a Parent Company? (With Definition and Benefits)

Vertical markets vs. horizontal markets

In contrast to the markets which offer products to particular clients, horizontal markets provide diverse goods and services to a wide range of customers. Developing marketing approaches is easier in the verticals as compared to horizontal markets because you already know your clients and you develop a strategy which suits your target customers. In horizontal markets, the client base is diverse with an assortment of products, making it difficult to create a marketing strategy that suits all the clients.

In horizontal markets, it might be a challenge to develop a product that satisfies the needs of a diverse client base, unlike the vertical system, which allows you to develop a product for a specific consumer. With verticals, consumers normally have higher purchasing power, which might require businesses to give more attention and build strong client relationships. Consumers in the vertical system might rely on one provider to meet their needs, unlike the horizontal system, where customers get different goods and services from different providers.

Related: Guide to Understanding Business Development (Plus FAQs)

How to choose and develop a vertical market

You can consider the following five steps to help you choose and develop a vertical market for the business:

1. Select your target vertical market

The first step is to choose a suitable vertical market by examining your current customers and identifying patterns. Next, prepare a spreadsheet with columns containing sector, income values, and suitable solutions. It's necessary to research the industry trends and understand current developments which might assist you in choosing a worthwhile vertical. You can then choose a viable vertical market by considering the one with potential growth and prospects.

Before choosing your vertical market, it's important to consider the business operations and resources. It might be necessary to perform a SWOT analysis, abbreviated for strengths, weaknesses, opportunities and threats, to determine if the company can manage the new vertical or determine whether the vertical is expanding or shrinking. If the company has enough resources and skilled employees to complete the entire distribution process from production to selling, you might opt for the corporate vertical system. In contrast, you can choose contractual type and contract other companies to perform part of the roles within the distribution system.

Related: What Is a Target Market? (Plus 5 Steps to Help You Identify One)

2. Create a customer profile

The next step is to establish your target client base. Determine what these customers have in common and find out their needs and challenges. You can then analyze these needs and decide which products or services you can provide to solve the client issues.

Related: How to Create an Ideal Customer Profile (With Steps)

3. Evaluate the market value

Explore your potential customers to determine whether they are worth pursuing. Find out if the client sector or their business is moving in the right direction and also whether the venture might be profitable for the business. You can also consider networking with other businesses in your vertical market who aren't your competitors. Some companies might offer different products and services to your niche and may assist you in developing a business relationship with these clients.

4. Commit to your new vertical

Strategize with other employees to ensure the enterprise becomes a dominant entity with a substantial market share in the vertical. You can achieve this by studying the industry principles, knowing the main influencers, and reading industry articles. You can also contact mid-level employees to get insight into the obstacles they encounter during their daily routine.

Next, learn the workflow and processes of the business and your clients use to generate income. Understanding your customers helps you to provide the best solutions, enhance customer loyalty, and improve your credibility. Finally, acquaint yourself with the dynamic rules and regulations in the industry and understand how to implement them for the business.

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