Vertical Market Definition Example Types How It Works

Vertical Market Definition

Understanding Vertical 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 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.

Types of Vertical Market

There are three types –

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#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.

Example

Let us consider an example of a software development company that develops software exclusively for retail. Such a company can be a part of a vertical market as it only deals with a particular group of customers.

Vertical vs Horizontal Market

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.

Limitations

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.