Vertical Market Definition
Vertical market refers to a market wherein the seller provides goods and services specific to a particular industry, business or other sets of persons having specific needs. Sellers operating in such market generally do not cater to the needs of the general market and deals with an only select type of industry or business groups.
Characteristics
- The competition will be limited to sellers operating for the same industry and thus the competition will be very less.
- Sellers in a particular vertical market are involved in similar products or services.
- The participant sellers deal with a particular industry, business group or persons with specific needs.
Types of Vertical Market
There are three types –
#1 – Corporate System
In such a system, all the functions of production and distribution are done by a single company. Such companies do not need to depend on other persons for production and sales-related functions and are self-sufficient in doing so.
#2 – Contractual System
In such kind of system, there exits contractual agreement between the different production and distribution levels for the completion of the overall function. The participants of such a system enjoy the economies of scale.
#3 – Administered System
In an administered system, one member of the production and distribution channel is dominant and the entire functions of a vertical market are being carried out by them in an informal manner. The dominant ones are those who are larger in size.
Example of Vertical Market
Let us consider an example of a software development company that develops software exclusively for the retail sector. Such a company can be said to be a part of a vertical market as it is dealing with respect to a particular group of customers only.
Difference Between Vertical and 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 the sellers to be dealing in different kinds of industries. The sellers are operating among themselves, who are dealing in a specific industry. They deal with the 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 but cater to the needs of various industries. They are concerned with the overall market and do not depend on some select group of customers for their profits.
Advantages
- The participant sellers can focus on that specific product or service in which they have a comparative advantage over others.
- 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 be able to understand the industry better and they may come up with some new suggestions and improvements and may be able to solve the challenges faced by the businesses working in that particular industry.
Disadvantages
- The vertical market can lead to only some enterprises controlling the particular market which will reduce the competition to a minimum level.
- The quality of the products is likely to be poor in such cases since the level of competition is low and the customers have limited choices.
- The sellers will be in a position to charge higher prices for their products since there are few numbers of sellers in the market.
- The products will be lacking innovation since there will be no motivation or competition level to design and develop the products with improved techniques and features.
Conclusion
The types of the market may be different, but the operations of a business enterprise may be termed as vertical and horizontal markets in some scenarios. If one analysis which kind of market suits their business well, they can drive their resources and energies accordingly.
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