What Is a Business Vertical?

In our previous article on vertical marketplaces, we introduced the rising phenomenon of B2B vertical marketplaces and looked at a few of the most probable reasons behind their success in recent years. For a comprehensive understanding of the subject, we’ll continue this conversation in this piece and will talk about B2B verticals, vertical markets, and related terms, while trying to structure information previously discussed.

Definition of a Business Vertical

A B2B vertical (aka a vertical marketplace) is a niche marketplace where suppliers or vendors serve a specific business audience within a particular industry.

Vertical Markets vs. Horizontal Markets

If vertical marketplaces serve a niche audience with a specific set of needs, horizontal marketplaces, by contrast, do not share that purpose and instead serve a wide range of buyers across various industries. Below, we’ll compare the advantages and disadvantages of both types of marketplaces.

How Does a Vertical Market Work?

As mentioned above, vertical markets focus on a particular niche, say, heavy machinery or renewable energy. Such focus allows companies within B2B verticals to realize higher profits through a narrower customer base and more cost-effective marketing campaigns. By trading within a vertical, businesses also gain expertise within their industries and increase their level of competitiveness. Such a degree of specialization, however, comes at a cost – vertical marketplaces have significantly higher entry barriers for new entrants.

Advantages of a Vertical Market

Below is a quick overview of the main advantages vertical marketplaces offer participants:

  1. Companies that grow within the vertical gain a significant competitive advantage over their ‘peers’ that do not trade on vertical marketplaces; they gain expertise in market trends, regulations, compliance, customer needs, and requirements.
  2. Because of a granular specialization, vertical businesses can contain competition, sustain higher prices (or justify the price increase), excel, and innovate in their respective niches.
  3. From an advertising standpoint, vertical marketplaces are more cost effective -- their narrow focus leads to more streamlined campaigns and results in a more unified marketing effort.

Disadvantages of a Vertical Market

Below is a quick rundown of the disadvantages of vertical markets and factors to consider before entering a vertical:

  1. While a high degree of specialization and narrow customer base can be an advantage, it can also become a disadvantage – a smaller customer base may limit the company’s revenue potential. However, customers in a vertical marketplace typically boast higher purchasing power, which, in turn, might offset the potential limitation in revenue.
  2. The reduced competition, while listed as a pro in the earlier section, can also become a con – satisfied with the status quo, companies may choose not to innovate, as there is no need to convince the customer to buy their products or services rather than competitors’.
  3. As businesses tend to downsize with changing trends and market conditions or, conversely, amalgamate and merge, a niche market, while already concise, can become even more condensed.

How Does a Horizontal Market Work?

In contrast to vertical marketplaces, horizontals maximize their market outreach by catering to more customers across a wide spectrum of industries. Since they do not specialize in any particular sector and cater to a large range of buyers, horizontal marketplaces are considered more basic than vertical.

Advantages of a Horizontal Market

Let’s look at the advantages of operating in a horizontal market:

  1. Tending to a varying set of buyers means a larger customer base, more revenue opportunities, and fewer risks related to a demand shortage.
  2. Since in horizontal markets the risk of fluctuating demand is minimal and there’s no dependence on a particular customer base, companies within horizontals become relatively immune to market changes that might significantly affect verticals.
  3. The standardized offering allows businesses within a horizontal market to operate at a larger scale, thereby minimizing complexities in operation and lowering the cost of production per unit.

Disadvantages of a Horizontal Market

Despite its many pros, horizontal marketplaces also come with disadvantages, such as:

  1. Operating in horizontal markets doesn’t allow companies to focus on any specific industry, but rather grow through scale and expansion. Therefore, they become jacks of all trades that lack specialization and market knowledge.
  2. In contrast to vertical markets, where companies typically share deeper synergies with their customers, companies in horizontal marketplaces barely have time to get to know their buyers and, therefore, lack closer ties with their target audience.
  3. Higher competition and lower entry barriers result in significant threats to established businesses from new entrants both in terms of lower prices and new, innovative products.

Vertical Marketing Strategy

While operating in a vertical marketplace might imply selling alongside competitors, verticals actually provide more opportunities for closer partnerships and mutually beneficial cooperation with the direct competition.

Besides working with the competition, vertical markets are rife with other opportunities, so it’s essential to recognize them and employ strategies to turn things around and to the company’s advantage.

Below we’ll look at strategies that might be employed when selling within a vertical and factors to consider before actually entering a B2B vertical marketplace.

Why Choose Vertical Sales?

As mentioned above, verticals provide businesses with multiple opportunities, such as:

  • Opportunities for building and growing relationships with customers and partners.
  • Opportunities for excelling within a specific industry, gaining valuable marketing insights and expertise.
  • Opportunities to prosper and dominate in a particular sector.
  • Opportunities to cut down on marketing costs.
  • Opportunities for taking advantage of the marketplace’s B2B ecommerce platform with enhanced and intuitive user experience, different payment methods, and embedded finance options.

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Factors To Consider Before Entering a Vertical Market

Business owners who wish to enter a vertical market should pay attention to the vertical intricacies and potential downsides of B2B verticals that we’ve briefly discussed earlier, such as a smaller customer base, potential revenue limitations, and the dangers of the condensed market.

How to Identify Target Verticals

When companies start looking for potential verticals for their business, they need to follow at least the following steps:

  1. First, companies need to gather as much buyer insight as possible to identify potential verticals with increasing demand.
  2. What follows is extensive market research into competition and potential vertical marketplaces to join.
  3. By identifying several potential verticals, companies need to get more specific and drill it down even further until they arrive at a testable assumption.
  4. After landing on the assumption, companies have to develop a comprehensive business plan, a well-thought-out marketing strategy, revenue models, and short and long-term projections.
  5. After initial preparations have been made, companies need to begin testing their assumptions while tailoring their message to an identified target audience. If proven successful, companies may choose to apply for membership in a B2B vertical marketplace.

Examples of Business Verticals

Generic examples of business verticals include the aerospace industry, agriculture, chemical manufacturing, defense industry, energy production and distribution, healthcare, real estate, and transportation. Each of these sectors can be further narrowed down to a distinct vertical, such as nuclear energy in the energy sector and pharmaceuticals in chemical manufacturing. If you’re looking for specific examples of vertical B2B marketplaces, please refer to our previous piece on the topic, namely The Vertical B2B Marketplaces: The Sky’s the Limit, where we named a few examples across multiple industries.

FAQ

What do vertical industries mean?

Verticals describe companies that cater specialized services and products to a specific audience within a particular niche. For example, Whole Foods focuses on organic grocery products and caters to organic grocery consumers. Similarly, Brickhunter focuses on a brick-buying business and Parts Market on trading in used car parts.

What are horizontal and vertical markets?

Horizontal and vertical markets are markets where vendors offer goods and services either specific to a particular industry and clientele or to a wide range of buyers across many industries.

What is the difference between vertical and horizontal marketplaces?

The difference between vertical and horizontal markets lies in their specialization or lack thereof. Thus, verticals cater to a specific audience and specialize in a particular industry. Horizontals do not target any particular markets, but rather trade in different products and services across various industries.

What are examples of horizontal and vertical markets?

Virtually any business can trade either horizontally or vertically. For example, a bookstore can trade horizontally to anyone willing to spend a dollar on a new book, or vertically to parents and children. Another example can be a stationery business that typically trades horizontally – many industries require pens and paper. On the contrary, a company that develops patient-scheduling software trades vertically, because it caters to a specific clientele, such as healthcare. To put it succinctly, vertical businesses trade in specialized products and specialized services, whereas horizontal businesses do not specialize in any particular product or service.

What are the pros and cons of horizontal and vertical markets?

The pros of horizontal markets are scalability, low barriers of entry, abundant workforce, and less impact from demand fluctuation. 
The cons of horizontal markets are the lack of specialization, high competition, and reduced flexibility. 
The pros of vertical markets are reduced competition, higher prices, customer loyalty, and cost-effectiveness. 
The cons of vertical markets might be a lack of innovation, higher barriers of entry, and potential revenue limitations.

What is vertical market application software?

Vertical market software is a software developed specifically for a unique clientele, typically for businesses within a niche industry. Examples of vertical market software can be applications developed for banking businesses, real estate agents, investment funds, etc. 

What are the major business verticals?

The major business verticals are companies working in the agriculture, defense, and chemical industries. Although discussed previously, it’s worth noting that almost all verticals can be narrowed down further. For example, financial services companies can specialize in underwriting or mortgage processing; similarly, internet technology companies can specialize in business to business ecommerce software or website design.

What does vertical mean in digital marketing?

In marketing, verticals have come to describe the markets where brands cater to a specified group of customers. Those brands typically do not serve broader markets, but instead specialize on catering to the market’s particular needs. 

What are B2B verticals?

Vertical business to business companies are those that provide goods and services within one industry. An example of a very narrow B2B vertical is AirbusWorld, a collaborative customer portal and marketplace for better collaboration with operators of Airbus Helicopters' global network.

What is vertical advertising?

Vertical advertising is a strategy that companies apply to target customers within a particular industry. This way, insurance companies target customers who might be interested in buying insurance, while car parts manufacturers will target automobile companies, and so on.

What is an example of vertical integration?

Vertical integration implies acquiring, merging, or creating businesses and business processes within the same industry. For example, Netflix’s original content venture that supplements its main streaming services can be considered a vertical integration.

What are the different types of verticals?

There are three main types of verticals: corporate, administered, and contractual. Corporate verticals combine market stages under single ownership; administered are those coordinated by one company; and contractual verticals are created by independent businesses that combine market stages.

Is retail an industry or a vertical?

Retail is an industry. However, within retail, there might be multiple verticals, such as food and grocery, footwear, jewelry, etc.

What is a vertical retail distribution strategy?

A vertical retail distribution strategy is where a retailer bypasses intermediaries and designs, produces, and sells its own products. Some of the prominent vertical retailers are Uniqlo and H&M.

Is the automobile industry vertically integrated?

The automobile industry is considered one of the most vertically integrated sectors, since automobile companies strive to own as much of a supply chain as possible. 

What car companies are vertically integrated?

Tesla is considered the brightest example of a vertically integrated car company.

What are the types of vertical integration?

There are three types of vertical integration: backward, forward, and balanced. Backward integration is when a company controls its subsidiaries that produce product parts. For example, a car manufacturing company may seek to control companies that produce tires, engines, etc. In contrast, forward integration is when a company owns distribution centers and retailers. For example, a brewing company may control pubs and bars. This way, a balanced integration is when a company seeks to manage its manufacturing subsidiaries and distributors.

What is vertical competition?

Vertical competition describes the competition that happens along a channel or a value chain, where vertical competitors compete on how much they get from the total revenue relative to each other.

What does vertical mean in economics?

Vertical describes a market where companies offer goods and services specific to a trade, profession, industry, sector, and so on.

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Marina Vorontsova
Technical author and eCommerce advocate