Vertical markets are those defined by the type of customer (often by type of industry) rather than by the type of product.
For example, it is possible to divide the market for computer software for business use by the type of software: e.g. accounting software, CRM software, office productivity software, operating systems etc.
Alternatively, it is possible to divide up the market by the type of buyer. For example the telecoms, healthcare, banking and utilities industries are all important buyers of software. If each of these industries is regarded as a separate market, then each is a vertical market.
There are a number of reasons why it may be important to think in terms of vertical markets, and why companies may organise themselves to address vertical markets:
- The growth drivers will generally differ in different vertical markets. For example telecoms is cyclical, utilities are not.
- The needs of customers may vary between vertical markets. Therefore it may be possible to design or modify products to address those needs better.
- Business units specialising in a vertical market can develop a better understanding of customers' needs.
Specialising in vertical markets can be an important way of differentiating products and services. A strong position in a vertical market can erect a high barrier to entry. It can reduce economies of scale because addressing vertical markets requires smaller specialist business units rather than larger generalist divisions.