Do you know the difference?
Two methods of building a market strategy consist of vertical and horizontal markets. Vertical Marketing Systems, or VMS, seek to achieve efficiencies through economies of scale by focusing on a niche portion of a larger market segment. Horizontal marketplaces like eBay and Craigslist provide a wide range of products and services for a very broad audience. Marketing approaches must be broader, and are often more expensive due to the wide swath of demographics and advertising platforms needed to reach its potential consumers. Horizontal markets are often more cooperative by nature and seek joint venture opportunities in order to increase sales.
Vertical markets are a group of businesses that offer products or services within the same industry. They can provide highly focused solutions to more specialized markets. That’s not to say that vertical markets cannot serve a large market base – to the contrary, because the vertical is often more streamlined, organized and focused, it can often translate to a wider customer base. For example, JW Pepper is an online music publisher. The company has hundreds of thousands of pieces of sheet music in its databases, across all musical genres – instrumental, voice, band, orchestra, etc. If you want to find any kind of musical arrangement, this is a great, big vast place. Conversely, the Sweet Adelines musical library caters only to women’s barbershop a cappella music. Everything on the site is specific only to this narrow niche, serving its vertical place in the music universe well.
Vertical markets are definitely on the rise – think Uber, the on-demand car service app. Companies like Uber provide a niche, highly targeted solution for specific problems and market segments. The vertical on-demand market is growing exponentially reaching “4.12 billion in 2014” indicating a large shift from horizontal to vertical markets. Retailers are also starting to see the wisdom of shifting to a more vertical solution. With the increasing demand for same-day delivery models, researchers are seeing an uptick in drone usage for delivery with an anticipated $1 billion industry forecast by the year 2019 according to Tz Zhuo, Entrepreneur.com contributor. Think of the possibilities. Restaurant deliveries via UberEATS and package delivery by UberRUSH both existing vertical organizations are already branching out in new ways to take advantage of the space. With the addition of contracting out to Uber or companies like ChowNow, restaurants are freed to redirect their human capital dollars (read as, delivery drivers) into more business-focused capital investments.
How do you expand your own company’s vertical markets?
- Look for ways to introduce vertical services to your existing horizontal markets. Review your current marketing for opportunities to increase focus in a specific niche of your existing consumer base. Consider adding a vertical of your own and then selling the concept to other companies. Again, going vertical means that you will control all aspects of the organization, from development to production, sales and distribution. If you are selling cupcakes, consider that you will create the recipe, manage the ingredient supply chain, bake the cupcakes, frost them, box them and deliver them to your customers. You will control each stage of the process and make a multitude of decisions along the way about how to purchase ingredients, mix the batters and promote your cupcakes. Supply chain emergencies may arise along the way and that’s when having control over your vertical may be advantageous.
- Remember that customer experience is paramount to any business’ success. Your customer’s overall experience must be pain-free, enjoyable, easily accessible and cost-effective. Not a short order for any business, but especially not a small business. Great service is also the sole differentiator between a successful organization and one that is just getting by. Vertical markets also rely on a deeper relationship with their customers, where more areas of the business maintain touch points with their consumer. The more ‘sticky’ the business is the more loyal consumers will be – and the more difficult it will be for them to leave your company.
- Often the commitment to a vertical market isn’t for everyone or every business. Take stock in your organization, your employees and your current markets to determine strengths, weaknesses, opportunities and threats (SWOT analysis) before you jump into new strategies. It is okay to take a step backward and reintroduce horizontal strategies. Vertical integration is a concept where you introduce a new product or service line to augment the vertical. Major retailers Barnes and Nobel (NYSE: BKS) and Urban Outfitters (NYSE: URBN) are starting to add full bar service to their existing retail verticals as a way to attract Millennials back into their retail experience. Adding bar service is being tested as a way to combat online sales and encourage this attractive marketing segment back into the physical retail space. Time will tell if this is a successful venture, but it does pose some interesting questions and concepts that will play out over the next few selling seasons.
- Adjusting to change and being nimble enough to respond quickly is one of the earmarks of a vertical market and a small business. Businesses competing in this market need to constantly be vigilant of industry news, trends and forecasts in order to rise to the challenges and meet customer needs.
- Vertical can translate to greater access to broad spectrum selling. The more efficient your process and products, the easier it is to take vertical. Reorganizing complicated processes and streamlining will result in a cleaner delivery method and ultimately a better consumer experience. Just remember that while your processes may be simplified, the personal touches are still what often makes and keeps the customer relationship strong with your brand.
- Take advantage of supply chain efficiencies within the vertical. “The integration of the [vertical] supply chain is something that the resellers have to now learn, in addition to just the industry as a whole,” Brian Babineau, senior analyst at Enterprise Strategy Group in Milford, Mass. This learning curve make take additional time, so plan to give yourself and your business the window necessary to fully understand the implications of utilizing supply chains in new and unique ways.
- Moving into a vertical market allows you to expand your knowledge and industry experience and position your business to become ‘the expert’ within your vertical. Deeper understanding of all aspects – regulation, marketing, compliance, competition, finance to name a few, will further solidify the business with both consumers and industry leaders.
Shifting business strategies happens every day in small businesses, but not without a great deal of consideration and planning. Give us a call and we can talk about this more….
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Copyright 2016 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire.
