There are diverse types of e-commerce markets that serve specific business needs. Understanding how you can use them will be helpful for the effective implementation of your business strategy. In this guide, we will reveal the answer to a question what is the difference between horizontal and vertical e-marketplaces that help you to choose your marketplace business model.
What is an online marketplace?
An e-commerce marketplace is a website or a platform that connects three types of users: sellers or vendors, customers, and administrators.
There are different categories of marketplaces. Check them in the picture below:
Whether you do B2B or B2C business, you make a choice between horizontal and vertical marketplaces in e-commerce. As an e-commerce web development company with experience in creating marketplaces, we’ll explain the difference between horizontal and vertical approaches.
Horizontal e-commerce – buy anything you need in one place
First thing first, what is a horizontal marketplace? Horizontal marketplaces allow customers to buy various products in one place. Horizontal e-marketplace definition combines markets with various retailers of several industries in a digital one-stop shop to reach broader coverage.
For example, Amazon is a standard of horizontal e-commerce, where you can buy everything that you need. Having started as a bookseller, now the company is an engine of growth for over 2 million third-party sellers. Amazon is both a seller and a platform — here there are third-party retailers featured alongside products Amazon sells itself.
Horizontal markets tend to be more suitable for small or medium-sized businesses and start-ups that lack sufficient capital, staff, or resources. Therefore, temporary or permanent partnerships with other companies are an opportunity for them to enter the market or to make better use of shared resources to generate profits.
By consolidating numerous market segments, a horizontal marketplace meaning refers to markets that adhere to a diversified marketing strategy and have their benefits and downsides as well.
The strengths and downsides of horizontal business integration
When planning to launch a marketplace, you need to evaluate all pros and cons of each approach. To build a successful horizontal model, you need to build a much more sophisticated marketing strategy and constantly resolve countless tasks at the same time. It’s better to decide in advance how many industries your business will cover in order not to complicate your marketing strategy. Moreover, with a wide product range your solution can’t dominate in any given industry.
Here are some essential benefits of going for a horizontal marketplace strategy:
- Substantial savings: The possibility to drive down costs and make better use of valuable resources by sharing resources with other companies.
- Maximizing profits: Improve your profits by using diverse pricing strategies for different markets based on values.
- A greater market share: Opportunity to achieve better results by attracting more vendors from different industries and thus scaling.
- Good customer engagement: Diversification of products and services in a horizontal market improves user engagement.
Targeting horizontal online marketplaces is an effective strategy, but, as with any process, some disadvantages must be considered along with the benefits.
- Legal issues: Any regulatory changes affecting a certain industry may impact the company’s future. Moreover, technological changes that influence the application of the offering in vertical business are a potential threat to its top line.
- Acquisition costs: The average cost per customer acquisition is significantly higher because marketing efforts are not focused on just one industry.
- A closer interaction: Vertically oriented company has a closer interaction with its customers; hence, a change of supplier may have a strong impact on both parties; Any organizational changes, even if an ideal replacement is available, can result in a loss of time and resources. The cost of this transition can be prohibitive.
- Standardized offerings: Horizontal marketplaces provide very limited opportunities for cross-selling to the existing customer base.
- Low product differentiation: In the case of horizontal market focus, the low product usually leads to significant threats from new entrants–both from vertically focused companies across industries, and new horizontally focused entrants quoting much lower prices for almost the same offering.
- Higher promotion costs: Although horizontal offerings have wider applicability and enjoy the benefits of various specializations, building and growing such a company is a major challenge. Higher promotion costs and the need for building a prominent technological advantage over existing players become a must to survive on the market.
Now, let’s get to the vertical market model to figure out what vertical integration has to offer.
Vertical e-commerce – conquering a single market scope
What are vertical marketplaces? Vertical vs horizontal marketplace focuses on providing services in a specific industry or market. Still, the vertical marketplace definition refers to markets that offer products from a large number of vendors. When you've dedicated all your effort to capturing the niche, you need to be the leading company in your industry. Usually, vertical businesses have no backup revenue sources to keep the business alive.
By trying to be the best in its domain, a vertical marketplace keeps its position in the target audience limitation. There are still a lot of unexplored opportunities for niche-specific marketplaces.
In analyzing what is the vertical marketplace, you can consider Instacart and Airbnb – the distinctive representatives of vertical e-marketplaces.
Once startups, Airbnb and Instacart have turned into thriving businesses and continue to grow their e-commerce business in a vertical market.
Benefits and risks of vertical integration
Being dominant in one domain may be an effective strategy. Creating one vertical and then developing others has also proven to be a successful business model.
Among the main advantages of vertical marketplaces we can outline:
- More customer engagement: Vertical marketplaces provide more specialized services to meet clients' needs and expectations. Thus, your target group will naturally like to engage more with a brand that personalizes every customer interaction.
- Leading position in a niche: A vertical e-commerce marketplace lets you specialize in a specific market domain and get a leading position thanks to market credibility and expertise.
- Lower competition: Decreased competition in vertical markets may increase sales and result in faster and better growth.
- Streamlined marketing campaigns: Targeting a particular audience lets you get marketing results faster and build less expensive marketing tactics that are targeted at a wide range of customers.
Despite many benefits, there are some risks that may arise.
- Trends and changes: when you focus on one niche, you risk losing everything when trends are reshaping businesses. If you aren’t up on the latest trends and innovation, you may lose competitiveness and toss to the wayside in an instant.
- Challenge to grow: depending on your niche, it can be hard to grow your business in a saturated market. You need to emphasize the unique aspects of your product or service, or innovate emerging products that match your market and fill a need your consumers didn’t know they had.
So vertical marketplaces serve a specific business need. Thus, they are easier to enter and more susceptible to changes in trends and interests. The key factor of a successful vertical e-commerce marketplace is listening carefuly to your customers and providing an outstanding experience.
Both vertical and horizontal e-commerce models may be beneficial when implemented correctly. Neither is better, there is only one that best suits your business needs.
How are vertical and horizontal e-marketplaces different? If you are ready to try your business in multiple industries and do not want to completely depend on one business niche you choose, so horizontal e-commerce will be a perfect choice. Furthermore, you will get wider applicability and enjoy the benefits of specialization, building, and growing. On the other hand, offering highly specialized services in vertical markets may bring significant profits if you are sure of your scope's prospects.
The success of your e-commerce marketplace does not completely depend on the business model you choose. There are many other factors, like e-commerce platform development, customer service, branding, marketing, acquisition cost, effective launching of your marketplace, and many more.
DigitalSuits is proficient in building successful marketplaces and upgrading existing ones. Our specialists swiftly and with minimum coding help you to launch a marketplace of any complexity and effectively reach your consumers by meeting their needs. If you have any idea about your marketplace, contact us and we will implement it into life.