What is a vertical marketplace?

Definition of a vertical market

Online vertical marketplaces derive their working philosophy from vertical markets.

A vertical market connects companies and customers around a specific niche.

So, the stakeholders involved are very much attuned to the specific needs and wants of their niche. As such, they have their own set of business standards and take different strategic approaches to succeed.

Unlike horizontal markets, which cater to multiple sectors or user segments, vertical markets focus exclusively on a specific niche. As you will understand later in this article, vertical markets usually enjoy higher profit margins than horizontal markets. However, they also have drawbacks. Vertical markets are more susceptible to shifts in niche market conditions.

Definition of a vertical marketplace

A vertical marketplace, also known as a niche marketplace, is an online platform that connects a specific group of buyers with a specific group of sellers, focusing on a particular industry, product category, or service vertical. 

Unlike horizontal marketplaces, which offer a wide range of products to a broad audience, vertical marketplaces are more like specialty stores, catering to the unique needs and interests of a well-defined audience.

For example, Amazon offers a wide array of products and is a horizontal marketplace. In contrast, marketplaces like Airbnb, Etsy, and Vinted focus on a specific niche: vacation rentals, hand-made items, and second-hand fashion, respectively. They are vertical marketplaces. 

Vertical vs horizontal marketplace

To better understand, let's explore how vertical marketplaces differ from horizontal marketplaces. These two marketplaces differ in multiple aspects.

• Focus. The first thing that differentiates the two types of marketplaces is the focus. Vertical marketplaces focus on a particular sector, segment, demographic, or location, and their services are built around that audience. Horizontal marketplaces, on the other hand, have a wider focus. They serve a broad audience and offer a wide array of products or services across multiple industries or categories. Think of one-stop shops like Amazon, Alibaba, eBay, and Doordash, versus focused platforms like Etsy, Vinted, Thumbtack, and Airbnb.

• Specialization. Vertical marketplaces specialize and serve the specialized needs of their niche, while horizontal marketplaces adopt a generic approach. This specialization gives vertical marketplaces a significant advantage in crowded markets.

• Economics. There's a significant difference in how vertical and horizontal marketplaces operate financially. Vertical marketplaces often rely on premium pricing and charge more to consumers. Thus, they often follow the higher-margin-lower-volume route to make money. Horizontal marketplaces focus on keeping costs down. So, they follow the lower-margin-higher-volume approach to stay financially competitive.

• Marketing approach. The two types of marketplaces also adopt a distinct approach to marketing. Because of their narrow focus, vertical platforms' marketing is targeted and specific. They leverage specialized channels, partnerships, and community engagement initiatives to connect with consumers within their specific industry or vertical. Their horizontal counterparts use broad-based marketing approaches and top-of-mind strategies to reach a wide audience across multiple industries or categories.

• Regulatory compliance and verification. Vertical marketplaces often face the challenge of navigating industry-specific regulations and standards. Ensuring compliance with these laws and norms is crucial to their success. Additionally, these marketplaces may require additional user verification steps to ensure that all operators within their niche are reliable and of high quality.

Many horizontal marketplaces began as vertical marketplaces and expanded over time. For example, Amazon famously started as a bookstore. 

Today, a significant trend in marketplaces is verticalization. Horizontal marketplaces are being disrupted by vertical players focusing on just one of their categories and offering a better experience. A famous example is Airbnb: the founders deliberately positioned their platforms as a better, more reliable alternative to the horizontal Craigslist.

The verticalization trend also shows that there are degrees to how focused a marketplace is on a single vertical. 

For example, even though Airbnb is a vertical marketplace, it has competitors that are even more narrowly focused. BoutiqueHomes specializes in unique or design-focused properties, and Hipcamp targets outdoor and nature lovers by offering camping, glamping, and RV stays.

Examples of vertical marketplaces

Vertical marketplaces come in all shapes and sizes, offering specialized services to meet specific needs. 

For instance, think of the huge global marketplaces like Airbnb, Uber, and Etsy, which are classic examples of vertical marketplaces. 

Specialized job platforms like Upwork and Fiverr, which focus on connecting people with freelance services and jobs, are other great examples of vertical marketplaces. While they cater to multiple verticals, they do constrain the number of categories they offer. However, the jobs platforms are also a great example of increasing verticalization: Upwork and Fiverr are both facing increasing competition form even more specialized players, like Mayple for Marketing freelancers and SoftwareSupp for software professionals.

Some vertical marketplaces, like Thumbtack, focus on local services where you can buy and sell within your city or even your neighborhood. These smaller, more localized marketplaces offer a more personal touch, making it easier to find what you need right in your community.

That said, let's look at some well-known vertical platforms that are leading the race.

Airbnb

Airbnb is a homestay startup that quickly revolutionized the travel industry. It is a compelling example of a vertical marketplace. In an industry dominated by major players like Radisson and Marriott, and even online travel aggregators like TripAdvisor and Booking.com, Airbnb stands out by catering to a specific audience: travelers seeking unique lodging experiences, often at more affordable prices or with a focus on local immersion. Instead of offering a generic selection of hotels, it prioritizes distinctive and non-traditional accommodations.

This focused approach has translated into more than 6 million global listings on the platform as of 2019. Beyond bookings, the platform facilitates verification, payments, discovery, and other travel-related experiences, showcasing its specialization in the affordable homestays segment.

Uber

Another prominent example of a vertical marketplace is Uber. Uber focuses on the mobility sector and connects drivers with individuals who need transportation. Because of the narrow focus, it is able to innovate around ride-sharing, which helped reduce costs.

Over time, Uber has developed a deep understanding of the ride-sharing industry, including logistics, pricing algorithms, safety measures, and factors that influence customer satisfaction.

Lately, the company has diversified into other segments too. It also caters to sub-niches within the ride-sharing audience. For example, UberX offers budget-conscious riders an option, while Uber Black provides a luxury car experience. 

After launching as a ride-sharing app, Uber has expanded by adding new verticals: UberEats for food delivery, and UberFreight for freight. 

Etsy

If you love buying handmade crafts, where do you go first? Chances are Etsy. This platform epitomizes deep specialization and customer focus by offering a wide array of unique, crafted products. Etsy's niche focus on handmade and vintage goods sets it apart from horizontal product marketplaces like Amazon and eBay, which offer a broad range of products.

By catering to this niche, Etsy has become a premier destination for handmade and vintage enthusiasts. The platform has cultivated a loyal user base that appreciates its curated selection of products from independent sellers.

In 2023, Etsy boasted an annual revenue of $2.7 billion, which demonstrates the viability of well-defined niche markets.

Thumbtack

Thumbtack has become a go-to platform for homeowners and local professionals alike, thanks to its vertical market approach.

Unlike broad platforms, Thumbtack focuses on connecting local professionals with customers who need various home services. This niche specialization allows Thumbtack to cater to the unique needs of both service providers and customers in the home services industry, fostering a sense of community and trust. 

One of Thumbtack's standout features is its local focus. By emphasizing local connections, Thumbtack helps build relationships between neighbors and local businesses, creating a more personal and trustworthy experience for everyone involved.

To ensure that customers get the best service possible, Thumbtack has a screening process for its professionals. This process varies but often includes qualifications and background checks to ensure that customers can trust the professionals they hire.

Zillow

Real estate is a highly fragmented market. Zillow has leveraged the power of focusing on a specific market by becoming the go-to destination for selling and finding a home.

After succeeding with Hotwire, the founder, Spencer Rascoff, started Zillow. After analyzing the real estate market, Spencer discovered that consumers were disempowered and that there was an information asymmetry. Thus, it started by empowering the buyer side by providing more information with the idea of "a price on every rooftop."

Over time, after specializing in the real estate market and its niche audience, it launched "Zestimate," a home worth estimator tool, which is popular to this day. Zillow also facilitates other services like insurance and mortgage loans, which makes it a one-stop shop for home buyers and sellers.

Vinted

Vinted is a great example of a vertical marketplace, focusing specifically on the fashion resale market. It's a platform where individuals can buy and sell pre-owned clothing items, creating a community that values sustainable fashion and affordable style.

What sets Vinted apart is its user-friendly approach. It offers a seamless experience for browsing, listing, and purchasing secondhand fashion items. Users can easily search for items, list their own pieces, negotiate prices, and complete transactions---all within the platform.

To ensure a positive experience, Vinted provides features like seller ratings, buyer protection, and secure payment processing. These elements contribute to a safe and trustworthy environment for buying and selling fashion items online.

This end-to-end service, along with top-notch quality checks to ensure product quality, helps Vinted stand out in the competitive resale market.

StockX

Just like Vinted has carved out a niche in the goods reselling market, StockX has done the same within the fashion and collectibles industry, with a focus on sneakers, streetwear, electronics, and collectibles.

StockX serves as a specialized marketplace for buying and selling authenticated products in these verticals. As a buyer, you'll find Air Jordans, Adidas-exclusive boots, and out-of-stock iPhones. You can browse, buy, and sell a wide variety of products. The platform also facilitates transactions and provides services such as authentication, secure payment processing, and shipping logistics.

What sets StockX apart is its strong community and fan base, which has helped propel its brand and profits. This dedicated following has made StockX a go-to platform for sneakerheads, streetwear enthusiasts, and collectors alike, solidifying its position as a leader in the resale market.

Drive lah

How do you beat in the car rental and mobility sector? By niching down. While not a direct competitor, Drive lah has become a success story in the ride-sharing industry by focusing on peer-to-peer car rentals in a specific location: Singapore.

By focusing on Singapore, Drive lah was able to address local consumer needs that global players like Uber had overlooked. The company facilitates car sharing between owners and users who require temporary access to vehicles, solving a problem acutely felt in the Singaporean market.

Over time, it perfected the experience and now has technology in place that allows car owners to hand over access remotely. This specialization helps Drive lah hold onto the market lead and expand into other territories like Australia.

That's how you can dominate a particular segment with a vertical approach.

Drive lah's platform is powered by Sharetribe. Read Drive lah's story here.

Swimmy

Many marketplaces can help you find vacation homes with pools for rent, but very few specialize in pool rental. Swimmy is a vertical marketplace that does.

Swimmy specializes in a specific niche within the travel and leisure industry: the rental of private swimming pools. The platform serves as a dedicated marketplace for individuals to rent out their pools to others for recreational use.

Swimmy also has a local focus, targeting the French and Spanish markets. This focus helps it further fine-tune its offering and stay competitive.

Swimmy is a Sharetribe customer as well, and you can read Swimmy's story here.

The Octopus Club

It may seem impossible to compete against giants like eBay or Craigslist, which facilitate peer-to-peer buying and selling of goods. But there's The Octopus Club, which does.

It's a marketplace for buying and selling used toddler items like clothes, toys, and accessories. Because of this focus, it understands what moms and dads want better than eBay. This specialized knowledge helps it to curate and find items that parents want at discounted rates.

The premium membership offering, Octoplus, offers access to 20 maternity-focused brands. This helps the marketplace increase brand loyalty and stay competitive.

Read how Sharetribe helped The Octopus Club launch and grow "like rapid fire".

Characteristics of a vertical marketplace

Certain characteristics help you identify a vertical marketplace. These are:

• Specified niche and targeted consumers. The defining feature of a vertical marketplace is its focus on a specified niche, which allows it to serve a narrower audience. This focus can include specific industries, product categories, or service verticals. Vertical marketplaces cater to a specialized audience with distinct needs and preferences within that particular segment. This focused approach is what distinguishes a vertical marketplace from others.

• Specialized but comprehensive services. To meet the specific needs and preferences of its targeted audience, a vertical marketplace must provide specialized services not readily available elsewhere in the economy. This specialization is achieved through a deep understanding of the target audience and their challenges. A vertical marketplace is attuned to the unique challenges, trends, and preferences of its audience and tailors its offerings accordingly. Despite its narrow focus, a vertical marketplace typically offers a comprehensive range of products or services within its chosen niche. It aims to be a one-stop destination for consumers, providing everything they need within a specific industry or category.

• Focus on quality and authenticity. In vertical platforms, there's a heightened emphasis on quality and the authenticity of products or services. Generic items are often replaced by specialized offerings, reflecting a shift toward more unique and curated selections. As a result, vertical marketplaces commonly implement quality checks to ensure both the quality and authenticity of the goods or services offered.

• Managed marketplace approach. Some vertical marketplaces take a highly managed approach, closely overseeing transactions to ensure customer satisfaction. This contrasts with the lightly managed nature of most horizontal marketplaces today. In these cases, the marketplace plays a significant role in ensuring a positive and reliable transaction experience for all parties involved.

• Community building. Vertical marketplaces often cultivate a sense of community among users who share common interests or needs within their niche. They provide forums, discussion boards, or social features that encourage interaction, collaboration, and knowledge sharing among community members. In some cases, these marketplaces may also organize offline events to engage their community further and foster stronger connections among users.

• Premium pricing and higher margins. Due to their specialized services, vertical marketplaces often command higher prices, which are willingly paid by buyers who recognize the increased value. This higher pricing benefits both the marketplace and its sellers, leading to potentially higher margins. Additionally, because these platforms offer comprehensive services tailored to their niche audience, they tend to enjoy a higher consumer LTV (lifetime value).

• Enhanced search and discovery. Vertical marketplaces often feature search functionalities that are specifically tailored to the needs of buyers seeking particular items within their niche. This specialized search capability can be a significant selling point for vertical platforms, as it allows buyers to quickly and easily find the products or services they are looking for within the marketplace's specialized inventory.

• Targeted marketing and engagement. Vertical marketplaces employ targeted marketing strategies to reach their niche audience effectively. They leverage specialized channels, partnerships, and community engagement initiatives to connect with consumers and drive engagement within their specified industry or vertical. This focused approach allows vertical marketplaces to maximize their marketing efforts and connect with consumers who are most likely to be interested in their offerings.

• Regulatory compliance. Vertical marketplaces typically take on responsibility for ensuring safety and transparency within their niche, which requires them to stay in compliance with regulations. This added responsibility can be a significant challenge for vertical marketplaces, as they must navigate complex regulatory environments to maintain trust and compliance among their users. At the same time, it's a significant part of their value proposition.

Benefits and challenges of vertical marketplaces

Looking at the success of the above marketplaces, it's understandably quite tempting to build a vertical marketplace. And it makes sense and a strong case can be made in favor. 

In their article about the verticalization trend in online marketplaces, Jeff Jordan and D'Arcy Cooligan write: 

Savvy founders know that stumbling upon the ideal market at the perfect moment is like finding a cheat code for startup success. Looking at verticals within the broad horizontal platforms that are near their breaking point is like a cheat code for a cheat code."

However, the road is not quite straight, and there are various roadblocks. Let's understand the benefits and challenges of vertical marketplaces.

Benefits

Accessible business type for startup founders

Vertical marketplaces are something all startup founders can access with limited resources. These are easier to build (with the help of no-code + low-code platforms like Sharetribe) and easier to reach product-market fit with. Since you're going after a well-defined, homogenous audience, you can discover pain points faster and present a better offering. Thus, there's a possibility to reach marketplace liquidity faster.

Competitive value proposition

Focusing on a niche allows you to gain a deep understanding of your customer base. You'll learn their needs, pain points, and buying habits. This enables you to come up with a better, more competitive product. 

Reduced competition

There are usually fewer players in a smaller niche. Although there will be competition from bigger players, you can always differentiate against them by offering specialized services. Reduced competition within a segment means higher market share and revenue opportunities.

Increased trust and credibility

A laser-focused approach and subsequent specialization can increase your trust factor and credibility. When you're focusing on a niche, it's much easier to understand the perceived risks, safety requirements, and legal requirements of that niche and build your offering to respond to them.

Higher profit margins 

Because vertical marketplaces can offer tailored services, they can often justify higher commission rates. Sellers, too, may be able to command higher prices when targeting specific audiences. For example, selling vintage clothing on a large, general marketplace compared to a marketplace specifically targeting vintage enthusiasts could yield significantly different results in terms of pricing and sales volume.

Challenges 

Limited scalability

Arguably, the biggest disadvantage to vertical markets is limited scalability opportunities. When you niche down, you invariably reduce your TAM (total addressable market). Therefore, to succeed with vertical marketplaces, you need to find a balance between a niche and a sub-niche, i.e., a market large enough to be viable but not small enough to limit growth.

Very often, it makes sense to start with a very small niche, find product-market-fit, and then example

For example, as Charles Armitage of Florence told us in an interview, they connected nurses and care workers with hospitals and nursing homes at one time. But doing so meant they were spreading themselves too thin. So, they first scaled back to nurses exclusively since care workers had different work profiles and demands, and added new professional categories later. 

Same is the case with Freightos, a marketplace for freight. As revealed to us in an interview, they initially aimed to serve the global freight industry. However, they realized that meeting the diverse needs of such a broad market was challenging. To improve their services, they decided to narrow their focus to facilitating small exports from China to the US. This shift allowed them to better tailor their offerings and enhance the customer experience. As they refined their services, they began expanding to other areas.

Dependency on niche market events

All industries are marked by trends (both micro and macro) and events that shape the market. Any downturns or disruptions in the industry can significantly impact the marketplace's business.

Vertical marketplaces, because they're focused on a certain segment, are prone to such disruptions more than horizontal marketplaces. For example, Airbnb lost millions due to COVID, while e-commerce companies in general saw good growth during the pandemic (the demand gradually slowed down as the restrictions were lifted, however.)

While horizontal marketplaces feel the crunch, too, because of their broader reach, they can shift their offerings and potentially offset losses.

Understanding user needs

When diving into vertical marketplaces, grasping user needs is important but challenging. 

A founder's understanding of industry standards and customer expectations must be top-notch, especially when facing competition. Even a founder with lots of experience in the niche they're targeting may end up making the wrong assumptions about the exact features their audience needs and appreciates.

Staying relevant means building your marketplace iteratively. Begin with a Minimum Viable Product (MVP), engage with users, and learn how to enhance your platform to better serve their needs. This approach ensures that your marketplace evolves in sync with user expectations, keeping you ahead in the game.

Sharetribe's marketplace software is designed for this iterative approach. Our no-code marketplace builder lets you launch a fully functional marketplace in a single day. Once you've learned more about your audience and its requirements, you can gradually invest in developing custom features with the help of Sharetribe's Developer Platform.

How to build a successful vertical marketplace

You're definitely headed in the right direction by exploring the concept of a vertical marketplace. Despite their prevalence, building (and growing) a marketplace platform is never an easy task. And that's applicable to vertical marketplaces, too. But taking care of certain things will increase your chances of success.

Here's a 10-step process to help you get started with building a vertical marketplace. For more details and lots of further reading, check out our complete guide to creating a marketplace. 

1. Brainstorm and find a strong marketplace idea

Everything starts with an idea, and so does a vertical marketplace. Consider, for example, horizontal marketplaces with verticals that aren't served as well as they could. 

2. Validate the idea 

Before proceeding with execution, there's one crucial step: validating your idea. This is where you talk to potential customers about the problem you're trying to solve.

3. Select the right business model 

Next comes the business model. Marketplaces can follow different business models. Most marketplaces monetize through commissions: taking a cut out of each transaction.

4. Start with a focused scope

When building a vertical marketplace, you need to focus on a particular segment. So, bring the focus to your planning process. Start small, and expand as you grow.

5. Build the platform 

Next up, build the vertical marketplace. It's recommended that you develop an MVP or minimum viable product to test the customer response. Platforms like Sharetribe help you cut time and cost, so you can start learning and iterating as you go. .

6. Onboard your first sellers 

Once the platform is built, you need to solve the chicken-and-egg problem. The recommended option is to onboard sellers first. Have quite a few sellers on the platform before you open up to users.

7. Open the marketplace to buyers 

After sellers, it's time to introduce buyers to your vertical marketplace. You can either run ads or contact customers individually to find buyers.

8. Reach product-solution fit 

After acquiring enough buyers and sellers, the next step is to reach a product-solution fit. This is where you confirm your product, which is the vertical marketplace, in this case, is solving an actual problem. Are users using your platform to make transactions?

9. Reach product-market fit 

Next, you need to ensure product-market fit. Are you facilitating transactions in a way that has a clear path to profitability? This establishes your marketplace as a viable and profitable venture.

10. Scale and introduce new offerings 

As a final step, you can start scaling your marketplace to new locations or verticals and introducing new features and services. Build more features as you continually discover pain points.

That sounds like a lot of work, doesn't it? Automation can help. Sharetribe is a low- to no-code marketplace builder that enables you to set up a fully functional marketplace within a few days, not weeks. Get started today!

Key takeaways

• A vertical marketplace is always built around a specific niche. The niche can be in terms of sector, segment, demographic, or location. It connects buyers and sellers within that specified niche market.

• Vertical platforms specialize in a particular segment, thereby creating specialized products and shunning generic offerings.

• Because of their specialization, vertical marketplaces are often able to charge higher commissions and enjoy higher profit margins.

• Vertical platforms also have the potential to reach liquidity faster, quickly raise VC capital, and enhance brand value.

• Vertical marketplaces have a smaller addressable market than horizontal platforms. They are also prone to market disruptions.

• Starting with a single vertical is an effective strategy to launch a marketplace---even if you plan growing your reach later.

← Back to the marketplace glossary

• What are network effects?
• What is a product marketplace?
• What is a local online marketplace?
• What is a global marketplace?