Vertical Marketing Systems 101!

In a vertical marketing system the most important functioning members of the distribution channel - producers, wholesalers and ret...

  • Vertical Marketing Systems 101!
    Manish Khanna Image Manish Khanna

    Vertical Marketing Systems 101!

    • Wednesday 17th of September 2014
    • Strategy

    In a vertical marketing system the most important functioning members of the distribution channel - producers, wholesalers and retail outlets - work together as a unit to deliver products to end users.

    This marketing system can be against the conventional system (where each department in a business organization works as a separate business with a sole aim to earn profits) but this can often be at the expense of other businesses in the channel resulting in the following:

    a. Poor quality product reaching the customer

    b. Unsatisfactory service system

    c. Passing the incremental costs to consumer

    Vertical Marketing Systems solve the problem of conflicts in various functional heads of the business and establishes a mutual benefit to all parties. The VMS includes advertising, promotions and public relations within different but related industries. This process allows businesses to manage and coordinate various companies formally or informally in order to gain a larger market share.

    A vertical marketing system is a business system that aims to achieve better efficiency and economies of scale. In the vertical marketing system, independent companies within related industries work together and eliminate conflict. Horizontal marketing systems, on the other hand, represent agreements across different industries.

    Such systems occur to control channel behaviour and manage channel control.

    Besides, all other advantages of this effective business model, the most prominent one is co-ordination and thus, harmonious efforts in a unified direction which yields better results. Companies have been gaining higher profits with this set up.

    There are various types of Vertical Marketing Systems, chiefly:

    Corporate VMS

    A corporate vertical marketing system streamlines the process by bringing all of the elements of the distribution channel, from manufacturing to the stores, under the ownership of a single business. The brand ‘Woodland’, for example is the single owner of different successive stages of production for distribution of its footwear, bags and clothing.

    The ownership of the distribution channel can happen from any point in the chain. A well-financed retail outlet might buy a wholesaler and production facilities, or a producer could purchase its main wholesaler and retail outlets.

    Administrative VMS

    This type of VMS occurs where one member of the channel is large and powerful enough to coordinate the activities of the other members without an ownership stake.

    Massive retail chain stores, such as Wal-Mart, often preside over administered vertical marketing systems. Further examples are HUL, P&G, and ITC. The entire marketing efforts of the system are co-ordinated by the company.

    Contractual VMS

    With contractual VMS, independent production and distribution companies come to an agreement to integrate resources for their mutual benefit. Examples of such systems are franchises and cooperatives.

    • - Producer, wholesaler and retailer have sub-groups.
    • - Producer/Wholesaler- Franchise operations fall in this category. The manufacturer licenses the wholesaler to distribute the product.
    • - Producer/Retailer - Another franchise operation where the retailer must meet certain quotas to operate under the company name. Must be a strong company name.
    • - Retailer/Wholesaler - If the wholesalers are the owners they encourage retailers to band together to buy as a group to receive more desirable pricing. If the retailers are the owners, they are called co-operatives. They buy from the jointly-owned wholesaler and share the profits those purchases generate.

    This approach allows all of the participants to leverage economies of scale that enable more competitive pricing. Variations on contractual vertical marketing systems exist, such as retail co-ops that only deal with a wholesaler. For example, if 15 independently owned restaurants enter into an agreement with a produce wholesaler, the total costs go down for everyone thanks to bulk ordering and shipping.

    As Tom Egelhoff wrote in an online article entitled "How to Use Vertical Marketing Systems," a VMS can hold both advantages and disadvantages for small businesses. "The main advantage of VMS is that your company can control all of the elements of producing and selling a product. In this way, you are able to see the whole picture, anticipate problems, make changes as they become necessary, and thus increase your efficiency. However, being involved in all stages of distribution can make it difficult for a small business owner to keep track of what is happening. In addition, the arrangement can fail if the personalities managing of the different areas do not fit together well."

    For small business owners interested in forming a VMS, Egelhoff recommended starting out by developing close relationships with suppliers and distributors. "What suppliers or distributors would you buy if you had the money? These are the ones to work with and form a strong relationship," he stated. "Vertical marketing can give many companies a major advantage over their competitors”.

    Like every coin has two sides, here are certain advantages and disadvantages of Vertical Marketing System:

    Over all Vertical marketing systems have their disadvantages and advantages, as many things do. Through delving into the specifics of the different types of systems a basic understanding can be made. This understanding can aid in further business decisions and ventures.

    Good Luck!

  • Author Info Manish Khanna

    Manish Khanna is a serial entrepreneur, philanthropist and genuine Australian success story. In a decade he has built an online empire unlike any other. He is currently the Managing Director of more than 10 individual companies. These include the flagship Business2Sell which operates internationally in 6 countries. The others include CommercialProperty2Sell, Million Dollar Mansions, Netvision, BCIC Pty Ltd and Better Franchise Group, to name a few.

    With more than 21 years’ experience developing web applications plus very successfully creating, managing and growing start-ups, he is forging ahead to turn more of his innovative ideas into future success stories.