A vertical marketing system is the type of cooperation between the members of a distribution channel. It includes a producer, wholesaler, and retailer collaborating to deliver customers the necessary product and aims at achieving better efficiency and economies of scale.
In this article, we’ll review the benefits of the vertical marketing system, its types, and grab some inspiration from the example.
Advantages of Vertical Marketing System
Earlier companies preferred the conventional marketing system. It can be described as one where a retailer, wholesaler, and producer operate independently to earn better profits even at the expense of one another. The system caused a lot of conflicts between the partners and reduced ROI. To avoid such consequences, some companies decided to change to a vertical marketing system.
In a vertical marketing system, manufacturers, wholesalers, and retailers participate together in the production and distribution process. Therefore, business owners can manage their businesses efficiently and obtain a bigger market share. Vertical marketing system tries to eliminate competition and conflict that often arise between companies. As a result, there’s better efficiency and a reduction in product costs.
In this system, producers, wholesalers, and retailers cooperate to reach the business objective and gain increased profits for all parties involved. Besides, each member has the power to control channel activities.
This cooperation allows businesses to control all aspects of a company, helps solve problems, and boosts efficiency. However, to achieve success, the system requires good communication and coordination.
Vertical marketing systems can be used by different types of businesses. Whether it’s a small firm or an enterprise, the system helps create a strong bond with suppliers, distributors, and retailers.
Now that you know the pros, let’s proceed to the types.
Types of Vertical Marketing System
The system can be divided into three main types. Let’s review each of them in detail and with examples.
- Corporate. This type involves a single company that has ownership over all stages of the supply chain. Although there’s only one business that controls all the processes of production and distribution, each organization inside this channel continues to manage the project. One of the examples is Amway. It’s an American marketing company that manufactures beauty, home care, and health products. The brand belongs to a corporate vertical marketing system because it sells products only through its authorized stores. So, the company plays the role of a producer and distributor of its goods.
- Contractual. In this system, every member in the distribution channel performs as an independent entity. They integrate their pursuits to achieve higher efficiency and obtain value for all companies involved in the process. Firms sign contracts with large distributors to sell their goods and stay competitive. Working with a franchise is an example of a contractual type. To open one of the stores or cafes, individuals purchase a license. Yet, they have to follow the standards, practices, and guidelines of a franchisor. The famous examples of franchises are Pizza Hut, Dominos, and McDonald’s.
- Administered. The activities of companies involved in the production and distribution channel are affected by the size and power of one of them albeit there’s no contract. Simply put, a large company that has the most influence, dominates the activities of others. For example, Procter & Gamble. This consumer goods corporation commands a high level of cooperation.
Now that you know a lot about this system, it’s time to explore an example.
Example of Vertical Marketing System
You can find a lot of examples among modern companies. This is because the system allows firms to manage the costs and logistics of a distribution channel to improve efficiency and reduce product costs. So let’s walk you through an example.
Let’s take Zara, for example. The brand has complete control over all activities of the supply chain. This prevents the company from having any conflicts. Zara owns all stores, so they follow the same marketing strategy. Complete integration of all activities removes reasons for conflict between channels and stimulates the maximum efficiency of each of them.
To put it simply, a vertical marketing system is an alternative to a traditional marketing system. It ensures the cooperation between few companies to meet the needs of customers, gain more profits, and reduce costs.
- This article defines the term, explains how the vertical marketing system works, and covers three types.
- This article covers the definition and types of the vertical marketing system.
- In this article, readers can find an explanation of the vertical marketing system and its types.
Last Updated: 28.04.2021