Definition: A vertical marketing system refers to a coordinated approach where the producer, wholesaler, and retailer of a product or service work together as a unified group to meet consumer needs and achieve business goals.
An example of a vertical marketing system is the Contractual Vertical Marketing System of the franchising model. Franchising involves an agreement between the parent company (franchisor) and the franchisee, in which the franchisee obtains exclusive rights to use the franchisor’s trademarked items, products, and services in exchange for paying royalties or fees. The franchisor provides training and support to help the franchisee operate their business and maintain brand consistency.
A vertical marketing system works because of the cooperation among the members of a distribution channel. While in traditional marketing systems, every member of the distribution channel works independently as a separate business to channel the production and distribution chain of a corporate system.
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What is a Vertical Marketing System?
A vertical marketing system is such a system of marketing wherein you get the combined effort of the three key levels of distribution channels. These are the producers, the wholesalers, and the retailers. This way a lot of money is reduced while the profits are increased. Certainly, the power and profits increase when there is more than one person involved.
This system could be understood better with following example. Consider a market with only two shops. One of the purchases is from the wholesaler who in turn purchases the lot from the producer. The other shop is linked with the wholesaler and the producer. Since they are linked or can be said to be the three elements of one organization, it could have better chances of attaining the objectives.
While the first shop owner may progress with the wholesaler. When the retailer will gain sufficiently, only then he could think of further expansion. While the latter one is the sole owner of his/her decisions. So it has a lot of benefits. This way bringing the producer, wholesaler, and retailer under one roof and one boss could be so much more profitable. This enhances the customer base too. Ultimately this is the requirement of every business. It helps to cut down the costs that would be otherwise spent at the expense of each corporate owner. The total effort does make sense.
Types of Vertical Marketing Systems
There are 3 types of vertical marketing systems –
1) Corporate vertical marketing system
In this type of marketing, either of the three key elements has the ownership of the business as a whole. It could be the retailer who is the ultimate boss or the wholesaler or the producer itself. It could be said as a joint venture of three firms with the majority with one of them. For example, a firm called Tupperware makes the product, distributes it through its select people, and gets to the customers.
2) Administered vertical marketing system
Here the dominance of either the producer or the distributor exists. There is no formal contract but their behavior is influenced by the size and power of the owner. As the name suggests they administer the working of the other. For example, big brands may have a link or association with the wholesalers or retailers to get a particular amount of goods in their shop.
3) Contractual vertical marketing systems
In this type of contractual system, the independent owners at each level are under contract with the higher level. The contractual vertical marketing system is like endorsing a particular product in their shop having any other products as well. For example, if there is a stationery brand a wholesaler could be in contact with the producer to have a certain number of products at certain costs of that brand only. The existence of franchise systems is based on this model only.
Role of Vertical Marketing System
Marketing is a crucial tool for any business to widen its reach and impress the customer. The customer base depends on the way marketing strategies are employed. The booming population has made it an opportunity to make their dream of a business come true.
However, it also led to terrible competition. Amidst all this what could add value to your business is the way the products and services are presented to the customers. That one way that should strike the customers has to be envisioned.
Today is the time of supermarkets or mini-markets where multiple products are available under one roof. It is difficult to make your product stand out and garner all the traffic you can in a crowd of so many products and services. Also, there could be so many challenges at the wholesalers’ or retailers’ end.
With the increasing number of people in the business, it sometimes makes it difficult to track all the issues that may arise. A simpler way is to combine the total effort of the people involved. It could be done by the combined effort of the producer, wholesalers, and retailer. This idea of marketing is a vertical marketing system.
The traditional marketing system, or conventional marketing system, may initially seem like a more straightforward approach, where each entity in the distribution process operates independently. It focuses on individual marketing efforts without a unified strategy. But it lacks the coordination and streamlining found in a vertical marketing system.
Interestingly, by adopting your own vertical marketing strategy, you can create a more integrated and efficient distribution process. This strategy brings all the levels of production and distribution under a single command, fostering better communication, reducing costs, and maximizing profits. It’s a harmony of efforts that you don’t usually find in a conventional marketing system. With a well-implemented vertical marketing system, businesses can increase their market reach while ensuring customer satisfaction and loyalty
Key Reasons Behind the Importance of Vertical Marketing Systems
There can be huge advantages on economic terms both on the sides of the customers and the clubbed entity. Businesses practice forward integration as well as backward integration for forming vertical marketing systems to optimize marketing campaigns for effective attention and cost management.
Talking specifically, some of the key reasons behind the importance of vertical market setup are described:
1. Economies of scale
making things in bulk could always be a profitable thing. It could be economical for the clubbed entity as all the middle-men costs involved are now removed. There is only one chain.
2. Profit margins increase
when three independent workers club into one, the profit margin which was earlier at the cost of one another shrinks to the firm as a whole. This increases the profit margins.
3. Brand image expansion
It creates a feeling of security, and authenticity and builds a sense of trust among the customers. Since they know that it is the only outlet sporting products right from the maker, they will associate with the brand in more numbers. This expands the brand image.
4. Enhanced customer base and satisfaction
every customer wants to buy at the cheapest rate possible. Even they are smarter to know that buying from the clubbed entities could cost them less. This certainly gets in more customers and enhances customer satisfaction.
5. Tracking becomes easier
when there is a single system working it is easy to keep things organized. This, in turn, makes tracking easy for the main owner. This also leads to settling disputes if any.
6. Less fuel consumption
this is so that the customers will contact the retailers about the product and since the information would be accurate, they will visit the store only after the availability of the product. This would reduce the fuel consumption otherwise needed.
Applications of Vertical Marketing Systems
If this marketing system is so useful almost every other business must try to adopt this one. So getting to the specific applications or use of this type of system, here are some areas.
1. Large firms: it is easy for large firms to acquire smaller and middle-level firms into wholesaling or retailing. This enables them to keep track and make things simpler. It also chucks away the competition found at the lower channels of the market.
2. Firms with efficient manpower: there are those intermediary firms that are neither too big nor too small. They may have efficient manpower who adorns excellent communication skills. Based on these, the firm can engage in one or the other type of vertical marketing system.
Advantages of Vertical Marketing Systems
Some of the notable advantages of a vertical marketing system are-
1. An administered system with efficient control- VMS enables a company to have better administration of all parties involved in the channelization of a business.
2. Consistent marketing message- VMS offers best-in-class solutions for optimizing the marketing or branding messages of the business, as producers, retailers, and wholesalers all have the same marketing goal to achieve greater efficiency.
3. Combining resources- In VMS, all the resources work as a single company and help the business achieve success and promote efficiency.
4. Competitive pricing- Because of the togetherness of the different channel members of a supply chain, a business may also ensure competitive pricing for its product or service.
Here is a video by Marketing91 on Vertical Marketing Systems.
Disadvantages of Vertical Marketing Systems
Even though this system of marketing has so much to its advantages, still it could be disadvantaged in a few areas. They are:
1. Bad for small firms: Small firms can’t manage all that is required to keep the clubbed entity perfectly functional. They also might face issues and competition but they can’t employ this marketing strategy to overcome them.
2. Focus hazed out: When things get clubbed probably the dominant partner might lose focus on his/her areas of improvement. This could happen for any of the levels and get the ideas to fade.
3. Personality issues: usually the business fails due to the changed behavior of one or the other partners. There could be personality issues for the owner which may get the desired outcome.
Examples of Vertical Marketing Systems
One of the common examples of VMS is an auto parts supplier ABC that uses forward integration by purchasing a retail outlet for selling auto products. In the same way, ABC may also try backward integration by acquiring a steel plant for obtaining raw materials to manufacture the auto products.
Another example can be a clothing brand like Zara that has full control over the supply chain, as the brand owns all the retail stores or retail outlets and ensures vertical integration for removing all conflicts and ensuring more profits.
Vertical Marketing System Vs Horizontal Marketing Systems
The vertical marketing system is different from the horizontal marketing system. In a horizontal marketing system, several firms or companies of similar sizes are involved in just one stage of production or distribution. Moreover, each company maintains its own identity and has no direct control over any other business associated with it. This type of system does not provide economies on the scale available through the vertical system and is not common in businesses.
On the other hand, the vertical marketing strategy involves firms or companies at different stages of production and distribution. All companies are integrated through a channel with communication from top to bottom and vice versa. Vertical marketing system companies provide more economies on the scale available to all involved companies. It enables efficient coordination between various activities such as procurement, manufacturing, storage, and distribution.
| Basis of Comparison | Vertical Marketing System | Horizontal Marketing System |
|---|---|---|
| Integration | It involves the integration of firms at different levels of production and distribution, enhancing efficiency. | Companies of similar levels in production or distribution join forces. Each retains its identity and there's limited integration. |
| Control | One firm often exerts control over the others, ensuring coordination. | No one firm has control; each operates independently. |
| Economies of Scale | This system facilitates economies of scale, leading to cost savings. | Economies of scale are less prevalent due to the lack of holistic integration. |
| Communication | Communication happens both top-down and bottom-up, aiding in conflict resolution. | Communication is usually peer-to-peer and may be disjointed. |
| Examples | Companies like Zara and auto parts suppliers. | Rare in businesses, but can be seen in collaborative marketing efforts like Niike+iPod. |
How to Choose a Vertical Marketing System
For any business to be successful it is important to choose the right vertical marketing system. Here are a few tips for choosing a VMS –
- Identify your business needs and goals.
- Analyze your supply chain thoroughly.
- Consider the company’s resources.
- Understand the cost implications.
- Consider your business size and scalability.
- Evaluate the potential for conflicts.
- Determine the level of control required.
- Assess the feasibility of integration.
- Review potential legal implications.
- Plan for future growth and expansion.
- Consider customer needs and expectations.
Conclusion
Thus the vertical marketing system could be a great tool for owners with a vision and the ability to do so. One must have a proper idea of this strategy and get into the contract only after the clarification of certain things.
One must realize and have the right vision to unleash the benefits of this interesting marketing tool. This could prove to be quite beneficial in the days to come with fierce competition all around.
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