A vertical marketing system is the type of cooperation between the members of a distribution channel. It includes a producer, a wholesaler, and a retailer collaborating to deliver necessary products to their customers and aims at achieving better efficiency and economies of scale.
In this article, we’ll review the benefits of a vertical marketing system, and its types and grab some inspiration from the example.
Advantages of vertical marketing system
Companies preferred a conventional marketing system earlier. It can be described as one where retailers, wholesalers, and producers operate independently to earn better profits, even at the expense of one another. The system caused a lot of conflicts between business partners and reduced ROI. To avoid such consequences, some companies decided to switch 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 more significant market share. A 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 their business objectives 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 skills.
Different types of businesses can use vertical marketing systems. 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 of this marketing system.
Types of vertical marketing systems
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 production and distribution processes, 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. Hence, the company plays the role of a producer and distributor of its goods.
- Contractual. In this system, every member of 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 such stores or cafes, individuals purchase a license. However, they have to follow the standards, practices, and guidelines of a franchisor. 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, although 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 a 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 their efficiency and reduce product costs.
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 maximum efficiency.
Simply put, a vertical marketing system is an alternative to a traditional marketing system. It ensures the cooperation between several companies and helps them meet customers’ needs, gain more profits, and reduce costs.