Vertical Marketing system, Types, Features, Advantages and Disadvantages

Vertical Marketing System (VMS) is a strategic distribution channel arrangement in which the different levels of a distribution channel, from manufacturers to retailers, work together as a unified system to satisfy customer needs. Unlike conventional distribution channels where each member operates independently, a VMS involves a more collaborative and coordinated approach to deliver products or services to the end consumer. Vertical Marketing Systems are a strategic response to the challenges of a complex and competitive marketplace, aiming to streamline operations, reduce costs, and enhance the overall effectiveness of the distribution channel.

Types of Vertical Marketing Systems:

1. Corporate Vertical Marketing System (CVMS):

In a CVMS, a single entity owns and controls multiple levels of the distribution channel. This can involve the ownership of manufacturing facilities, distribution centers, and retail outlets. The central coordinating authority ensures a unified strategy, consistent branding, and efficient communication throughout the channel.

• Example:

Apple Inc. is an example of a corporate vertical marketing system. It owns manufacturing facilities, controls distribution through its own channels, and operates retail stores to directly serve customers.

2. Contractual Vertical Marketing System (CVMS):

In a CVMS, independent firms at different levels of the distribution channel enter into contractual agreements to collaborate. These contracts outline the terms and conditions of the relationship, including pricing, marketing strategies, and product specifications. Despite being independent entities, the cooperating firms work together to achieve common goals.

• Example:

Franchise systems are a common example of contractual vertical marketing systems. Franchisors and franchisees enter into agreements that define the terms of the relationship, including branding, operational standards, and revenue-sharing.

3. Administered Vertical Marketing System (AVMS):

An AVMS is characterized by a dominant member within the distribution channel who takes a leadership role in coordinating activities. Unlike the contractual arrangement, coordination is achieved through the dominant firm’s power and influence rather than formal contracts.

• Example:

Walmart is an example of an administered vertical marketing system. While Walmart does not own all the suppliers and distribution channels, its dominant position in the retail sector allows it to influence pricing, packaging, and other aspects of the supply chain.

Features of Vertical Marketing Systems:

• Coordination and Collaboration:

VMS emphasizes coordination and collaboration among different channel members to achieve efficiency and effectiveness.

• Shared Information:

Members of the VMS share information about market trends, inventory levels, and customer preferences, allowing for better decision-making and responsiveness.

• Common Goals:

The primary goal of a VMS is to enhance overall channel performance and customer satisfaction. This involves aligning the objectives of different channel members.

• Efficiency Gains:

By working together, VMS seeks to achieve efficiency gains in terms of cost reduction, improved distribution, and better utilization of resources.

• Integrated Marketing Communications:

VMS often involves the use of integrated marketing communications to ensure a consistent message and brand image throughout the distribution channel.

Advantages of Vertical Marketing Systems (VMS):

• Improved Coordination:

VMS promotes better coordination and collaboration among channel members, ensuring a seamless flow of information and resources.

• Cost Efficiency:

By streamlining processes and eliminating redundancies, VMS can lead to cost savings, benefiting from economies of scale.

• Consistent Branding:

VMS allows for consistent branding and messaging throughout the distribution channel, enhancing brand recognition and customer trust.

• Enhanced Communication:

Information sharing is a key feature of VMS, leading to improved communication among different levels of the distribution channel.

• Efficient Resource Utilization:

VMS optimizes the use of resources, ensuring that each channel member contributes effectively to the overall efficiency and success of the system.

• Market Responsiveness:

The coordinated approach in VMS allows for quicker responses to market changes and trends, enabling timely adjustments in product offerings and strategies.

• Increased Customer Satisfaction:

A well-coordinated VMS contributes to a better overall customer experience, as products and services are delivered more efficiently and with consistent quality.

• Streamlined Supply Chain:

VMS helps in streamlining the supply chain, reducing delays, minimizing stockouts, and improving overall supply chain performance.

Disadvantages of Vertical Marketing Systems (VMS):

• Reduced Flexibility:

VMS may lead to reduced flexibility, as the coordination and standardization may limit the ability of individual channel members to adapt quickly to local market conditions.

• Conflict of Interests:

Conflicts of interest can arise, especially in a corporate VMS where a single entity owns multiple levels of the distribution channel. Different departments may prioritize their interests over the collective good.

• Dependency on Dominant Members:

In an administered VMS, dependency on a dominant member may result in unequal power dynamics, potentially disadvantaging smaller members.

• Complexity in Implementation:

Implementing and managing a VMS can be complex, involving negotiations, contracts, and ongoing communication among diverse channel members.

• Resistance to Change:

Existing channel members may resist the changes associated with implementing a VMS, especially if they perceive a loss of autonomy or control.

• Risk of Antitrust Issues:

The concentration of power in certain types of VMS may raise antitrust concerns, as it may lead to a lack of competition in the market.

• Strategic Dependence:

Members in a VMS may become strategically dependent on each other, and disruptions in the relationship could have significant consequences for all parties involved.

• Potential for Rigidity:

VMS, particularly in a contractual or administered structure, may introduce rigidity in the decision-making process, hindering adaptability to dynamic market conditions.