Introduction
Vertical marketing systems (VMS) are strategic alliances or collaborations between different entities in the supply chain to enhance distribution and marketing efforts. These systems are designed to improve efficiency, reduce costs, and provide better customer service. There are three major types of vertical marketing systems: corporate, contractual, and administered. Each type offers unique advantages and challenges, catering to different business needs and market dynamics.
Corporate Vertical Marketing Systems
Definition: Corporate vertical marketing systems involve a single entity controlling and integrating the entire distribution channel. This entity may own multiple levels of the distribution channel, such as manufacturing, wholesaling, and retailing.
Advantages: Corporate VMS allows for better coordination and control over the entire distribution process. It enables companies to streamline operations, reduce costs, and maintain consistent branding and messaging throughout the channel. By owning multiple levels, companies can also capture a larger share of the profits.
Examples: Companies like Apple and Nike employ corporate VMS by owning their manufacturing facilities, distribution centers, and retail stores. This allows them to have complete control over the production, distribution, and retailing of their products.
Contractual Vertical Marketing Systems
Definition: Contractual vertical marketing systems involve independent entities at different levels of the distribution channel entering into contractual agreements to coordinate their activities. These agreements can be formal contracts or informal arrangements.
Advantages: Contractual VMS allows companies to leverage the expertise and resources of other entities in the distribution channel without the need for complete ownership. It provides flexibility and scalability, allowing companies to adapt to changing market conditions and expand their reach. It also enables specialization, as each entity can focus on its core competencies.
Examples: Franchise systems, where a franchisor grants the right to operate under its brand to franchisees, are a common example of contractual VMS. McDonald’s and Subway are well-known examples of companies that use franchising to expand their presence globally.
Administered Vertical Marketing Systems
Definition: Administered vertical marketing systems involve a dominant player in the distribution channel influencing the behavior and actions of other entities. The dominant player can be a manufacturer, wholesaler, or retailer with significant market power.
Advantages: Administered VMS allows the dominant player to exert control and influence over the entire channel without the need for ownership or formal contracts. It can leverage its market power to negotiate favorable terms, secure preferred shelf space, and gain access to promotional opportunities.
Examples: Retailers like Walmart and Amazon have significant market power and can dictate terms to their suppliers. They can demand lower prices, exclusive products, and favorable promotional support, effectively administering the vertical marketing system.
Conclusion
Vertical marketing systems play a crucial role in optimizing distribution and marketing efforts. Corporate, contractual, and administered VMS are the three major types, each offering distinct advantages and challenges. Corporate VMS provides complete control and integration, contractual VMS allows for flexibility and specialization, while administered VMS leverages market power to influence the channel. Understanding these different types of VMS can help businesses make informed decisions about their distribution strategies.
References
1. American Marketing Association: https://www.ama.org/
2. Kotler, P., & Keller, K. L. (2016). Marketing Management (15th ed.). Pearson.
3. Berman, B., & Evans, J. R. (2018). Retail management: A strategic approach (13th ed.). Pearson.
4. Pride, W. M., & Ferrell, O. C. (2019). Marketing (19th ed.). Cengage Learning.
