Vertical Marketing System: Meaning, Types


Meaning of Vertical Marketing System

Vertical marketing system is a marketing system in which all key members of distribution channel- manufacturers, wholesaler and retailers work together as a group for fulfilling the needs of customer. All members perform their role simultaneously with one another for accomplishing the organizational objectives. It is more effective marketing system over the conventional marketing system where each member work separately with an aim of maximizing their profit even not considering the interest of one another. This leads to conflicts among members and reduces the overall profit of business. Vertical marketing system has overcome all these conflicts as under it all main peoples involved in distribution channel worked as joined hand with one another. This way due to better cooperation overall performance of business gets enhanced.

Types of Vertical Marketing System

This marketing system is divided into three parts which are explained in details as given below:-

  1. Corporate VMS
  2. Contractual VMS
  3. Administered VMS

Corporate Vertical Marketing System

It is a marketing system under which all members of distribution channel are owned by single member of channel, be it a manufacturer, distributor or retailors. Single company have ownership of all elements of production and distribution channel. Middlemen’s are avoided under this system and all elements of channel are combined effectively under the single business leadership. Different elements comprise of production, development, distribution and marketing. Corporate system provides complete control over its products movement and facilitate companies to move in desired direction.

Example- An American based cosmetic company named Amway produces its own range of products and sell them only through authorized stores of Amway. Company have complete control over production and distribution of its products.

Contractual Vertical Marketing System

Under this vertical marketing system, each member of channel of distribution work on independent basis and combine their activities. These member work on contractual basis for earning higher profits by working in isolation. Franchising is the common form of Contractual vertical marketing system. Under franchising, manufacturer authorizes distributor for selling its products in return for some annual license fees. Products are sold under the producer’s name by distributor. 

Example- Pizza hut, Dominos, Mc-Donald’s are some of the franchise that operate on a contractual basis.

Administered Vertical Marketing System

In administered VMS, one member of distribution channel due to its giant size and power possess a capability of influencing the activities of all other members of channel. There is no contract in between the different members of distribution channel. In simple terms, any influential and powerful member control all activities without even owning the elements of distribution channel. 

Example- Big Brands like proctor & gamble and ITC command from retailers a high cooperation level in terms of pricing policies, display, promotional schemes and shelf space.

Therefore, vertical market system develops better relationship among all member of distribution channel. They all work jointly in a group effectively toward attaining the common goals of business. Members are able make higher profits that they could have earn if they would have work alone. It also avoids any conflict among members that lead to increase the overall profitability of organization by ensuring smooth functioning.