In my last blog post I wrote about the importance of effectively integrating marketing channels in order to attract a broader audience and make more sales. Today, I’m going to focus on distribution channels — the concept of a vertical marketing system, to be more precise.
First of all, let’s clarify the term of vertical marketing systems (VMS). What does VMS stand for and more importantly, how does it work? Here’s a great definition from Inc.com:
A vertical marketing system (VMS) is one in which the main members of a distribution channel—producer, wholesaler, and retailer—work together as a unified group in order to meet consumer needs. In conventional marketing systems, producers, wholesalers, and retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits comes at the expense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are forming vertical marketing systems.
To have a better understanding of vertical marketing, let’s watch the following short video (01:44 min). We’ll learn about the difference between horizontal and vertical marketing, and discover the advantages of the latter.
Vertical Marketing System Vs. Horizontal Marketing System
In horizontal marketing, members at the same level in a channel of distribution form strategic alliances (or joint ventures) to harness new marketing opportunities. The concept of VMS is different and should not be confused with horizontal marketing.
Types Of Vertical Marketing Systems
VMS can take several forms.
1. Corporate VMS
In a corporate VMS, all the elements of the distribution channel are streamlined under the ownership of a single business. Nevertheless, each company in the chain – from manufacturing to the stores – continues to perform a separate task.
2. Administered VMS
In an administered VMS, one member of the distribution channel has the ability to control the activities of the other members of the distribution channel. This can be accomplished through size or power — for example retail giant Walmart. There is no ownership required.
Walmart is large and powerful enough to exert the necessary influence to run such an administered system. Small businesses that are exposed to this kind of system might find it very challenging to operate under such circumstances.
3. Contractual VMS
A contractual VMS comes to fruition when several independent businesses join forces and sign a contract to leverage economies of scale thus enabling them to get ‘better deals’ — that is competitive prices.
Examples: A group of retailers that deal with a jointly owners wholesaler. Twenty independently owned boutique owners sign a contractual agreement with a wholesaler to purchase fashion accessories. The costs go down due to bulk ordering and shipping.
Vertical Marketing System & Small Businesses
How can small business owners profit from VMS?
The best way for small businesses to benefit from VMS is by forming strong relationships with suppliers and distributors.
Here’s what Tom Egelhoff from SmallTownMarketing.com has to say about the advantages and disadvantages of vertical marketing systems for small business:
“The main advantage of VMS is that your company can control all of the elements of producing and selling a product. In this way, you are able to see the whole picture, anticipate problems, make changes as they become necessary, and thus increase your efficiency. However, being involved in all stages of distribution can make it difficult for a small business owner to keep track of what is happening. In addition, the arrangement can fail if the personalities managing of the different areas do not fit together well.”
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Do you have any experience with a vertical marketing system? Have you implemented any VMS in your small business? Looking forward to your insights in the comments below.