Traditionally, the producer, the wholesaler, and the retailer operated independently of each other, and it has proven to be largely ineffective. In the vertical marketing system, the three business entities cooperate to ensure more efficient distribution of sales commodities. There are three types of vertical marketing systems, and they differ mainly in the distribution of leadership and executive power within the vertical structure.
In this type of vertical marketing system, a single business entity owns all three levels of the vertical structure, namely manufacturing units, wholesale distribution, and retail stores. In other words, a company produces its sales commodities and distributes them across a network of its retail stores.
It could be the case of a well-established retail store that had decided to incorporate the entire structure. Or a successful producer opens retail points to market its production. In both cases, the owner of a vertical marketing system effectively eliminates the wholesaler as an unnecessary link altogether, which is the ultimate motive for appropriating the entire system in most cases. A wholesaler is highly unlikely to assume that position, though, except in a voluntary retail chain to be discussed later.
Which link in the vertical marketing system will obtain the proprietorship is irrelevant for classification purposes. However, it's a significant factor in the subsequent organizational dynamics and the marketing strategy of the system. It makes a difference whether the executive power is vested in a producer who has no marketing experience or vice versa.
For example, a commercially successful retailer without any experience in the manufacturing industry could have inadequate demands on the production unit. Or a manufacturer with a reputation for producing high-quality goods might not be able to market his commodities for lack of sufficient skills.
In both cases, the elimination of the wholesaler can lead to inappropriate marketing unless the executive leader of the corporate structure acquires the necessary skills for efficient distribution logistics. Ideally, though, the corporate nature of a marketing system should only be a matter of proprietorship, while in practice, each party would continue to do what it's good at, which brings us to the second type of vertical marketing system.
In this vertical arrangement, the three levels of a vertical marketing system coordinate the entire process while operating as separate business entities. This arrangement is the most common form of vertical marketing to date. It allows each party to expand its marketing opportunities, optimize its output, and increase its profits.
Typically, there are different formats in which companies can build a contractual vertical marketing system.
1. Voluntary Retail Chains
A commercially successful wholesaler integrates several independent retailers into a chain of stores that voluntarily accept the wholesaler as their exclusive supplier. In return, the wholesaler offers discounts for the supplied commodities.
The most common motive behind such agreements is to increase everybody's chances against larger chains and well-established concerns. Each company has better chances of winning the competition in cooperation with other companies than on its own. Plus, this strategy allows the chain to increase its weight on the market.
This type of vertical marketing system allows each member to win in its own way. The discounts offered by the supplier increase the retailers' profits. The producer expands its market and increases its sales. And the wholesaler establishes secure supply channels and expands its presence on the market.
2. Retail Cooperation
Alternatively, retailers could arrange a vertical marketing system by themselves. In a retailer cooperative, all retailers agree to make purchases from each other while coordinating their marketing strategies, wholesale supplies, and even the production processes at the same time.
Typically, members of a cooperative share the communal profits, according to how much each one has purchased. This type of vertical marketing system offers limited opportunities, and the potential risk of mismanagement at every level is relatively high. Retailer cooperatives tend to concentrate in the small retail business sector, among flee market freelancers and small agricultural communities.
3. Franchising
A franchise network is the most common form of contractual vertical marketing system. In this case, a commercially successful producer licenses a retailer or a wholesaler to operate under the producer's name, either in exchange for a regular fee or a specified share of the profits gained that way. Effectively, a retailer pays for the producer's famous name that will noticeably increase the revenues and help the retailer assume a more secure position in the industry.
The potential benefits are great, and each party wins a lot more than in any other type of contractual vertical marketing system. The two most serious drawbacks are, one, there must be a name to sell in the first place, and two, the entire vertical marketing system may collapse as soon as the name loses its credit.
4. Administered System
The third type of vertical marketing system is similar to the corporate one, except that no formal contracts are signed, and no business entity acquires ownership of the vertical chain. One party, typically due to its size or commercial success, begins to dominate the entire system and dictate the terms of production, supply, and distribution.
A leading business entity does it informally and doesn't need to sustain its influential power by any formally signed obligations or contracts of corporate proprietorship. The less powerful members of the vertical marketing system submit to the leader's authority and comply with the leading company's terms and conditions. The leader of an administered vertical marketing system could be from any of the three levels. What matters is the company's weight on the market. There may be two reasons for a less significant member to abide by the rules. One, it has no choice due to its small size. Or, it voluntarily accepts the terms because cooperation with the leader is potentially lucrative enough due to the latter's stable position in the industry.
Many companies apply vertical marketing system strategies, particularly in the online service-oriented small business sector. For example, Bitrix24 provides online tools to help businesses automate their marketing processes, facilitate internal communication, and ensure efficient project management.
The company sells its own software product by distributing it directly from its site or negotiating deals with intermediary platforms. In other words, the producer has taken over the entire three-level vertical marketing system.
There are several definite advantages that a vertical marketing system provides for all three levels of the distribution channel since they help:
● reduce investments
● increase sales revenues
● simplify distribution processes
● enhance efficient marketing
● facilitate expansion on the market
● reduce inter-organizational conflicts
● improve brand recognition
If you've decided that vertical marketing is the right choice for you, the next question is how you can develop your vertical marketing system. Here are some general guidelines to help you get started.
Deciding what you want to do is the first and most crucial step in building your business strategy. You'll only succeed in your enterprise if you do what you want to, so you may as well start by spending some time with yourself.
When you know what you want to do, you can start looking for your market. That's the time for doing thorough research. You can browse the internet, read papers, or speak with people to find your potential clientele and discover what they want. It will help you adjust your goals and get down to the actual planning of your vertical marketing system.
Now you can start expressing your goals in operational terms, preferably on paper. Ideally, your vertical marketing system would help you achieve your goals and address the needs of your target audience. The main thing is to be as specific as possible.
What exactly are you going to do, how, and when? Keeping a business diary will help you plan your days more efficiently.
5. Assess your progress.
You must see where you're going if you want to move in the right direction. Besides, we learn from our mistakes. And you can only do it if you have something to analyze. You ought to develop the habit of constantly recording your performance. It's the only way to check if you're at the proper place and time and with appropriate content so that you could facilitate the progress of your vertical marketing system.
In business, every pro is a potential con and vice versa. Your goals and your personality determine which way it will be for you. And cooperation goes a long way too. In this article, we've discussed several ways of cooperating with your business partners. If you know your goals and you've found your potential market, you should have no problem choosing a type of vertical marketing system to best suit your business needs and your style.