Before going towards the vertical marketing system and the types of vertical marketing system, lets talk about the links of distribution channels. A number of independent businesses are linked with each others in the form of a distribution channels. Previously these links are loose and each intermediary focuses primarily on its individual goals, and general distribution channel members do not fully cooperate with one another which resulted in the overall poor performance. One main reason of this poor performance was the lack of a leadership in the whole channel, which had created conflicts between the members. The members of the conventional distribution channel efforts to seek personal profit even at the expense of overall profit of the whole channel. Moreover, there is no proper system of roles and duties assigned to each member and no nominated bodies to resolve the conflicts.
The above mentioned conventional distribution channel led the foundation of highly specialized distribution channel structures called vertical marketing system (VMS). The vertical marketing system is composed of manufacturer, wholesalers and retailers, who work as a unified system. The member of the system owns the products of others and works for the fulfillment of the overall benefits of the channel. Each member also has sufficient power to exert control over the channel activities. The vertical marketing system is dominated by the manufacturer, wholesalers and retailers, so that the channel behavior and conflicts are tackled effectively.
Types of Vertical Marketing System
The Vertical Marketing System is further divided into the following three types on the basis of different means of power and leadership in the channel.
- Corporate Vertical Marketing System
- Contractual Vertical Marketing System
- Administered Vertical Marketing System
Each one is discussed below.
- Corporate Vertical Marketing System:
A type of Vertical Marketing System, in which sequential stages of production and distribution are combined under single ownership is called a corporate vertical marketing system. There are regular organizational channels through which coordination and conflict between different structures are managed for the smooth working of the overall chain.
- Contractual Vertical Marketing System:
In contractual VMS, different independently working firms of production and distribution are combined with each other through certain contracts, so that larger economies of scale or increase in sales can be obtained. These advantages cannot be obtained by working independently, therefore they make contracts to work together as a unified channel. Coordination and conflicts among members are managed by the contractual agreements.
Contractual VMS is further divided into the following three types.
- Wholesaler Sponsored Voluntary Chains
- Retailer Cooperatives
- Franchise Organizations
- Wholesaler Sponsored Voluntary Chains
In this type of contractual VMS, voluntary chains of independent retailers are organized by the wholesalers to get help for competing large chain companies. For this purpose, a program is initialized by the wholesaler in which the independent retailers are agreeing to buy their purchases from that wholesaler at discounted rates and standardize their selling practices, so that the whole group can compete with the large chain companies effectively.
- Retailer Cooperatives:
Retailer Cooperative is such kind of contractual VMS in which a new business is organized by the retailers for the wholesaling purposes and even for production also. All members of the contracting group purchase their goods through the retailer cooperatives and advertising is made jointly through a common plan. All the profits are distributed back to the retailers, according to their proportion of purchases.
- Franchise Organization:
In franchise organization, stages of production and distribution process are linked by a channel member called franchiser.
The franchise is further divided into the following three forms.
- Manufacturer Sponsored Retailer Franchise System
- Manufacturer Sponsored Wholesaler franchise System
- Service Firm Sponsored Retailer Franchise System
Manufacturer Sponsored Retailer Franchise System:
Automobile industry is composed of this form of the franchise system.
Manufacturer Sponsored Wholesaler franchise System:
Soft drink industry adopts this form of the franchise system.
Service Firm Sponsored Retailer Franchise System:
In this form of franchises, certain retailers are given license by the service firm to provide the services of that firm to the consumers.
The most important fact in the success of the contractual VMS is that many customers cannot make a difference between contractual and corporate system.
- Administered Vertical Marketing System:
In administered vertical marketing system sequential stages of production and distribution are coordinated not only on the basis of ownership or contracts, but also on the reality of the power and size of the member in a chain. Leadership is considered by one or few dominant members of the channel. Resellers provide strong trade cooperation and support to the manufacturer of a top brand.