Vertical Marketing System
Before going towards the vertical marketing system and the it’s types, let’s talk about the links of distribution channels. A number of independent businesses are linked with each other in the form of distribution channels. Previously these links were loose and each intermediary focuses primarily on its individual goals. Although, general distribution channel members do not fully cooperate with one another. That resulted in the overall poor performance.
One main reason for this poor performance was the lack of leadership in the whole channel. That 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. Also, no nominated bodies to resolve the conflicts.
The conventional distribution channel led the foundation of highly specialized distribution channel structures called vertical marketing systems (VMS). This system is composed of manufacturers, 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. It is dominated by the manufacturer, wholesalers and retailers. So, that the channel behavior and conflicts are tackled effectively.
It is further divided into the following three types on the basis of different means of power and leadership in the channel.
Each one is discussed below.
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. In order to get the smooth working of the overall chain.
In contractual VMS, different independently working firms of production and distribution are combined each other. Hence, 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 Cooperative is such a kind of contractual VMS in which a new business is organized by the retailers. Also, for the wholesaling purposes and even for production. All members of the contracting group purchase their goods through the retailer cooperatives and advertising. All the profits are distributed back to the retailers, according to their proportion of purchases.
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.
There is an important fact in the success of the contractual VMS. That is many customers cannot make a difference between contractual and corporate systems.
In an administered 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.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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