Vertical Marketing Systems

You travel to Europe, and you use there is KFC everywhere. You've heard that KFC uses a franchise model to do business. How does a franchise business model relate to vertical marketing systems? What types of vertical marketing systems, and what are their benefits? In this article, we'll explore the definition of vertical marketing systems and break down the two main types - administered and contractual. We'll also examine real-life examples of companies successfully implementing vertical marketing systems to streamline operations and improve efficiency. But it's not just about convenience - we'll also explore the many benefits of vertical marketing systems, from reducing costs to improving efficiency.

Vertical Marketing Systems Vertical Marketing Systems

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Table of contents

    Vertical Marketing System Definition

    A Vertical Marketing system, also known as a VMS, comprises the three primary stakeholders in the distribution channel: the retailer, the wholesaler, and the manufacturer. One of the channel members either owns, has a contract with, or has influence to the extent that other members must cooperate.

    The vertical marketing system comprises the three primary partners in the distribution channel: the manufacturer, the wholesaler, and the retailer. These partners collaborate as a single unit to meet the requirements of the end consumer.

    In the traditional marketing model, the manufacturer, wholesaler, and retailer all worked independently, intending to increase their respective profits as much as possible, even if it meant competing against one another.

    Because of this, there were never-ending disagreements amongst the channel partners, resulting in lower profitability for the company.

    As a result, several businesses have begun employing a method of marketing known as vertical marketing. Under this model, the business's producers, wholesalers, and retailers have teamed up with one another and are cooperating to achieve the company's overall goal.

    This helped the profits of all parties involved in the vertical marketing system to expand.

    There are three main types of vertical marketing systems: Corporate VMS, Contractual VMS, and Administered VMS:

    1. Corporate VMS: A corporate vertical marketing system unifies the many phases of production and distribution into a single ownership structure.
    2. Contractual VMS: Contractual vertical marketing systems consist of separate businesses operating at varying levels of production and distribution that come together under contractual relationships to achieve more sales or economies of scale than they could on their own.
    3. Administered VMS: In an administered vertical marketing system, leadership is not inferred because of shared ownership or contractual relationships; instead, it is assumed based on the size and influence of one or a few dominating channel members.

    Administered Vertical Marketing System

    An administered vertical marketing system is a type of vertical marketing system in which one member of the supply chain takes the lead in coordinating the activities of the other members. In an administered VMS, a dominant member of the channel, such as a manufacturer or a large retailer, uses its power and influence to coordinate and direct the activities of the other channel members, such as wholesalers and smaller retailers.

    An administered vertical marketing system is a type of system where one or a few powerful members in a supply chain assume the leadership role, not because of shared ownership or contractual relationships, but due to their size and influence in the market.

    Massive retail chain businesses such as Walmart sometimes rule over vertical marketing networks run by third parties.

    The vast majority of smaller businesses cannot exert the kind of influence required to manage such a system successfully. Yet, they may find it vital to do business with a wholesaler or producer that does.

    A top brand retailer is positioned to provide its manufacturers with robust commercial collaboration and assistance. It is, therefore, in the interest of the small businesses to keep doing business with the big suppliers.

    P&G and Apple, for instance, can obtain an uncommon level of cooperation from many resellers concerning displays, shelf space, promotions, and pricing policies. On the other hand, giant retailers such as Carrefour, Sainsbury's, and Tesco can significantly impact the manufacturers that provide them with their items.

    Contractual Vertical Marketing Systems

    Contractual vertical marketing is a system in which supply chain members, such as manufacturers, wholesalers, and retailers, enter into agreements that dictate the terms of their relationships. These contracts can include pricing, distribution, and promotion provisions, among other things. Essentially, contractual vertical marketing allows different companies in the same supply chain to work together towards a common goal.

    Contractual vertical marketing is a system in which supply chain members, such as manufacturers, wholesalers, and retailers, enter into formal agreements that outline the terms of their relationships. These contracts can include provisions related to pricing, distribution, advertising, and other aspects of the supply chain.

    The most common kind of contractual agreement is the organization known as a franchise. In this kind of system, multiple phases of the manufacturing and distribution process are connected by a channel member referred to as a franchisor.

    Even if American companies continue to enjoy enormous levels of popularity in Europe, many franchises that were first established in European nations have become well-known not just in Europe but also in other parts of the world.

    Jean Louis David is a French hairdressing company with a worldwide network of more than 1,000 units1. Foto-Quelle is a German franchise that has become the world's largest dealer in photographic equipment.

    Almost any company may be turned into a franchise, from hotels and fast-food restaurants to dental clinics and dating services, from wedding advisors and cleaning services to fitness clinics and funeral directors. Franchises are available for almost any type of business.

    There are three distinct categories of franchise opportunities:

    1. Manufacturer-sponsored retailer franchise system. One example of this is BMW and the network of independent franchised dealers that it works with.
    2. Manufacturer-sponsored wholesaler franchise structure. Coca-Cola licenses bottlers (wholesalers) in different international markets so that they may acquire Coca-Cola syrup concentrate and then bottle and sell the completed product to retailers in their respective communities.
    3. Service-firm-sponsored retailer franchise system. One example of this is Burger King, which has more than 19,000 locations that are owned and managed by franchisees all over the globe. 2

    Vertical Marketing System Example

    There are many vertical marketing systems examples, including KFCs and Walmart. We will dive into these examples in more detail below.

    KFC's Vertical Marketing System

    KFC has always relied on direct distribution, providing its goods to customers by sending them straight from the restaurants where they are sold. This helps to lower total margins, build a deeper contact with clients, and regulate operational operations more effectively. In addition, it helps to bring down total margins.

    Nevertheless, the process of becoming global in the few years that have passed recently has resulted in the need to use a new distribution channel. KFC has decided to focus its marketing efforts on the retailer channel to take advantage of the new type of distribution that has come about due to opening markets on many continents. The practice of franchising has recently been widespread; for example, KFC has begun licensing both its brand name and the recipes for some of its more classic items to restaurants in other countries. As discussed above, this is part of a contractual vertical marketing system.

    Walmart Vertical Marketing System

    Another typical example of a vertical marketing system is Walmart. The parties involved in an administered vertical marketing system do not have a formal contractual relationship with one another, nor do they have corporate ownership of the distribution channel. Instead, the size and strength of a single individual affect the activities they engage in.

    The multinational retailing corporation Walmart. Walmart is giant and influential enough to operate such a supervised system. The vast majority of small firms cannot exert the influence required to manage such a system successfully. However, they may discover that it is essential to do business with a producer or distributor that does.

    Benefits of Vertical Marketing Systems

    There are several benefits of vertical marketing systems. The main ones include more resources, efficiency, better communications, branding, and sales.

    More resources

    A company has a better chance of success if it collaborates with a more significant number of organizations working toward the same objective. For instance, it does not have to negotiate with a third-party shipping business since it can transport its products, saving time and money. The company will have greater control over shipping costs and delivery times now that having access to this resource.

    Efficiency

    In a vertical marketing system, the producers, distributors, and retailers work together toward a shared objective. This fosters the ability to design superior and more efficient methods. This enables companies to have a comparative advantage over their competitors.

    Better communications

    The ability to communicate effectively usually improves when everyone works together. Producers, wholesalers, and retailers can share frequent updates and adhere to the same rules, all of which may lead to increased profits, improved outcomes, and satisfied consumers.

    Branding and sales

    You can hone in on your primary message and boost the likelihood of people recognizing your brand if you direct your marketing efforts at a specific subset of prospective customers and sectors. If your company offers a specialist product, you have the opportunity to establish itself as an authority inside its industry.

    Vertical Marketing Systems - Key Takeaways

    • The vertical marketing system comprises the three primary partners in the distribution channel: the manufacturer, the wholesaler, and the retailer.
    • There are three main types of vertical marketing systems: Corporate VMS, Contractual VMS, and Administered VMS.
    • In an administered vertical marketing system, leadership is frequently defined by the size and influence of a few of the system's most influential channel members.
    • Contractual vertical marketing ties independent enterprises at various distribution tiers together to gain economies of scale and increased sales.
    • Benefits of VMS include more resources, efficiency, better communications, branding, and sales.

    References

    1. Talkie, AI Voice Assistants Revolutionize Jean Louis David Booking Experience, https://talkie.ai/blog/voice-assistant-jean-louis-david/
    2. Franchise Direct,Burger King Franchise Costs & Fees, https://www.franchisedirect.com/foodfranchises/burger-king-franchise-07118/ufoc/

    Test your knowledge with multiple choice flashcards

    Which of the following is not part of vertical marketing system?

    _________ system unifies the many phases of production and distribution into a single ownership structure.

    _______ ties independent enterprises at various distribution tiers together to gain economies of scale and increased sales effect.

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