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As a business owner, what is the first thing to pop up in your mind when you think of marketing?
Perhaps you will focus on customer-facing elements, such as advertising content and branding messages. However, do you know marketing also includes business-facing elements, such as distribution that require a lot of attention and cost management as well?
In this guide, we will introduce everything you need to know about the vertical marketing system, which is one way for businesses to manage both costs and logistics of a distribution channel. Besides the definition, you’ll find out 3 types of vertical marketing systems, as well as 5 steps to develop an effective vertical marketing strategy for your business.
So, let’s dive right into it!
A vertical marketing system (VMS) can be defined as a form of cooperation between multiple levels of a distribution channel, including producers, wholesalers, and retailers. They work together to promote economies of scale and efficiency to finally meet consumer needs in a specific vertical market.
A distribution channel is a network of individuals and organizations involved in the process of getting a product or service from manufacturing to consuming. Distribution channels are also called marketing channels or marketing distribution channels.
In another type of distribution channel – conventional marketing systems, producers, wholesalers, and retailers work separately and try to maximize their own profits. When the profit of one channel member comes at the expense of other members, conflicts can arise that reduce profits for the business as a whole. Therefore, to deal with this problem, more and more companies are forming vertical marketing systems.
The concept behind vertical marketing systems is quite similar to vertical integration. In vertical integration, a company assumes control over several of the production steps in the creation of its product or service in a particular market. In other words, companies purchase a part of the production or sales process that was previously outsourced to get it done in-house.
For example, a solar power company might practice forward integration by purchasing a retail outlet to sell its products. At the same time, they might apply backward integration by purchasing a plant to obtain needed raw materials to manufacture its products.
Vertical marketing systems can seem to work effectively, but there are existing limitations that need your consideration. So, in this part, let’s explore to have an in-depth understanding of both sides!
Here are some of the significant advantages of vertical marketing systems:
The key benefit of vertical marketing systems is that it allows a company to see the big picture and maintain overall control of its products from manufacturing to selling. The company can analyze the process, identify problems, and resolve those issues in a timely manner. Besides, customer feedback could be gathered quickly as opposed to being stopped by an independent retail outlet.
For example, if the shipment process gets into trouble, the company can immediately send a new shipment or order more of the product manufactured without communication delays and financial matters.
In conventional marketing systems, manufacturers and retailers sometimes keep in mind different goals when selling a product. A manufacturer may desire to brand a product as a luxury item, while a retailer would prefer to sell more items by reducing the price.
In a vertical marketing system, the business maintains the brand messaging from the product creation to the final sale to ending consumers. Retailers will focus on brand messages, as the marketing message comes from inside the business, and no brand inconsistency arises.
A vertical marketing system enables the combined entity to benefit from the pooling of resources. For instance, a vertical marketing system ships products from the producer to a wholesaler and then to retail outlets.
In a standard distribution arrangement, this would be the activity of three separate organizations. However, in a vertical marketing system, the shipping costs can be combined, and a lower overall shipping arrangement can be negotiated with shipping providers.
When it comes to the disadvantages, it will help a lot to keep in mind the following aspects.
Following a vertical marketing system means that you are running multiple businesses simultaneously.
Think about it when you are an owner of only one business. There is a high possibility that your business will sometimes suffer from normal problems, such as handling accounting errors or managing client relationships. In case you are a manufacturing business, you might face up with material acquisition issues.
Managing all of the elements of all the business may require business owners a lot of knowledge and energy, as well as effective strategies to run smoothly.
One of the benefits of maintaining separate manufacturing, distribution, and retail channels is the wide range of companies available to work with. When it comes to marketing your products and services, your company can benefit from many different approaches other organizations may suggest.
In vertical marketing systems, there are no outside ideas, and that can limit the ability of an organization to generate unique and breakthrough solutions.
Communication among different ‘layers’ within the vertical marketing system plays a crucial role that can make or break a business. If a retailer places orders from a wholesaler, but the wholesaler fails to send these orders to the manufacturer on time, the retailer may run out of stock and alienate end-users.
Besides, if personality issues arise between key players of the vertical marketing system, your projects are doomed to fail.
A vertical marketing system is further divided into three types, including the corporate system, contractual system, and administered system. Let’s take a look at how each system could be beneficial to a business.
A corporate system occurs when all the elements of the distribution channel are streamlined under the leadership of a single business. The corporate system does not include the role of the middleman, so all business is done in-house. Making the most of a corporate system allows the company to completely control over the products and direction the company wants to go.
For example, Apple Inc. designs and manufactures its own products. These products are sold in retail outlets of the company itself. They do not need to depend on any people for the purpose of production or product selling.
In a contractual system, every party in the distribution channel works independently and integrates their activities on a formal agreement. They have to work together to help achieve greater efficiency and leverage economies of scale, which enable more competitive pricing. This type is also called a “value-added partnership,” in which they coordinate their strategies through contracts in order to eliminate channel-conflict that may arise out of individual objectives.
Franchising is a common form of a contractual vertical marketing system. Franchising involves an agreement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or brand name, as well as specific business processes and systems, to produce and market a product or service according to certain specifications.
For instance, McDonald’s, Domino’s, Pizza Hut, etc. are all forms of the franchising system which work on a contractual basis.
Under an administered vertical marketing system, there is neither formal contractual tie nor corporate ownership of the distribution channel among parties. Instead, their activities do get influenced by the size and power of one member. Simply put, any robust and influential member of the production and distribution chain dominates the activities of other channel members.
A typical example of this type could include the retail giant Walmart. Walmart is large and powerful enough to run such an administered system. Most small businesses cannot exert the necessary influence to run such a system but might find it essential to deal with a producer or wholesaler that operates under such a system.
It can be challenging to decide if making the leap to a vertical marketing system is the right move for your company.
After all, as a vertically-specific brand, you will be limiting yourself to a much smaller audience base, at the starting point – even if you decide to branch out into new verticals later. Vertical marketing is described as the effort by companies to make highly-specialized products that appeal to a narrow target market or demographic.
For instance, the solar power company in the first section would sell its products to other solar contractors and installers, often using the vertical marketing system.
The good news is that customers are increasingly looking for experts in their field, and they are even willing to pay extra to buy from brands with a good reputation. According to a study by McKinsey of tech start-ups, 38% of companies with a vertical-oriented value proposition get annual contract values of more than $100,000 per customer, compared to 4% of companies with a horizontal focus.
As a matter of fact, a vertical marketing system can offer a highly-specialized and targeted approach to the right audience. Additionally, as you’re focusing on a particular space, you can access a unique insight into the buying behaviors of your customers as well. Done well, you can become a best-in-class solution in your niche.
However, you should also consider the risk factor when utilizing the vertical marketing system, such as revenue potential, profitability, and competition. Besides, it requires a lot of time and effort to look for ways to collaborate and develop your position in your niche.
If you think a vertical marketing system is the right move for your business, it’s crucial to plan and implement a strategy. To effectively create one, follow these steps that we’ve outlined.
As mentioned earlier, running a vertical marketing system can be tough when it involves multiple businesses and relationships. Therefore, it is essential to set your business goals right from scratch.
When a company sets goals, everything will be clear for all parties involved in the vertical marketing system. Each member of the distribution channel will know exactly what they need to focus on, how they work together, and what they need to achieve after a specific period of time.
It is also necessary to set SMART goals, which include specific, measurable, achievable, realistic, and timely criteria. Besides, as a business owner, you can set some KPI (Key Performance Indicators) to set your targets.
It is important to present the outstanding features of your products, but wait a sec; you need to understand and market towards the needs of end-users in your vertical.
You should ask yourself: What do end-users require from you? How can your vertical marketing system do to meet those needs? Remember that end consumers are key to the buying process and a lot more influential than you may think.
Based on their needs and requirements, you can define what is happening in your process, detect problems, and quickly make necessary changes to satisfy them. Then, your vertical marketing system can run more smoothly.
So, are you confident that your sales staff understand the vertical target, or how to track and analyze their product usage? Specialized knowledge is required when addressing a vertical’s needs, so provide your staff with additional training before jumping into vertical marketing systems.
More than the purpose of understanding verticals, training programs are useful in showing how parties work together in a distribution channel. There will be less wastage of time, money, and resources if employees are trained properly.
Vertical customers simply want to have their problems solved. Consequently, your go-to-market strategies have to revolve around end-to-end solutions rather than the individual pieces that make up the whole.
This step increases your marketability so that you can work as a part of a bigger system, or you can work to provide all the solutions that are needed by your end-users. To transform the different components of your solution into a bigger one that can work as a whole, you may need added-value from your channel partners.
Finally, any good promotional manager would know how essential it is to test and measure your performance. By tracking the impact of your management and marketing campaigns, you can make sure that you’re coordinating properly, and reaching out through the correct channels to accelerate your path to success.
Follow these steps when choosing a vertical marketing system:
The type of vertical marketing system you choose is based on your existing resources. If you have the revenue, experience and personnel to develop your own production, wholesale and retail departments, then you may want to use a corporate vertical marketing system for your business. If you notice another company has the resources you need, consider proposing a contractual partnership. Finally, if you’re big enough to make the rules, you may already be an administered vertical marketing system.
Creating your own vertical marketing system requires extensive and thoughtful planning and resources. Reflect on what you hope to achieve by combining all aspects of your marketing channel. If you need more resources and want less competition, then this may be an ideal marketing system for your brand. If your brand thrives on a little competition, then you may want to wait before collaborating.
If you are still unsure which vertical marketing business model best meets your business’ needs, consider hiring a consultant. A business marketing professional can help you evaluate the size, resources, limitations and needs of your business to make smarter decisions. Look for a professional who has solid experience in business marketing and has worked in your specific industry.
So, that’s it for everything you need to know about a vertical marketing system. You’ve learned that through a vertical marketing system, distribution channel partners establish close contact with each other and work in unison to accomplish targets and eventually enjoy more profits than working alone.
However, there are many pieces to this puzzle, so before joining the game, take time to create a strategy. This will ensure you are stepping in the right direction to achieve success with a vertical marketing system.