A vertical marketing system (VMS) is almost the opposite of a conventional marketing channel. In this system, manufacturers, wholesalers, and retailers work in tandem and are interested in the system’s profits as a whole and not just their personal gains. This results in instant coordination across the channel. Vertical systems gained prominence when traditional channel members started maximizing individual profits at other members’ expense, leading to channel conflicts and financial losses.
There are basically three types of VMS:
- Corporate VMS
- Administered VMS
- Contractual VMS
In corporate VMSs, a single member owns other distribution channel members. In an administered setup, one channel member is reputed and powerful enough to command respect and dictum over other independent channel members. The contractual VMS comprises independent firms working together for mutual gains.
In vertical marketing systems, companies associate with members before or after them in the channel, and not horizontally. For instance, a retail store joining hands with a manufacturer or logistics firm is vertical marketing – allying with another retail store is not vertical marketing. This is similar to vertical integration wherein a company expands operations by setting up its own subsequent or prior chain link, or acquiring existing ones.
With VMS, a company can control all aspects of product manufacturing and sales. Though this gives much needed autonomy, taking over all the responsibilities could get cumbersome to manage, especially for smaller companies. Therefore, the decision to adopt the vertical marketing setup hinges on a company’s resources, size and market share.