A vertical marketing system is a form of cooperation between multiple levels of a distribution channel. The members work together to promote efficiency and economies of scale in the way products are promoted to customers, credit is provided to customers, and products are inspected and delivered to customers.
Members of a Vertical Marketing System
The three components of a vertical marketing system are the producer, the wholesaler and the retailer. The producer is the manufacturer that actually physically makes a product. The wholesaler purchases products from the producer and manages the distribution to retailers. Retailers in turn mark up the price and sell products to consumers.
A corporate vertical marketing system involves the ownership of all levels of the production or distribution chain by a single company. An example of a corporate vertical marketing system would be a company such as Apple sells through its own retail stores the products it designs and manufactures.
A contractual vertical marketing system involves a formal agreement between the various levels of the distribution or production channel to coordinate the overall process. Franchising is a common form of a contractual vertical marketing system.
An administered vertical marketing system is one in which one member of the production and distribution chain -- due to its sheer size -- is dominant and organizes the nature of the vertical marketing system informally. An example of this type of system could include a large retailer such as Wal-Mart establishing standards for makers of smaller products, such as a generic type of laundry detergent.