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.
The three types of vertical marketing systems are corporate, contractual and administered.
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 markup 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. This would include the production, development, marketing, and distribution by a single company. This system is often the result of forward or backward integration; a manufacturer expanding into all parts of the distribution network is considered forward integration while a company buying up suppliers of its widgets would be backwards integration. An example of a corporate vertical marketing system would be a company such as Apple selling the products it designs and manufactures through its own retail stores .
A contractual vertical marketing system involves a formal agreement between the various levels of the distribution or production channel to coordinate the overall process. This system allows companies to benefit from economies of scale and marketing reach. These relationships are a popular form of vertical marketing. Franchising, retail sponsored and wholesale sponsored are forms of a contractual vertical marketing system. McDonalds and Burger King are examples of franchises.
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.
To decide which system is best for a business, business owners should consider environmental, consumer, product, and company factors. According to UT Dallas, marketers should consider the following three questions: Which system will provide the best coverage of the company's target market? Which system will provide the prospective buyers with what they want? Are they interested in convenience, variety of products or customer service? And finally, which system is the most profitable for their company?