A vertical marketing system is one in which the principal members of a distribution channel --producer, wholesaler, and retailer -- work together as a group. To be a vertical marketing system, all members need to be in the same industry or niche market sector. Good examples of vertical markets are automotive and engineering markets. Vertical marketing systems can be organised in three main ways: corporate, administered and contractual.
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Producers, wholesalers and retailers normally act as separate businesses that are all trying independently to maximise their own profits. This means that, although they are all operating in the same market, they see themselves as having different customers. Profit for one company in the chain usually comes at the expense of other companies. This can create conflicts that reduce profits for everyone. In a vertical marketing system, every part of the chain is focused on the end-customer. This reduces conflict and increases efficiency and profits for all.
In a corporate vertical marketing system, one member of the distribution channel owns the others. M&S is a good example of a corporate vertical marketing system: it owns the manufacturers that make the products for its stores, and also owns the distribution network that moves products from the warehouses to the stores.
In an administered vertical marketing system, all members of the group remain separate companies, but one member is powerful enough to take a leadership position and coordinate the activities of the other members. Holiday tour operators who link with hotels and airlines are good examples of leaders in administered vertical marketing systems.
A contractual vertical marketing system consists of a group of independent companies that have joined together by contract. One type of contractual vertical marketing system is a retailer cooperative, such as the Cooperative Society, in which a group of retailers buy from a jointly owned wholesaler.
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