Vertical Marketing Systems, Contractual VMS, Administered VMS, Hybrid Marketing Systems

Vertical Marketing Systems
Historically, distribution channels have been loose collections of independent companies, each
showing little concern for overall channel performance. These conventional distribution channels
have lacked strong leadership and have been troubled by damaging conflict and poor performance.
One of the biggest recent channel developments has been the vertical marketing systems that have
emerged to challenge conventional marketing channels. Figure contrasts the two types of channel
arrangements. A conventional distribution channel consists of one or more independent
producers, wholesalers, and retailers. Each is a separate business seeking to maximize its own
profits, even at the expense of
profits for the system as a whole.
No channel member has much
control over the other members,
and no formal means exists for
assigning roles and resolving
channel conflict. In contrast, a
Vertical Marketing System (VMS)
consists of producers, wholesalers,
and retailers acting as a unified
system. One channel member owns
the others, has contracts with them,
or wields so much power that they
must all cooperate. The VMS can be
dominated by the producer,
wholesaler, or retailer. Vertical
marketing systems came into being to control channel behavior and manage channel conflict.
We look now at three major types of VMSs: corporate, contractual, and administered. Each uses a
different means for setting up leadership and power in the channel. We now take a closer look at
each type of VMS.
a. Corporate VMS
A corporate VMS combines successive stages of production and distribution under single
ownership. Coordination and conflict management are attained through regular organizational
channels.

b. Contractual VMS

A contractual VMS consists of independent firms at different levels of production and distribution
who joins together through contracts to obtain more economies or sales impact than each could
achieve alone. Coordination and conflict management are attained through contractual agreements
among channel members. There are three types of contractual VMSs: wholesaler-sponsored
voluntary chains, retailer cooperatives, and franchise organizations.
In wholesaler-sponsored voluntary chains, wholesalers organize voluntary chains of independent retailers
to help them compete with large chain organizations. The wholesaler develops a program in which
independent retailers standardize their selling practices and achieve buying economies that let the
group compete effectively with chain organizations. In retailer cooperatives, retailers organize a new,
jointly owned business to carry on wholesaling and possibly production. Members buy most of
their goods through the retailer co-op and plan their advertising jointly. Profits are passed back to
members in proportion to their purchases. In franchise organizations, a channel member called a
franchiser links several stages in the production-distribution process. There are three forms of
franchises. The first form is the manufacturer-sponsored retailer franchise system, as found in the
automobile industry. The second type of franchise is the manufacturer-sponsored wholesaler franchise
system, as found in the soft drink industry.. The third franchise form is the service-firm-sponsored retailer
franchise system, in which a service firm licenses a system of retailers to bring its service to
consumers. The fact that most consumers cannot tell the difference between contractual and corporate VMSs shows how successfully the contractual organizations compete with corporate
chains.
c. Administered VMS
An administered VMS coordinates successive stages of production and distribution, not through
common ownership or contractual ties but through the size and power of one of the parties. In an
administered VMS, leadership is assumed by one or a few dominant channel members.
Manufacturers of a top brand can obtain strong trade cooperation and support from resellers.

G. Horizontal Marketing Systems

Another channel development is the horizontal marketing system, in which two or more
companies at one level join together to follow a new marketing opportunity. By working together,
companies can combine their capital, production capabilities, or marketing resources to accomplish
more than any one company could alone. Companies might join forces with competitors or noncompetitors.
They might work with each other on a temporary or permanent basis, or they may
create a separate company. Such channel arrangements also work well globally.

H. Hybrid Marketing Systems

In the past, many companies used a single channel to sell to a single market or market segment.
Today, with the proliferation of customer segments and channel possibilities, more and more
companies have adopted multichannel distribution systems—often called hybrid marketing channels.
Such multichannel marketing occurs when a single firm sets up two or more marketing channels to
reach one or more customer segments. The use of hybrid channel systems has increased greatly in
recent years.
Figure shows a hybrid channel. In the figure, the producer sells directly to consumer segment 1
using direct-mail catalogs and telemarketing and reaches consumer segment 2 through retailers. It
sells indirectly to business segment 1