The Definition and Benefits of a Vertical Marketing System

By Indeed Editorial Team

Published June 10, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies can use vertical and horizontal marketing systems to effectively manufacture and sell their products and services. In the vertical system, manufacturers, wholesalers, and retailers cooperate to improve their operational efficiency and increase their joint and individual profits. As a business development professional, understanding how this system functions can be beneficial if you're looking for new ways to achieve a higher level of operational efficiency. In this article, we define a vertical marketing system, explain the three main types, discuss the advantages and potential challenges of this system, and share tips on choosing between horizontal and vertical systems.

What's a vertical marketing system?

A vertical marketing system represents cooperation between production and distribution channel members. It involves collaboration between the manufacturer, wholesaler, and retailer of a particular product or service to meet the customers' requirements and improve efficiency. It also enhances a company's control over producing and selling its products, and it can increase the total and individual profits of the three collaborators. Unlike a vertical system, in a horizontal marketing system, the producers, wholesalers, and retailers work as separate entities and focus on maximizing their profits.

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Types of the vertical systems

This marketing system consists of three main types. Here's a detailed explanation of each type with examples:

Corporate system

In a corporate system, one company manages all the processes, deadlines, targets, and budgets of the manufacturers, retailers, and wholesalers. This company controls the entire production and distribution process of its goods and services and can complete its work with minimal help from third parties when distributing to consumers. In a corporate vertical system, the company usually only stocks and sells its products in its authorized stores.

For example, Flora Enterprises is a health and beauty company that only sells its products in authorized company stores. In this scenario, Flora Enterprises is the only manufacturer and distributor of its products. As a result, customers can only purchase these goods directly through Flora Enterprises rather than through third-party wholesalers and retailers

Contractual system

Although the manufacturers, wholesalers, and retailers collaborate in a contractual system to increase their profits and attain their goals, they're separate entities. A contract or agreement usually binds these three parties to perform specific duties according to the amount of time they invest, the costs, and the product. Companies typically use this system to create partnerships that reduce overhead costs and create more competitive pricing. By collaborating, the manufacturers, wholesalers, and retailers can increase their market reach and leverage each other's connections and capabilities.

This system typically works with franchises. Although a company's standards, guidelines, and practices bind their operations when they purchase a franchise license, they operate independently. For example, if Flora Enterprises grants a franchise license to someone that person can operate multiple locations that sell the company's products. At the same time, that person is responsible for their processes, budgeting, and workflow.

Administered system

In this system, the company with the most influence and power often controls the activities of the other entities in the supply chain. The leading company is typically in charge due to its considerable size and market influence. With its power, the company usually organizes an informal system structure. The smaller businesses can then follow the terms and conditions of this structure, especially regarding price points, branding, and stock.

For example, Flora Enterprises decides that each of its store locations can stock up to 500 products monthly that sell in a particular price range. As a leader in the beauty industry, their wholesalers and retailers are likely to accept these decisions and adjust their operations accordingly. Smaller companies in the industry are also likely to follow this model in their own business stocking decisions.

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How to choose a type of vertical marketing system

Here are some steps you can follow to decide between the corporate, contractual, and administered systems:

1. Consider the company's resources

The type of vertical system you choose depends on the company's existing resources. If you have the revenue, personnel, and experience to develop your manufacturing, wholesale, and retail departments, then the corporate system may be better. If you notice another company with your desired resources and insights, you can consider proposing a contractual system. Additionally, if a company is big enough to handle its market research and operations, it may already use an administered system.

2. Define your goals

Creating a marketing system can be challenging since it typically requires extensive planning and substantial resource investment. Consider how you plan to achieve your goals by combining the aspects of your marketing channel. If you aim to obtain more resources and reduce competition, the ideal system may be the contractual system, but you can also opt for the corporate system if you thrive on competition. If you plan to dominate your competition and become a leader in the industry, the best option may be the administered system.

3. Hire a professional consultant

If you're still unsure which vertical system is ideal for your requirements, you can consider hiring a consultant. You can select a consultant who knows how to approach companies in your industry and has solid experience in business marketing. A business marketing consultant can help you evaluate the business, including its size, resources, requirements, and limitations. The results of their evaluation can help you decide on a type of vertical marketing system and facilitate more intelligent business decisions.

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The advantages of using a vertical system

The vertical system can offer several advantages. These benefits include the following:

  • This system can help you manage a company's processes and products better while facilitating a higher market share and a more significant presence.

  • This marketing system can help eliminate company competition, improve efficiency, and reduce product costs.

  • By cooperating, manufacturers, retailers, and wholesalers can increase their collective and individual profits.

  • By focusing marketing efforts on a specific target group, you can increase brand recognition and position yourself as an industry expert.

  • Cooperation between all relevant parties can improve communication, enhance results, and increase customer satisfaction.

  • You can gain access to more resources through partnerships with wholesalers and retailers.

  • Increased access to resources may provide you with more leverage regarding shipping expenses and delivery times.

  • Partnerships with wholesalers and retailers may provide you with insight and feedback from customers regarding the products and services.

  • These insights can help you develop innovative products and services that serve customers better.

  • By collaborating, each party can provide a fresh and unique perspective regarding challenges, which can help resolve issues.

The challenges of a vertical system

A vertical system may be a less ideal choice for some companies. Here are some potential challenges of this system you can consider:

  • When the entire team is working towards a single goal, it can limit their perspective and cause them to overlook issues.

  • It can become challenging to track and monitor all the departments and processes, which may reduce output quality.

  • A vertical system can reduce coordination as there may be less incentive to meet company goals.

  • The third parties involved usually promote their own profits and may put their interests above the company.

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Vertical vs. horizontal marketing systems

To help you decide between the vertical and horizontal marketing systems, here's a comparison of the key characteristics of both systems:

  • The vertical system often applies to smaller markets, while companies prefer the horizontal marketing system for larger markets.

  • The vertical system usually focuses on one industry, while the horizontal system often concentrates on a specific but larger demographic, such as a particular age range or gender.

  • Companies usually use the vertical system when they produce unique and specialized products for their target market, while they use the horizontal system for more general products.

  • The vertical system often encourages companies to compete with others due to the nature of the structure, while the horizontal system typically prefers collaboration with other entities to reach the market.

  • The vertical system may require detail-oriented customer purchases to be fully effective, while the horizontal system often requires more significant advertising efforts.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

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