Vertical Market System (VMS)

Posted in Marketing and Strategy Terms, Total Reads: 323

Definition: Vertical Market System (VMS)

VMS is the one in which main members of the formally or informally coordinated distribution channel that is producer, wholesaler and retailer work together as a unified group in order to achieve customer’s needs and achieve greater efficiency, eliminate channel conflicts arising due to individual objectives, achieve economies of scale.

What is the need of VMS?

Conventionally in marketing systems, producers, wholesalers, retailers are separate businesses that all try to maximize their profits. When this profit comes at the expense of others members, it leads to conflicts which in turn reduce the profits of the entire channel. Hence to solve this issue, increasing number of companies are forming vertical VMS.

There are three types of VMS –

1. Corporate vertical marketing system –

it brings all the members of the distribution channel, from manufacturing to stores under the ownership of one business. This ownership can be from any member of the channel. For example – well financed retail outlet owning the wholesaler and the production facility or a producer owning wholesaler and retail outlet. Like Apple is responsible for designing and making their products. And these products are sold by company owned retailers itself.

2. Contractual vertical marketing system

In this, members of distribution channel continue to operate as individual entities. A formal agreement exists between members of distribution channel; hence they are in contractual relationship. This allows all the members to leverage economies of scale and enables them to be more competitive in pricing. Franchising is a common form of contractual VMS.

3. Administered vertical marketing system –

In this form of VMS, one member of distribution channel enjoys enough power, majorly because of its size, to control the activities of all the other members of the distribution channel. For example Walmart enjoys this position because of its huge size. They usually dictate their terms and condition to the smaller producers.

How horizontal marketing is different from vertical Marketing?

In horizontal marketing, the members at the same level in distribution channel club together in joint venture or strategic alliance to exploit the new marketing opportunity.



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