The most popular type of vertical marketing system is the

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By Indeed Editorial Team

Updated May 24, 2021 | Published November 5, 2020

Updated May 24, 2021

Published November 5, 2020

Businesses often use one of two methods to effectively produce and sell their products to their consumers: horizontal or vertical marketing systems. In a vertical marketing system, producers, wholesalers and retailers work together to improve their profits and operate more seamlessly.

In this article, we define what a vertical marketing system is, the three main types, the advantages and potential drawbacks of using a vertical marketing system and how to choose the best type for your business.

Related: What Is a Business Vertical? Definition, Benefits and Examples

What is a vertical marketing system?

A vertical marketing system is when producers, wholesalers and retailers work in unison to meet their customers' needs. It allows one company to have control over the entire process of producing and selling a product.

With conventional marketing systems—or horizontal marketing systems—producers, wholesalers and retailers typically work as separate entities, trying to maximize their own profits. While this may give each entity more freedom, it can also lead to more conflict and competition, which can result in lost profits for both.

Related: A Complete Guide To Vertical Integration (Tips, Types, Examples and More)

Three types of vertical marketing systems

There are three main types of vertical marketing systems that you might consider for your business’ distribution process:

Corporate

A corporate vertical marketing system controls the processes, budgets and deadlines of its producers, wholesalers and retailers. They are responsible for the entire production and distribution process: creating their products, marketing them and then selling them to consumers. They do not depend on any other entities to get their products to the end-user.

Example: John’s Dairy Freeze makes ice cream and sells it directly to its customers.

Contractual

In a contractual vertical marketing system, producers, wholesalers and retailers work together for the same profit and goals, but each entity is separate. They are bound by a contractual agreement to meet common goals according to costs, time and product, but how they manage their own teams and workflow is often up to them. Often, businesses will create partnerships to cut overhead costs and provide more competitive prices. By working together, they can get a further market reach and leverage each other's capabilities.

Example: Consider if John’s Dairy Freeze was a franchise, owned and managed by the original owner, but with multiple locations responsible for their own location’s workflow, budget and process.

Administered

In an administered vertical marketing system, one member of the production and distribution chain wields considerably more power. This is often due to its large size and market influence. With this power, it can organize the system structure without a formal agreement. Smaller businesses typically need to work under their terms and conditions in regards to branding, price points and stock.

Example: As a large company, John’s Dairy Freeze decides that each one of its locations can only carry 100 gallons of ice cream per store, annually.

Related: Finding and Choosing the Right Business Partner

Vertical marketing systems vs. horizontal marketing systems

Businesses typically use either a vertical marketing system or a horizontal marketing system to organize and streamline their production and distribution workflow. Here are the key characteristics of vertical and horizontal marketing systems and how they differ:

VMS characteristics

Vertical marketing systems:

• Are often used with smaller markets

• Focus on one industry

• Fulfill a specialized role and product for their market

• Provide unique and specialized products

• Are highly competitive with other businesses

• Require detail-oriented customer purchases

HMS characteristics

Horizontal marketing systems:

• Are often used with larger markets

• Focus on a specific but large market demographic, such as age or gender

• Often sell more general products

• Collaborate with other businesses to reach market

• Need larger advertising efforts

Related: Vertical and Horizontal Business Markets Explained

The benefits of using a vertical marketing system

Depending on the needs of your business, you might find that using a vertical marketing system works best for you. Here are the main advantages:

Effective sales messaging and branding

By focusing your marketing efforts on a select number of potential customers and industries, you can pinpoint your central message and increase the opportunity for brand recognition. As a provider of a specialized product, you can position your business as an industry expert.

Better efficiency

Producers, wholesalers and retailers in a vertical marketing system are, by definition, working together toward a common goal, which promotes the opportunity to create better, more efficient systems.

Stronger communication and relationships

When everyone works together, communication tends to be better. Producers, wholesalers and retailers can give each other regular updates and follow the same policies, which can result in more profit, better results and happier customers.

More resources

With more entities sharing a common goal, your business has the opportunity for more resources. For instance, instead of having to negotiate with a third-party shipping company, you have the resources to ship your own goods. Having this resource gives your company more power over delivery times and shipping expenses.

Develop new ideas

With a vertical marketing strategy, your specialized focus can also make it easier to learn more about your market with insights from specific customers, and potentially come up with innovative new products and services. Often, brands use vertical marketing systems to deliver groundbreaking solutions.

Related: FAQ: What Are the Benefits of Vertical Integration?

The potential drawbacks of using a vertical marketing system

A vertical marketing system is not always the best fit for every company. Here are some common potential drawbacks:

Limited perspective

One potential disadvantage to vertical marketing systems is limited perspective. With the team working toward one goal, they are less likely to be able to see inefficiencies clearly. On the other hand, when companies use third parties for production, process and supply, each entity brings its own unique perspective to the project.

Reduced quality control

Another potential drawback is reduced quality control. With one company in control over all departments, it can become increasingly difficult to keep track of all departments and processes. This can result in a reduced quality of product, process, environment or even employee appreciation.

Disjointed coordination

Though it might seem like working under one company would be more conducive to coordination between departments, a vertical marketing system can promote less coordination. When third parties are involved, they are motivated by their own opportunity for profit and will work to meet that goal. In a VMS, there is less of an incentive to collaborate to meet the goal of the company.

How to choose a vertical marketing system

Follow these steps when choosing a vertical marketing system:

1. Consider your resources

The type of vertical marketing system you choose is based on your existing resources. If you have the revenue, experience and personnel to develop your own production, wholesale and retail departments, then you may want to use a corporate vertical marketing system for your business. If you notice another company has the resources you need, consider proposing a contractual partnership. Finally, if you're big enough to make the rules, you may already be an administered vertical marketing system.

Related: How To Create a Marketing Positioning Strategy

2. Define your goals

Creating your own vertical marketing system requires extensive and thoughtful planning and resources. Reflect on what you hope to achieve by combining all aspects of your marketing channel. If you need more resources and want less competition, then this may be an ideal marketing system for your brand. If your brand thrives on a little competition, then you may want to wait before collaborating.

3. Hire a consultant

If you are still unsure which vertical marketing business model best meets your business’ needs, consider hiring a consultant. A business marketing professional can help you evaluate the size, resources, limitations and needs of your business to make smarter decisions. Look for a professional who has solid experience in business marketing and has worked in your specific industry.