The term “marketing channels” refers to the path that products take from the point of manufacture to the point of consumer purchase. As such, virtually every business that sells a tangible product participates as a member of a marketing channel. Marketing channels come in two primary forms- conventional marketing channels and vertical marketing systems and differ in a several significant ways.
Conventional marketing channels consist of one or more manufacturers. wholesalers/distributors and retailers that operate under independent ownership. Each business answers to its own owner, shareholders or board of directors. In vertical marketing systems, one member of the channel either owns or wields sufficient leverage to control and coordinate the activities of other members of the channel. The channel members continue to operate as distinct entities but become accountable to one owner or the most powerful channel member. Walmart, for example, wields sufficient power to direct much of the activity of manufacturers and wholesalers, while Firestone owns all the elements of its marketing channels.
As independent entities, each member in a conventional marketing channel focuses on minimizing costs and maximizing its own profits with little regard for other channel members. A powerful chain of toy stores, for example, might negotiate an unfavorable deal with a wholesaler and give no consideration to the impact of that deal on the relationship between the wholesaler and various toy manufacturers. Members in vertical marketing systems tend to recognize the symbiotic nature of the relationship between all channel members and aim to maximize benefits through cooperation.
Conventional marketing channels limit the responsibility of each member of the channel. Retailers focus efforts on selling products to customers, while manufacturers focus on making products and wholesalers worry about getting the products from one to the other. In vertical marketing systems. the majority of responsibility tends to fall on one channel member. The additional responsibility tends to pose fewer problems for large companies with strong management teams. For a smaller company engaging in vertical integration. buying the next step in the marketing channel, the management problems can prove significant.
- Other Considerations
Even in well-managed vertical marketing systems, problems common in conventional marketing channels can crop up for different reasons. Communication breakdowns often occur between manufacturers and wholesalers or between wholesalers and retailers in the conventional approach due to technical or logistical issues. Poorly managed personalities in vertical marketing systems can result in the same problem. Attempting to create a vertical marketing system through vertical integration can also reduce profitability and. if the company doing the buying lacks experience, lead to the demise of both businesses through.