When comes to marketing, business owners often focus their attention on the customer-facing elements, such as advertising content and branding messages. Marketing also includes business-facing elements, such as distribution. that require attention and cost management. Vertical marketing systems provide one way for businesses to manage both the costs and logistics of a distribution channel.
A corporate vertical marketing system streamlines the process by bringing all of the elements of the distribution channel, from manufacturing to the stores, under the ownership of a single business. Firestone, for example, manufactures tires and owns the service centers that sell the tires to customers. The ownership of the distribution channel can happen from any point in the chain. A well-financed retail outlet might buy a wholesaler and production facilities, or a producer could purchase its main wholesaler and retail outlets.
Under contractual vertical marketing systems, the pieces of the distribution channel continue to operate as individual entities. The businesses enter into contractual relationships with other elements in the distribution channel with their respective obligations and benefits spelled out ahead of time. This approach allows all of the participants to leverage economies of scale that enable more competitive pricing. Variations on contractual vertical marketing systems exist. such as retail co-ops that only deal with a wholesaler. For example. if 15 independently owned restaurants enter into an agreement with a produce wholesaler, the total costs go down for everyone thanks to bulk ordering and shipping.
Administered vertical marketing systems employ neither formal contractual obligation nor corporate ownership of the distribution channel. Instead, one member of the distribution channel wields enough power, generally though sheer size, to effectively control the activities of the other members of the distribution channel. Massive retail chain stores, such as Walmart, often preside over administered vertical marketing systems. Most smaller business cannot exert the necessary influence to run such a system but may find it necessary to deal with a wholesaler or producer that operates under such a system.