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Types of Vertical Market Systems

Instructor: Sean Kennedy

Sean has 8 years experience as a supervisor and has an MBA with a concentration in marketing.

In this lesson, we will discuss what a vertical marketing system is and the three types: a corporate system, a contractual system, and an administered system.

Vertical Marketing System

The Leather Logo company sells T-shirts in stores. They are a retailer, but they need producers and wholesalers in order to supply them with what they need. A producer, wholesaler, and retailer are all aspects of a distribution channel.

Leather Logo is involved in a conventional marketing system where each business in the distribution channel is independent and all about increasing their profits regardless of the other businesses involved. Is there a way the different businesses could work together to reduce this natural conflict?

Vertical marketing systems are a way for companies to work together to meet consumer needs, earn more profit, help reduce costs, and have more efficiency between companies. There are three different types of vertical marketing systems: a corporate system, a contractual system, and an administered system. Let's take a look at how each system could be beneficial to a business.

The Corporate System

A corporate system is where one member of the distribution channel owns all of the others, and they effectively combine all the elements of the distribution channel under the leadership of a single business. A corporate system eliminates the middleman, so all business is done in-house. Utilizing a corporate system allows the company complete control over the products and the direction the company wants to go.

For instance, if Leather Logo has their marketing outsourced to an advertising agency, they could do the marketing in-house to help save money and have more control over the end product. If they already have marketing experts in their office, they should use them! If not, perhaps hiring them on the team will be worth the effort in the long run.

Contractual System

The contractual system is a vertical marketing system where all parties maintain their independence and operate as individual companies, but they work together to help achieve greater efficiency. They are also called 'value-added partnerships' because they work together to help create values for all parties involved. Producers, wholesalers, and distributors meet to contribute to achieving more efficiency. Business's develop contracts with various large distributors to help sell more of their product and stay competitive.

A franchise is an example of a contractual system. In a corporate system it is one person who owns all the other distribution channels, where a franchise is comprised of a bunch of independent businesses that are contracted to use the same practices the franchisor has set. Multiple individuals can buy the license to own one of the stores. When buying a franchise, the franchisor has control and the business owner who purchases a business has to utilize the name, products or services, training, operation standards, and any other guidelines the franchisor sets. The franchisee enters into a contractual agreement to make sure the business brand is uniform through the various stores.

But what about in a business that isn't part of a franchise? Say a local brewery started selling their products in their brewery. The company decided to branch off to sell their beer to some local liquor stores. They have plans of expanding, so it would be beneficial for them to enter into a contractual agreement with chain liquor stores to help sell more of their products. They will have the ability to sell their products to more people, and can work out deals with different locations to have a certain amount of beer produced and shipped to chain liquor stores. Meanwhile the liquor store could be offered a bulk deal, so that everyone wins.

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