Vertical Marketing System: 3 Types of VMS

A vertical marketing system, sometimes abbreviated as VMS, is a marketing structure wherein distribution channels work together to meet consumer needs. In conventional marketing systems, the producers, wholesalers, and retailers operate independently, which can cause conflict. For example, the net growth of a retail outlet may come at the expense of the producers in a traditional marketing system. A vertical system, on the other hand, aims to benefit all parties in the distribution process, reducing conflict and improving economies of scale.

A vertical marketing strategy can take three primary forms:

1. 1. Administered vertical marketing system: The administered system does not use contracts or ownership to set the terms; instead, this version of a VMS typically features a member of the distribution channel that has enough power to influence how the supply chain operates. These companies have a significant market share.
2. 2. Contractual vertical marketing system: In this contractual system, all parts of the supply chain serve consumer needs but operate independently within the terms of a shared contract. The contractual VMS spells out the financing and rules for each part of manufacturing, distribution, and sales so that all parties can work together with shared knowledge and terms.
3. 3. Corporate vertical marketing system: A corporate VMS is perhaps the most efficient one as it brings all of the pieces of the distribution chain—from manufacturing to distributors—under the auspices of a single owner. The brand controls each step of the process and has more control over the supply chain pricing and styling. A corporate system is more common in large companies than in small businesses.

A vertical marketing system can offer the following benefits:

1. 1. Customer satisfaction: A vertical marketing system can mass produce goods at lower prices, satisfying customers.
2. 2. Direct control: A VMS' managing organization controls the entire production and distribution process, from suppliers to retailers. This allows the company to anticipate problems and enhance efficiency at all steps of the production and distribution processes.
3. 3. Economies of scale: An economy of scale is a business strategy focused on reaping the cost advantages of mass production. Increasing production through a vertical marketing system can decrease the cost per unit.

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