TYPES OF MARKETING SYSTEM

VERTICAL MARKETING SYSTEM:

A vertical marketing system (VMS) is one in which the main members of a distribution channel
—producer, wholesaler, and retailer—work together as a unified group in order to meet
consumer needs. In conventional marketing systems, producers, wholesalers, and retailers are
separate businesses that are all trying to maximize their profits. When the effort of one channel
member to maximize profits comes at the expense of other members, conflicts can arise that
reduce profits for the entire channel. To address this problem, more and more companies are
forming vertical marketing systems.

Vertical marketing systems can take several forms. In a corporate VMS, one member of the
distribution channel owns the other members. Although they are owned jointly, each company in
the chain continues to perform a separate task. In an administered VMS, one member of the
channel is large and powerful enough to coordinate the activities of the other members without
an ownership stake. Finally, a contractual VMS consists of independent firms joined together by
contract for their mutual benefit. One type of contractual VMS is a retailer cooperative, in which
a group of retailers buy from a jointly owned wholesaler. Another type of contractual VMS is a
franchise organization, in which a producer licenses a wholesaler to distribute its products.

The concept behind vertical marketing systems is similar to vertical integration. In vertical
integration, a company expands its operations by assuming the activities of the next link in the
chain of distribution. For example, an auto parts supplier might practice forward integration by
purchasing a retail outlet to sell its products. Similarly, the auto parts supplier might practice
backward integration by purchasing a steel plant to obtain the raw materials needed to
manufacture its products. Vertical marketing should not be confused with horizontal marketing,
in which members at the same level in a channel of distribution band together in strategic
alliances or joint ventures to exploit a new marketing opportunity.

As Tom Egelhoff wrote in an online article entitled "How to Use Vertical Marketing Systems," a
VMS can hold both advantages and disadvantages for small businesses. "The main advantage of
VMS is that your company can control all of the elements of producing and selling a product. In
this way, you are able to see the whole picture, anticipate problems, make changes as they
become necessary, and thus increase your efficiency. However, being involved in all stages of
distribution can make it difficult for a small business owner to keep track of what is happening.
In addition, the arrangement can fail if the personalities managing of the different areas do not fit
together well."
For small business owners interested in forming a VMS, Egelhoff recommended starting out by
developing close relationships with suppliers and distributors. "What suppliers or distributors
would you buy if you had the money? These are the ones to work with and form a strong
relationship," he stated. "Vertical marketing can give many companies a major advantage over
their competitors."

HORIZONTAL MARKETING SYSTEM:

A horizontal marketing system is a distribution channel arrangement whereby two or more
organizations at the same level join together for marketing purposes to capitalize on a new
opportunity. For example: a bank and a supermarket agree to have the bank’s ATMs located at
the supermarket’s locations; two manufacturers combining to achieve economies of scale
otherwise not possible with each acting alone to meet the needs and demands of a very large
retailer; or two wholesalers joining together to serve a particular region at a certain time of year.[

According to businessdictionary.com, a horizontal marketing system is a merger of firms on the

same level in order to pursue marketing opportunities. The firms combine their resources, such
as production capabilities and distribution, in order to maximize their earnings potential.

An example is Apple and Starbucks, who announced a music partnership in 2007. The purpose

of this partnership was to allow Starbucks' customers to wirelessly browse, search, preview, buy,
and download music from iTunes Store onto their iPod touch, iPhone, or PC or Mac
running iTunes. Apple’s leadership in digital music, together with the unique Starbucks
experience, created a partnership that offered customers a world class digital music experience.

Apple benefits from this partnership with higher iTunes sales as Starbucks has a vast and loyal
customer base. When Apple first introduced its iTunes Store, it had hoped to sell one million
songs in six months, but to its surprise, sold over one million songs within the first six days of
launching. With such loyal online music consumers, Starbucks benefits from higher sales,
increase in market share, and stronger customer loyalty. This example demonstrates how two
companies can join forces to follow a new market opportunity. This opportunity
allowed Starbucks and Apple to both achieve greater results than otherwise would have been
possible if they somehow attempted this strategy independently.
HORIZONTAL VS VERTICAL MARKETING SYSTEM:

Another way to foster cooperation in a channel is to establish a vertical marketing system. In

a vertical marketing system, channel members formally agree to closely cooperate with one
another. (You have probably heard the saying, “If you can’t beat ’em, join ’em.”) A vertical
marketing system can also be created by one channel member taking over the functions of
another member.

Procter & Gamble (P&G) has traditionally been a manufacturer of household products, not a
retailer of them. But the company’s long-term strategy is to compete in every personal-care
channel, including salons, where the men’s business is underdeveloped. In 2009, P&G purchased
The Art of Shaving, a seller of pricey men’s shaving products located in upscale shopping malls.
P&G also runs retail boutiques around the globe that sell its prestigious SK-II skin-care line. 1

Franchises are another type of vertical marketing system. They are used not only to lessen
channel conflicts but also to penetrate markets. Recall that a franchise gives a person or group
the right to market a company’s goods or services within a certain territory or
location. 2McDonald’s sells meat, bread, ice cream, and other products to its franchises, along
with the right to own and operate the stores. And each of the owners of the stores signs a contract
with McDonald’s agreeing to do business in a certain way.

By contrast, in a conventional marketing system the channel members have no affiliation with

one another. All the members operate independently. If the sale or the purchase of a product
seems like a good deal at the time, an organization pursues it. But there is no expectation among
the channel members that they have to work with one another in the future.

A horizontal marketing system is one in which two companies at the same channel level—say,

two manufacturers, two wholesalers, or two retailers—agree to cooperate with another to sell
their products or to make the most of their marketing opportunities. The Internet phone service
Skype and the mobile-phone maker Nokia created a horizontal marketing system by teaming up
to put Skype’s service on Nokia’s phones. Skype hopes it will reach a new market (mobile phone
users) this way. And Nokia hopes to sell its phones to people who like to use Skype on their
personal computers (PCs). 3
Similarly, Via Technologies, a computer-chip maker that competes with Intel, has teamed up
with a number of Chinese companies with no PC-manufacturing experience to produce $200
netbooks. Via Technologies predicts that the new, cheaper netbooks the Chinese companies sell
will quickly capture 20 percent of the market. 4Of course, the more of them that are sold, the
more computer chips Via Technologies sells.

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