Principles of Marketing: Distribution and Supply Chain - Vertical Marketing Systems, Corporate Contractual Administered

What It Is

A Vertical Marketing System (VMS) is a marketing structure where a manufacturer partners with intermediaries (e.g., wholesalers, retailers) to distribute their products. This system helps manufacturers reach a wider audience and intermediaries gain access to a broader product range. For example, Apple's partnership with Best Buy allows Apple to reach a wider customer base, while Best Buy benefits from offering Apple products to its customers.

Key Concepts & Frameworks

• Corporate VMS: A manufacturer owns and controls the entire distribution channel. Example: Coca-Cola owns its bottling plants and distribution network.
• Contractual VMS: A manufacturer partners with intermediaries through contracts. Example: Apple contracts with Best Buy to sell its products.
• Administered VMS: A manufacturer controls the distribution channel through power and influence. Example: Amazon's influence over its third-party sellers.
• Channel Length: The number of intermediaries between the manufacturer and the end customer. Example: A product sold through a wholesaler and retailer has a longer channel length than one sold directly to the customer.
• Channel Width: The number of intermediaries selling a product. Example: A product sold through multiple retailers has a wider channel width than one sold through a single retailer.
• Channel Depth: The number of levels of distribution. Example: A product sold through a wholesaler and retailer has a deeper channel than one sold directly to the customer.
• Channel Power: The ability of a channel member to influence other members. Example: Amazon's power over its third-party sellers.
• Channel Conflict: Disagreements between channel members that can harm the distribution process. Example: A manufacturer and retailer disagreeing on pricing.

How to Apply It

• To create a successful VMS, identify your target market and choose the right intermediaries to partner with.
• Analyze the channel length, width, and depth to determine the most effective distribution strategy.
• Use channel power to influence other members and resolve conflicts.
• Continuously monitor and adjust your VMS to ensure it remains effective.

Common Mistakes

• Mistake: Assuming a single VMS structure is best for all products.
• Correction: Different products may require different VMS structures, so analyze each product's needs before choosing a structure.
• Mistake: Failing to consider channel power and conflict.
• Correction: Recognize the importance of channel power and conflict in shaping the distribution process.
• Mistake: Ignoring the impact of technology on VMS.
• Correction: Technology can significantly alter the distribution process, so stay up-to-date with the latest trends and innovations.

Exam / Interview Tips

• Be prepared to explain the differences between corporate, contractual, and administered VMS.
• Understand the importance of channel length, width, and depth in shaping the distribution process.
• Be able to analyze a case study and recommend an effective VMS structure.

Quick Practice

Scenario 1: A manufacturer wants to distribute its product through a VMS. Which of the following is a benefit of a contractual VMS?

A) The manufacturer has complete control over the distribution channel. B) The manufacturer can partner with multiple intermediaries. C) The manufacturer can negotiate contracts with intermediaries. D) The manufacturer can dictate pricing to intermediaries.

Answer: C) The manufacturer can negotiate contracts with intermediaries.

Explanation: A contractual VMS allows the manufacturer to partner with intermediaries through contracts, which can provide flexibility and negotiation power.

Scenario 2: A retailer wants to increase sales of a product with a long channel length. What should it do?

A) Increase the number of intermediaries. B) Decrease the number of intermediaries. C) Improve the product's quality. D) Lower the product's price.

Answer: B) Decrease the number of intermediaries.

Explanation: A longer channel length can lead to higher costs and reduced sales. Decreasing the number of intermediaries can help reduce costs and improve sales.

Scenario 3: A manufacturer wants to create a VMS that is highly efficient and cost-effective. What type of VMS should it choose?

A) Corporate VMS B) Contractual VMS C) Administered VMS D) Direct VMS

Answer: D) Direct VMS

Explanation: A direct VMS allows the manufacturer to sell products directly to customers, eliminating intermediaries and reducing costs.

Last-Minute Cram Sheet

• Corporate VMS: Manufacturer owns and controls the distribution channel.
• Contractual VMS: Manufacturer partners with intermediaries through contracts.
• Administered VMS: Manufacturer controls the distribution channel through power and influence.
• Channel Length: Number of intermediaries between manufacturer and end customer.
• Channel Width: Number of intermediaries selling a product.
• Channel Depth: Number of levels of distribution.
• Channel Power: Ability of a channel member to influence other members.
• Channel Conflict: Disagreements between channel members that can harm the distribution process.
• 'Marketing Myopia' = focusing on the product instead of the customer need.
• 'Channel Power'-'Channel Control'.
• 'VMS'-'Supply Chain'.