In which of the marketing systems two or more companies join together to grab new market opportunity?

For business managers understanding the best practice on how to deal with and distinguish Marketing Channels is one of their main issues. The importance of this subject goes beyond the imaginary border of your own company. You must conduct an analysis considering the holistic view of your business and understand that there are many other variables that will determine the success of your business.

Marketing Channel Structure and Functions

Marketing Channels are related to all the possible tracks the product travels from production to the end customer and is one of the important pillars of the Marketing Mix. Also known as one of the 4P’s, marketing channels is related to “Place” and how customers can find the product and vice-versa.

The marketing channels have a bi-dimensional spectrum and must be analysed in both ways to avoid myopia and perform in the best way.

In the conventional view of it we can relate it to the different levels of the channel from one member to the other till the product arrives at the hands of customers.

A Marketing Channel can only reach a better performance when there is vertical integration of it. In other words all the components of the marketing channel must work together, share information and have common goals to attend the customer’s expectations.

The other dimension is the Horizontal Marketing System where two or more companies join together at one level to follow a new market opportunity. By working together companies can combine their resources to accomplish more than they could alone.

In this spectrum businesses must build strategic alliances with common goals. For example Pepsi Cola drinks can be found in Burger King and ATM machines can be found in retail shops. Both companies take advantage of products, services and market share of each partner.

Multichannel Distribution Systems

Organisations can do business in several ways. In the past companies used a single channel to sell to a single market or market segment. Today with the proliferation of customer segments and all the channels possibilities is easier to find companies using multichannel distribution.

The producer can sell straight away to final customers through catalogues, by telephone, or via the Internet. Or they can sell direct to retailers and use distributors to find retailers. There are many options and the challenge for managers is to deal with the many marketing channels trying to ensure the best performance by doing so.

When we are talking about International Business the possibilities are even more complex and choosing the right alternatives requires the right skills.

Author: Murilo Branco

VERTICAL MARKETING SYSTEM

A Vertical Marketing System (VMS) comprises of the main distribution channel partners- the producer, the wholesaler and the retailer who work together as a unified group to serve the customer needs.

In conventional marketing system, the producer, wholesaler and the retailer worked separately with the intention to maximize their profits even at the expense of one another. This led to the unending conflicts between the channel partners resulting in less profits for the business as a whole.

In order to overcome these conflicts, several firms have started using a vertical marketing system wherein producers, wholesalers and retailers have joined hands with each other and are working in unison towards the accomplishment of the business objective as a whole. This has led to the increased profits for each involved in the channel of distribution.

Vertical Marketing System is further divided into three parts which are explained below:

(i) Corporate Vertical Marketing System: In Corporate VMS, one member of the distribution channel be it a producer, a wholesaler or a retailer Owns all the other Members of the Channel, thereby having all the elements of production and distribution channel under a single ownership. For example,: Amway is an American cosmetic company, which manufactures its own product range and sell these products only through its authorized Amway stores. Here the ownership of production and distribution is with the company itself.

(ii) Contractual Vertical Marketing System: In Contractual VMS, every member in the distribution channel works independently and integrate their activities on a Contractual Basis to earn more profits that are earned when working in isolation. The most common form of Contractual VMS is franchising. In franchising, the producer authorizes the distributor to sell its product under the producer’s name against some annual license fee. For example, Mc-Donalds, Dominos, Pizza Hut, etc. are all forms of the franchise which are working on a contractual basis.

(iii) Administered Vertical Marketing System: Under Administered VMS, there is no contract between the members of production & distribution channel but their activities do get influenced by the Size and Power of any one of the member. In simple words, any powerful and influential member of the channel dominate the activities of other channel members. For example, Big brands like HUL, ITC, Procter& Gamble, etc. command a high level of cooperation from the retailers in terms of display, shelf space, pricing policies, and promotional schemes.

Thus, through a vertical marketing system, the channel partners establishes a close contact with each other and work in unison towards the accomplishment of common objectives thereby enjoying more profits which they would have been earning when working alone.

HORIZONTAL MARKETING SYSTEM

A Horizontal Marketing system (HMS) is a form of distribution channel wherein two or more companies at the same level unrelated to each other come together to gain the economies of scale.

In other words, Horizontal marketing system is the merger of two unrelated companies who have come together to exploit the market opportunities.

Generally, this type of marketing system is followed by companies who lack in capital, human resources, production techniques, marketing programs and are afraid of incurring the huge losses. In order to overcome these limitations, the companies join hands with other companies who are big in size either in the form of joint venture –that can be temporary or permanent, or mergers to sustain in the business.

Horizontal marketing system has gained popularity in the recent times due to an immense competition in the market where everybody is striving to gain a good position in the market along with huge profits.

In this marketing system, the collaboration can be between:

• Two or more Manufacturers: With an objective of making optimum utilization of scarce resources.
• Two or more Wholesalers: With the objective of covering a larger area of the distribution of goods and services.
• Two or more Retailers: With the objective of providing bulk quantities in a particular area.

Examples of Horizontal Marketing

Nike and Apple have entered into a partnership, with the intent to have a Nike+ footwear in which the iPod can be connected with these shoes that will play music along with the display of information about time, distance covered, calories burned and heart pace on the screen.

Johnson & Johnson, a health care company, have joined hands with Google, with an objective of having a robotic-assisted surgical platform. That will help in the integration of advanced technologies, thereby improving the healthcare services.

Thus, two or more companies join hands to capitalize on the expertise of each and capture a greater market share.