How To Use Vertical Marketing Systems
By Tom Egelhoff
 Vertical marketing is another one of those
90's buzzwords that we all hear but aren't quite sure exactly
what it means. I want to give the strict definition, and as the
article goes on, expand on how to use vertical markets as a new
profit center for your business.
Here is the book definition of vertical marketing from, "The
Portable MBA Desk Reference" by Paul A. Argenti. "A
distribution channel in which the manufacturer, wholesaler, and
retailer act as a single system."
If you are not able to create a virtual market yourself, then
I want to show you how to approach vertical markets as a potential
customer for your products or services.
What does a vertical
market system (VMS) look like?
I'm a good example of a vertical market system (VMS). I write
my own books, I own the publishing company that prints and binds
them, I created and maintain the website that promotes them,
I own the marketing company that advertises, publicizes and markets
them, and I also handles the distribution and shipping of the
final product.
The advantage of a vertical market is that I control all the
elements. I know when there is a problem in any one area. I can
make adjustments when emergencies arise. I know when books need
to be shipped. If paper is delayed for some reason I can arrange
to buy or borrow some from local printers to make sure those
books ship on time.
By being able to see the whole picture I am more informed
and more efficient than if I had to deal with a several printers,
advertising agents, publishers, and shippers. Can you imagine
what a nightmare dealing with all those people could be?
Another example might be a clothing company that buys warehouses
and trucks to store and ship goods. Then they also buy or open
boutiques in an effort to bring the manufacturer, distribution
and sales of product.
What are the disadvantages
of vertical marketing systems?
Unusual at it may seem, the disadvantages are very similar
to the advantages. The ownership of a vertical market has to
keep a lot of balls in the air at the same time. You're keeping
track of what's happening in several companies at the same time.
You must place some of your trust in others from time to time
and hope that they perform as expected.
Personalities of your various divisions must all work together
and, most importantly, communicate with each other. Depending
on your business, and its impact on your industry, the government
might accuse you of attempting to reduce competition. Does the
name "Microsoft®" ring a bell?
Just when you get used
to vertical marketing, then comes vertical integration. What's
this?
Vertical integration is the expansion of a company by moving
forward or backward within your vertical market or industry.
For example, we have a company here in Bozeman, Montana (my
current hometown) that owns eight pizza restaurants. They are
planning a forward vertical integration by building a micro brewery
to brew beer to sell with their pizza in their restaurants.
An example of backward integration might be our local pizza
company buying farms to produce barley and wheat for their own
beer or pizza crusts.
Are there different
types of vertical marketing systems?
Yes, there are. The American way is to take a system and try
to make it as complicated as we can. Here are some examples of
different systems.
- Corporate VMS - A group of companies performing different
tasks under one ownership.
- Contractual VMS - Independent companies that join together
for mutual benefit. Producer, wholesaler and retailer have sub-groups.
- Producer/Wholesaler - Franchise operations fall in this category.
The manufacturer licenses the wholesaler to distribute the product.
- Producer/Retailer - Another franchise operation where the
retailer must meet certain quotas to operate under the company
name. Must be a strong company name.
- Retailer/Wholesaler - If the wholesalers are the owners they
encourage retailers to band together to buy as a group to receive
more desirable pricing. If the retailers are the owners, they
are called co-operatives. They buy from the jointly-owned wholesaler
and share the profits those purchases generate.
- Administered VMS - The big dog in the meat house concept.
Whoever wields the most economic power within the group can force
greater cooperation and support from other members of the group.
This is all great information
but I can't afford to do any of this. Why should I concern myself
with vertical market systems?
Why? Because they are elephants to your business. What are
elephants you ask? Elephants are businesses that produce big
tickets for your business with reduced effort on your part.
How much printing does Microsoft do? How much insurance do
they carry? How many vehicles do they own or lease? Are you beginning
to see the picture? Chances are there aren't many Microsoft's
in most small towns but each town has it's own specific elephants.
Some towns may have a university. A large hospital. Car dealer.
Construction company. Sometimes one call can cover many different
divisions of the same company. And you may only have to talk
to one purchasing agent.
What products and services do you offer that would be of interest
to the elephants where you live?
The last word on Vertical
Marketing Systems
With the addition of the Internet, many companies are able
to add additional products or services that make them a mini-VMS.
The point of this article is to alert you to why we are seeing
so many company mergers in the last few months. vertical marketing
can give many companies a major advantage over their competitors.
If you can't go vertical, go horizontal. Horizontal simply
means that instead of companies being under your control in a
vertical stack. They are beside you as equals. You don't control
them, they don't control you. But, you still need each other.
If you are a small business or just starting you may need them
more than they need you.
Start by creating a close relationship with these suppliers.
Try to negotiate lower prices for loyal patronage or prompt payments.
Request co-op advertising help. What suppliers or distributors
would you buy if you had the money? These are the ones to work
with and form a strong relationship.
Be aware of what changes or acquisitions are happening in
your industry or business area. Where is your industry headed?
Are the leaders expanding or liquidating?
Never lose site of your vision of what you want your company
to be. Some day you'll own them all. (To
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This article may be reproduced for your non-profit
group or organization provided it is not altered in any way
and the following is attached:
Used With Permission
©1999-2002 Eagle Marketing PO Box 271 Bozeman, MT 59771-0271
http://www.smalltownmarketing.com - (406) 585-0219 - Toll FREE
(888) 550-6100
email: tommail@smalltownmarketing.com
Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your
Business Or Service In A Small Town, and The
Small Town Advertising Handbook: How To Say More And Spend Less.
He is also a seminar and workshop presenter
and trainer. He may be reached at 888-550-6100 or PO Box
271 Bozeman, MT 59771-0271
Would
you like Tom Egelhoff to speak on vertical marketing
at your business function or convention?
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