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 Your 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.


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