7.4.6 Horizontal VS Vertical Channels¶
In distribution and place decisions, two common systems you will encounter are Vertical Marketing Systems (VMS) and Horizontal Marketing Systems (HMS). Both systems are key to understanding how businesses structure their distribution channels and manage relationships between different entities involved in the marketing process.
1. Vertical Marketing System (VMS)¶
A Vertical Marketing System (VMS) refers to a distribution channel where different levels of the supply chain—such as the manufacturer, wholesaler, retailer, and consumer—are part of a single corporate entity or linked through a contractual agreement. The main idea behind a VMS is that all members of the chain are working together under one unified structure. This system can take several forms:
- Corporate Ownership: The manufacturer, wholesaler, and retailer may all be owned by the same company, creating a seamless supply chain.
- Contractual Agreement: A franchise or licensing model where the manufacturer and the retailer (or wholesaler) are connected through contracts. For example, a brand like McDonald's operates with franchisees under a vertical system.
- Brand Power: Sometimes, the brand itself is so powerful and successful that the manufacturer has control over the subsequent members of the channel, such as wholesalers and retailers. The business depends heavily on the brand, so they align with the manufacturer's strategies.
Advantages of VMS:¶
- Maximum Control: The main benefit of a VMS is the significant control that one member (usually the manufacturer or brand owner) has over the entire distribution process. This control allows the brand to dictate pricing, inventory management, and sales strategies.
- Competitive Advantage: Since one entity controls the distribution channel, it is very difficult for competitors to infiltrate or disrupt that channel. This leads to a stronger market position.
- Examples:
- Apple is a notable example of a company that uses a vertical marketing system in some regions, where it controls the retail stores and the online experience, ensuring a consistent brand experience.
Industries Using VMS:¶
- Shoe retailing
- Jewelry retailing
- Electronics (e.g., Apple)
- Luxury goods markets
2. Horizontal Marketing System (HMS)¶
In contrast to the VMS, a Horizontal Marketing System (HMS) involves different members or businesses in the same level of the supply chain, such as a group of retailers, coming together to form a coalition. This system is typically formed when businesses with similar interests collaborate to gain better bargaining power and serve customers more effectively.
Key Characteristics:¶
- Collaboration of Competitors: In a horizontal marketing system, businesses that would typically compete with each other (e.g., retailers) join forces to leverage their collective power.
- Bargaining Power: For smaller businesses like mom-and-pop stores or independent retailers, joining together can provide them with better negotiating leverage when dealing with manufacturers (such as Unilever, Procter & Gamble, or Colgate-Palmolive). Instead of placing small orders, they can place a larger bulk order as a collective group, gaining discounts or favorable terms from the manufacturer.
- Shared Resources: The retailers in a horizontal system can pool their resources, such as inventory, to provide better customer service. If a product is out of stock in one store, it can be sourced from another store in the system, ensuring that customers do not face stockouts.
Benefits of HMS:¶
- Improved Bargaining Power: By coming together, small retailers can compete with large-scale retailers (e.g., Walmart or Tesco) that have more significant resources, better supply chains, and better prices.
- Better Service to Customers: The collective approach allows for more consistent product availability across a wider network of stores, leading to better customer satisfaction.
- Competitive Edge Over Large Retailers: Small stores working together in a horizontal marketing system can provide a response to large, well-established retailers, thus enhancing competition.
Example of HMS:¶
- A network of kirana stores (small, independent retail stores) in a city like Bangalore could band together to negotiate with manufacturers for better deals. By combining their orders, they can create a competitive offer that rivals large supermarkets or hypermarkets. Additionally, if one store is out of stock, another store in the network can fulfill the customer’s needs.
How Technology Helps HMS:¶
- The rise of online platforms and digital tools has made horizontal integration much easier. Retailers can use technology to connect, share inventory data, and make bulk orders, facilitating collaboration and better service delivery.
Key Differences Between VMS and HMS¶
| Feature | Vertical Marketing System (VMS) | Horizontal Marketing System (HMS) |
|---|---|---|
| Structure | Different levels (manufacturer, wholesaler, retailer) are integrated under one system | Businesses at the same level (e.g., retailers) collaborate |
| Control | One entity controls the entire system | Shared control among the collaborating entities |
| Examples | Apple, Franchise models, Luxury brands | Mom-and-pop stores, small retail cooperatives |
| Bargaining Power | Strong bargaining power for the dominant entity | Collective bargaining power among participants |
| Flexibility | Less flexible due to centralized control | More flexible, with collaboration among peers |
Conclusion¶
Both the Vertical Marketing System (VMS) and Horizontal Marketing System (HMS) provide unique benefits to businesses and play a significant role in shaping the distribution and marketing strategies.
- VMS offers control and a competitive edge by consolidating the supply chain under one entity, making it ideal for businesses aiming for a tight-knit, well-managed distribution channel.
- HMS, on the other hand, offers collective bargaining power for smaller businesses and helps them compete against larger competitors, making it an increasingly popular strategy in traditional retail and online commerce.
Understanding when and how to use each system depends on your business goals, the competitive environment, and the relationships you build within your distribution channels.
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