Conventional v Vertical Marketing Channels

Conventional to vertical marketing channels

The conventional distribution channel would comprise of producers, wholesalers and retailers all acting independently and seek to maximise their own profit. This system could run into problems between the channel members since their objectives maybe in conflict. As competition intensifies globally distribution channels have had to be adapted in order to cut costs, deliver customer satisfaction and a high visibility of the products sold through various techniques.

Kim & Daniels (1992 cited in Shenkar & Luo, 2007, p.448) state that in business to business dealings channel decisions often supersede the importance of brand name, pricing and advertising. The importance of a channel is further supported by the fact that competition in recent times has moved from competing independent business units to between whole systems centrally controlled and programmed (Kotler & keller, 2011, p.455), this has lead organizations to view distribution channels as marketing channels whereby all members of the system have to be aware of the importance of the functionality of the system as a whole in order for each member to succeed; members success has become interdependent.

Once members acknowledge this interdependency there are ways to move from a conventional distribution channel to a vertical marketing system which includes “...producer, wholesaler(s), and retailer(s) acting as a unified system.” (Kotler & Keller, 2011, p. 453). Choosing the right members of the vertical marketing system is imperative; the relationship between members needs to be strong reflecting a high level of trust. As Yimin & Wilkinson (2014, p.255) state trust”...reduces the degree of uncertainty regarding the outcomes of actions and the potential for opportunistic behaviour.” Therefore members can focus on the success of the channel rather than politicking or trying to be opportunistic at expense of other members.

There are three types of vertical marketing system (VMS) that organizations can undertake:

• Corporate VMS, which involves combining stages of the production and distribution under a single ownership therefore having a common goal of maximizing the gains as a whole entity; this limits conflict but the organization would need to be very large in order to afford the costs of running every part of the channel and needs to be able to succeed at each stage i.e. needs specialist knowledge not just in the product it manufactures but also in the retail industry, transportation and so forth.
• Administered VMS, where successive stages are monitored and controlled by the strongest member. This approach does emphasize the need for trust and harmony mentioned earlier, as conflicts can be managed more effectively if members have a good working relationship. Conflicts that drag on may cause disruption to the system resulting in loss of sales, fester mistrust and waste top management time as well as end in expensive law suits.
• Contractual VMS, where independent firms at different levels of the marketing channel contractually integrate relevant parts of their programs in order to streamline their sales and gain economies of scale, although contracts mitigate problems arising, this is only when the country under which these contracts are drawn has a system conducive to punishing those who breach the contract.

Conclusion

An organization’s decision upon which route to follow in order to engage in vertical marketing channels depends on its size, power and perspective it holds of other members in the system and their willingness to change their conventional methods. Furthermore, ensuring that efficient channel coordination is present will minimize the possibility of conflict as each member must be able to fulfil its goals (Kotler & Keller 2011, p.457). The main reason for evolving into vertical marketing distribution is the competition, those organizations who don’t evolve their distribution channels will be left behind.

References:

Kotler, P., & Keller, K. L. (2011) Marketing Management. 14th ed. Global ed. Harlow:Pearson Education Limited

Shenkar, O., & Luo, Y. (2007) International business. 2nd ed. Thousand Oaks: Sage Publications.

Yimin, H. & Wilkinson, F. (2014), A Case Study of the Development of Trust in a Business Relation: Implications for a Dynamic Theory of Trust, Journal Of Business Market Management, 7 (1) pp.254-279, Business Source Complete, EBSCOhost [online]. Available from:http://eds.b.ebscohost.com.ezproxy.liv.ac.uk/eds/pdfviewer/pdfviewer?sid=be3c72ca-0184-4a7d-84b0-1790a3db3c99%40sessionmgr110&vid=3&hid=105 (Accessed 24 April 2014)