In the uncertain fluctuating market of today, it is essential for a company to hold on and face those uncertainties in order to survive. Consumers can be an aid for a company’s survival, thereby it is essential for consumers to get the goods of a company whenever and however they need them. Here is where distribution channels come in and give hand. “Channels of distribution are the different paths that goods passed through in moving from the producer to the consumer”, (Meyer et al, 1988). With the help of distribution channels, companies are able to overcome the time, place and possession gaps that separate goods and services from the consumers. As said by Aaker (1984), access to an effective and efficient marketing channel is often a key success factor.
However, in this competitive era, an understanding of the alternative distribution channels and the trends in their relative importance can be of strategic importance for any company. For example, the growth and importance can be of a self service retail gasoline stations and the comparison growth in the importance of convenience stores such as the 7/11 chain in gasoline retailing has strategic significance to petroleum companies and distributors as well as to firms in food retailing (example adapted from Aaker, 1984). Additionally, because of competition, gaining distribution in some industries can be extremely difficult and costly. Nowadays, even large, established firms have trouble obtaining space on the supermarkets shelves for products with substantial marketing budgets.
As said by Kotler and Armstrong (2001), members of the marketing or distribution perform several functions such as providing information for the company, promotes their goods and services, have contacts with buyers, matching buyers needs, as well as negotiate prices so that goods can be transferred. Some other functions include physical distribution, financing and risk taking.
There are two types of marketing systems. They are conventional distribution channels and vertical marketing system.
Conventional Distribution Channel
According to Kotler and Armstrong (2001), a conventional distribution channel is a channel consisting of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits even at the expense of profits for the system as a whole. In this case, intermediaries operate independently or enter into some form of arrangements with suppliers and other intermediaries. Moreover, a conventional channel network tends to be fragmented because manufacturers, wholesalers and retailers bargain aggressively with each other over the prices and others.
Since channel members are separated and acts independently, none of them has much control over the other members. For example, in a conventional distribution channel, manufacturers, distributors and retailers act independently so the manufacturers as the producer of the goods, cant decide anything for the other members, lets say, on what price should the distributors and retailers sell, where should they sell, etc. the manufacturers or the other members has no formal authority over each other.
Moreover, in a conventional distribution channel, many conflicts may occur since there is the absence of a formal contract and also in most cases, their goals and aims differ. Another weakness of a conventional distribution system is that each and every member tries to reap a lot of profits in order to pursue their own corporate objectives. This may cause drawbacks for the system as each independent firm shows little concern for overall channel performance.
Vertical Marketing System
According to Evangelista, et al (1984), an improvement over the conventional marketing system, is the integrated marketing system which may be vertical or horizontal. “A vertical marketing system is a network of two or more levels of channel members as in the case of arrangement between manufacturers and wholesalers, wholesalers and retailers or between a manufacturer and a number of wholesalers and retailers” (Evangelista et al, 1984). So here, all the members act as a single unified system.
To illustrate the statement above, let’s take an example of a writer. This writer writes his own books, owns the publishing company that publishes the book, creates a website that promotes his books, has a marketing company that advertise and markets his books and he also handles the distribution and shipping of the final product. Here it is clear that the author is aware of all the processes of producing the book and is able to control all the elements. This can be beneficial for the company because if in case a problem occurs in any area, he can quickly tackle it. He knows when the books are going to be printed, when and where it is to be shipped, etc and will e aware of any emergency arising. In this case, we can see that the writer is more informed and more efficient rather than having to deal with publishers, agents, shippers, etc.
(example adapted from www.smalltownmarketing.com)
There are three types of Vertical marketing system. They are corporate, contractual and administered vertical marketing systems. Kotler and Armstrong, (2001) defines corporate vertical marketing system as a vertical marketing system that combines successive states of production and distribution under single ownership – channel leadership is established through common ownership. In other words, it is a group of companies performing different tasks under one possession.
Contractual vertical marketing system, according to Kotler, et al (1999), consists of independent firms at different levels of production and distribution integrating their program on a contractual basis to obtain more economies or sales impact than they could achieve alone. They normally join together to reap profits as well as to increase efficiency in the company.
Administered vertical marketing system “coordinates stages of production and distribution through the size and power of one of the parties” (Kotler, et al 1999). In other words, whoever wields the most economic power within the group can force greater cooperation and support from other members of the group.
Comparison between Conventional Distribution Channel
And Vertical Marketing System
Conventional and vertical marketing systems are two totally different type of distribution system. Many companies nowadays prefer to adopt vertical marketing system rather than the conventional one. This is because vertical marketing system is much more beneficial for companies and the conventional system is outdated increases redundancies for companies. Now let us see the difference of the two channels and compare for which one is better and beneficial for organizations today.
Conventional distribution Channel
-Channel members are independently owned
-Unstructured distribution channel
-No contract or agreements available
-Lacks in leadership
-Many conflicts might easily arise
-Weak or poor performance
-Any mistakes or flaws effects only the company
Vertical Marketing System
-Channel members act as a unified system
-Structured distribution channel
-May have contracts or agreements for this arrangement
-One member exercise strong (often formal) leadership
-Helps manage conflict
-May be forced into arrangements by power differential between members
As we can see from the table above, in the conventional channel members are independently owned whereas in the vertical marketing system, all the members act as an integrated system. This is good for a company because the can minimize costs and at the same time earn revenues. The conventional distribution channel are unstructured whereas in vertical marketing system it is properly structured, thus makes it easier for a company to distribute their product and services. There is no contract whatsoever between the members of the channel because they are all self-regulating and not bonded by any contract. On the other hand, in the vertical marketing system, contract and agreements are needed for the arrangement of this type of marketing channel particularly in a contractual vertical marketing system.
Additionally, there is a strong presence of leadership in vertical marketing system as one member exercise formal leadership. Hence there is proper control of the activities. Whereas in the conventional channel of distribution, there is lack of leadership in the channel. Furthermore, due to confusion, conflicts and problems may arise in a conventional distribution channel because of lack of control and leadership. On the other hand, in a vertical marketing system, the coordination among the members of the channel helps to manage conflicts that may arise. Moreover, this can also improve performance of the whole marketing system. Whereas conventional distribution channel has a weak performance due to conflicts and lack of leadership.
In my opinion, from the above comparison of both the channels, it is clear that vertical marketing system, if practiced properly, will be very advantageous and can provide economies of scale to any company which adopts it.
Aaker, D.A. (1998), Strategic Market Management, John Wiley & Sons, Inc., USA.
Kotler, P. et al (1999), Marketing Management – An Asian Perspective, Prentice Hall, Inc. USA.
Kotler, P. and Armstrong, G. (2001), Principles of Marketing, Prentice Hall, USA.
Evangelista, F. U. et al (1984), Principles of Marketing Management, National Book Store, Inc., Philippines.
Meyer, W. G. et al (1988), Retail Marketing, McGraw Hill, USA.
www.smalltownmarketing.com, access date: 4th December, 2003