A vertical marketing system, also called a VMS, is a business system in which suppliers in a product chain work in a cooperative arrangement designed for all businesses to receive the maximum benefit. Systems like these are in contrast with conventional marketing systems in which each business in the supply chain is independent. Vertical systems are often used by businesses to lower the cost of producing a product or to better control the production of the product.
This type of marketing system can be used by both small and large businesses. In the system, how much of the supply chain is owned by one business entity is its level of vertical integration. For example, if a writer owns the publishing company that prints his books and also owns the website where the books are sold, she would have a high degree of vertical integration in her writing business. When a writer uses vertical marketing to self-publish and sell a product, she will lose less profit in commissions paid to printers, agents or booksellers.
Vertical marketing systems generally come in three forms. Corporate systems mean corporate ownership and control of every business in the vertical supply chain. Contractual systems come about when multiple business in the supply chain agree to operate cooperatively. An administered system happens when some businesses in the supply chain are dependent on a dominant business in the supply chain, so the dominant business usually dictates the decisions of the other businesses in the chain.
Businesses often decide to use a vertical marketing system to reduce product costs or gain more control over other parts of the product supply chain. An example of a company that could benefit from gaining more control over supply chain might include a fast food chain that expands overseas into a country with generally poor food-handling practices. To ensure food safety, the retailer might buy and set up a bread-making factory or food-processing facility in the country rather than hiring a wholesaler to make pre-prepared food for the business. Because the fast food company has more control over its own facility, it can ensure that its food safety and production procedures are correctly carried out.
One disadvantage to this type of system is that owning multiple businesses can be fairly complicated. Large businesses with a built-in management structured for multiple operations can usually handle the complications involved with running a vertical supply chain, but small business owners can sometimes become overwhelmed by the commitments involved with supervising many interoperating businesses. Running multiple businesses with too little management power to provide adequate supervision can introduce production problems that may end up worse than buying from an unconnected wholesaler.