Marketing Channel Systems

1. Vertical:
A. Corporate
B. Administered
C. Contractual
2. Horizontal
3. Multi-channel

Vertical….
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 1)Vertical Marketing System
• Various parties belonging to successive
stages in the channel like producers,
distributors , wholesalers and retailers act as
a unified system to avoid conflicts
• Improves operating efficiency and
marketing effectiveness
• 3 types of VMS :
A. Corporate
B. Administered
C. Contractual
Corporate…
SDM- Ch 9 2
 1A)Corporate VMS
• Successive stages of production and distribution are
handled and performed by one entity (under single
ownership)
• .Examples:
– Bata
– Reliance petrochem
– Suppliers of items could be also their own supplying firms - like
Nilgiris, foodbazaar, shoppers stop with retail brands
– Café coffee day from coffee plantations to cafes
– Eureka forbes

SDM- Ch 9 Administered… 3
 Vertical Integration

• This means owning the channel.

• Means one company does all the work of
production, branding and distribution.
• Downstream/Forward integration means the
producer of the goods also does the distribution –
Eureka Forbes, Bata
• Upstream/Backward integration means the seller
who used to distribute also now produces the goods
– private labels of modern retailers.

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 Vertical Integration
• Vertical Integration provides better control over the
distribution function
• Vertical integration is a choice eg for
image, ,differentiation, control BUT it will become long
term and cannot be easily changed once the resources
have been committed.
• Reasons to choose- techno products , small number of
customers, control , need specialized handling eg piped
gas

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 1B)Administered VMS

• Here the ownership of different distribution channels is not with one

entity but one entity is of certain size and influence/power to be
able to control other channel partners
• Usually true of dominant manufacturer brands like GE, Kodak,
Pepsi, Gillette, Colgate , Marico , Dabur , Coke and HUL or Retail
brands eg Walmart , Amazon,D mart
• Resulting in special privileges eg gaining shelf space , co-operation
from resellers, special displays, pricing policies and promotion
strategies, delivery terms

Contractual…
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 1C)Contractual VMS
• Means channel members get into agreements , contracts to obtain
economies of scale , or use opportunities to increase sales ,or operate
promotions together . Hence they are called value added
partnerships
• Could take the forms of:
– Wholesaler sponsored voluntary chains eg Furniture
wholesalers , garment wholesalers
– Retailer co-operatives like Apna bazaar, Sahakari bhandaar
– Manufacturer sponsored retail franchise eg car dealers
– Manufacturer sponsored wholesale franchise eg soft drink
bottlers
– Service firm sponsored retail franchise eg McD

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 2)Horizontal MS
• Two or more related or unrelated companies, at
same distribution level come together to exploit
an emerging market opportunity better, through a tie
up mutually beneficial arrangement can be Short
term or long term
– eg Mahindra and Ford.
– eg Titan showroom for all FMQ Watches eg
Swatch,Fossil
– eg Café coffee day was approached by McD
– eg Car and banks

Multi-channel…
SDM- Ch 9 8
 3)Multi-channel/Hybrid channel MS
• Means Company uses more than one channel
• The objective is to manage different kinds of customers in a
manner most appropriate to them.
• Important that they should function in a coordinated fashion
rather than in conflict

SDM- Ch 9 9
 Multi-channel/Hybrid channel MS
1)Many companies use both indirect ( for B2C) and direct
channels (for B2B) eg FMCG institutional sales , CD eg tyres OEM
, and service companies eg airlines, Hotels ,cellular service
2)Different customer segments need to be reached through different
channels only eg young online vs old offline
3)Channels deliberately in competition eg EFL , online vs offline
4)Unrelated products in same market – Detergents and ice creams (HUL)
need different channels
5) Logistical demand eg Soft drinks to restaurants many times vs to shops
6) Size of buyers varies (ABC customers ) eg Organized retail vs kiranas
7) Geographic concentration of potential consumers varies (urban vs rural
and Reach is difficult ( eg Rural Shakti amma )
8) New emerging channels imperative due to changing consumer
behavior eg online also apart from offline
9) New channel to reduce cost -eg telemktg, net banking and phone
banking, airlines
10) Different service level expectation eg CCD vs Coffee day Express
( take away )
11) Different goals for different channels eg Pepper Fry
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Hybrid Channels - Advantages
• Increase reach through own efforts and local strengths
and relationship of channel partners
• Company may require to give different service levels
to different customers eg B2B vs B2C
• Healthy competition between company direct sales and
intermediaries
• Limit the dependence on one type of channel
partners
• Company also has access to correct market feedback
• Shift to lower cost channels
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 Channel Systems Costs and Margins

• Costs include capital investment (infrastructure) and

working capital (credit, inventory) and operating
expenses.
• Companies assure a reasonable ROI to channel
partners and not just margins.
• Different channel partners make different kinds of
margins – lower for C&FAs and increasing with
distributors, wholesalers and retailers.

SDM- Ch 9 12
 Channel Systems Costs and
Margins ( contd )
• CFAs –costs incurred are storage/warehousing; handling-loading and
unloading of goods ;warehouse operating costs (utilities,
communication) ; labour costs .companies normally give 1-2 % on total
value of goods handled
• Distributor –inventory , credit extended to market ,operating expenses of
distribution units ( vans ) ,manpower , cost of utilities and communication.
• FMCG companies give 5% mark-up .Distributor makes 25% -30 % ROI.
• In industrial goods , mark-up is 10% ,ROI 35-50%
• Wholesalers margin is 1%
• Retailers make largest margin in whole chain- 5 % -6% to 20% for
chemists to 50-60% for food

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