The journey of a product starts with the producers and ends with the consumers. The conventional sales channel consists of the producer, the wholesaler and the retailer. Most companies these days use hybrids of vertical and horizontal sales channels. So what do these terms stand for and what makes them different from each other?
Vertical Sales Channel
Let’s start with the vertical sales channel. The vertical sales channel unifies the different levels in the sales channel.
In a conventional marketing system, the wholesalers aim to make a profit at the cost of the retailers’ profit and vice versa. For example, in the apparel industry, profit margins for retail clothes are generally within a range of 4 per cent to 13 per cent. If the wholesale profit margin is increased, the profit of the retailer would decrease. The profit margin of the retailers must cover expenses like transportation costs and storage costs. Therefore, both the wholesalers and the retailers must not have conflicting interests.
If the system remains divided in their interests, the company suffers. Consider a system where the producer works with both the wholesalers and the retailer in order to maximise the profit generated. In such an arrangement the efforts of the different levels are unified and all the parties involved can benefit from the profit generated, hence preventing conflicts of interest. This system is what we call a vertical sales channel.
As you may have already observed, the strong points of this form of sales channel are its high efficiency and the clearly defined functions and responsibilities of each level. The vertical sales channels target a specific demographic of customers and specialise in a particular niche to maximise the profit in a specified area. As their efforts are undivided their main aim is to excel in the area they have chosen for themselves.
Vertical sales channels can be broadly divided into three types. Let’s take a look at each one to understand them better.
Corporate Vertical System
In this arrangement, one level in the vertical arrangement takes over the ownership and thus exerts control over the other levels. As the different levels are controlled by the owner, the efforts are unified and the complete authority minimises vertical level conflicts. An example is Apple who sells their products through their own retail stores. The vertical integration that IKEA follows is also worth mentioning. They have effectively cut down on transportation costs by allowing their customers to select furniture from their warehouses itself. The company is thus exempted from maintaining separate stores and having Swedwood as a subsidiary also allows them to control the supply of materials they need for production.
Contractual Vertical System
You have probably already seen these kinds of arrangements even if you are new to this field. That Pizza Hut or KFC near you are all working on a contractual system. In this system firms that work independently collaborate by drawing up contracts. Franchising is the most common form of the contractual vertical system. The producer can open up outlets to sell their products in different parts of the world by entering into a contract with local retailers. The local retailers thus get a chance to open a store under the name of the producer by paying an annual license fee and the brand value of the product can become their main selling point.
Administered Vertical System
Consider a vertical system with multiple levels, what happens when one level dominates in terms of power? That is exactly what an administered vertical system is. The vertical system consists of different levels working in unison, but when the system is administered, one level can exert control upon the other levels and set standards for the other levels. For example, retail giants like Walmart often dominate the supply chain through sheer size.
Horizontal Sales Channel
The horizontal sales channel as the name suggests involves the combination of two or more companies on equal terms. As these companies are from the same level, there is no hierarchy and the arrangement is mutually benefiting.
Have you ever waited for that one collaboration music video of your favourite singers? For the customers, when two companies come together for a venture, it creates the same kind of excitement. When the collaboration happens between well-established companies, like Uber and Spotify, the buzz generated is extensive, to say the least. Some collaborations may even make you wonder what brought them together. An example of this kind of collaboration is when Forever 21 launched a clothing range for the Taco Bell fan base. Fashion and food may not be an obvious pairing but what made this collaboration a success was the similarity in their target audiences. Both Taco Bell and Forever 21 cater to the youth and provide affordable products.
Horizontal sales channels are not limited to established brands. Smaller companies often come together to pool their resources and maximise their profit. So how does that work?
Companies who are just starting out often have limited resources and a limited workforce. If you are looking for a way to grow your company with your limited capital, chances are that another company is also looking to do the same. If your company focuses on a particular niche, collaborating with a company who specialises in another niche can help you cater to the needs of a wider demographic of customers and hence increase your reach and sales.
Horizontal sales channels succeed by pooling the resources available for production and thus growing their customer base. Foraying into a new field without proper expertise can be difficult but with horizontal sales channels, you can enlist the help of the companies who already specialise in the field instead of expending capital on trying to acquire the expertise on your own. These collaborations thus benefit from the expertise of the contributing parties. However, if the collaborators are not established in their respective fields their brand identity may suffer in a horizontal sales arrangement.
Choosing the right combination of sales channels for your company can be trying. When you are creating the sales channels you want to follow, firstly, make sure you have a clear cut idea on who your target audience is and what their needs are. The system you choose must ensure that you reach your target audience and fulfil their needs. The second point to keep in mind is the resources and capital you have. For example, you have limited resources and wish to expand your target audience, consider a horizontal system and choose a contributing company with the expertise and resources that can complement yours. And thirdly analyse which system gives your company the maximum profit. Making an informed choice can make all the difference as you are getting ready to start your venture.