The Principle of Verticalization in Online Marketing: When the Manufacturer Meets the Customer

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Vertical Integration of Manufacturers - Why? Retail is booming, consumer demand and appetite for purchasing are constantly growing, and access to and demand for products is greater than ever before. Manufacturers must be making considerable profits and revenues and enjoying prosperous times, one might think.

However, some companies have unfortunately learned painfully in recent years that sticking to conventional management styles and classic division of labor can quickly push you out of the market. It's crucial not only to appear solely as a manufacturer but also to get to know your customers personally.

We'll explain why this is the case and what causes have led to it. But don't worry, we also have solutions ready for you.

What is Vertical Integration Anyway?

Vertical integration per se describes the integration of upstream and downstream stages of the value creation process. This means that the previously clearly separated roles and responsibilities of manufacturers and retailers increasingly overlap, and boundaries become more fluid.

The mere division between manufacturers and transferring products to distribution partners is far from contemporary, with digitalization being one cause among many. Not only does a manufacturer's external presence become increasingly important, but customer loyalty should also be strengthened through open structures. In (online) marketing, this is called vertical marketing.

In vertical integration, manufacturers become so-called verticalizing manufacturers - meaning the products are not only produced by a company but also responsible for sparking the interest of potential customers, building, and strengthening customer relationships.

Moreover, a consulting function comes into play before and after purchase, potentially leading to direct sales - the manufacturer thus takes on a significant role in the value chain, depending on how the balance of power between the players is structured.

This vertical integration of processes can run in both directions, not only from the manufacturer towards sales but also from retailers towards manufacturers. Given this situation, companies should engage with the topic of vertical integration.

The Role of the Customer Life Journey and the Manufacturer

Why integrating processes into the value chain into your own company pays off in the long run has something to do with the Customer Life Journey. This describes how a potential customer becomes aware of the brand, develops an interest in a product as well as a willingness to purchase, and subsequently informs themselves about the product. This process is followed by purchase and the customer is subsequently cared for, ensuring that they ideally appear as a returning customer.

If a company covers as many steps as possible on this journey, the Customer Life Value increases: The likelihood of a customer's return through established customer loyalty and a repeat purchase rises.

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Fig. 1: Customer Life Journey and Customer Life Value in the AIDA Model.[/caption]

However, right from the first purchase, the preliminary step of customer loyalty is immensely relevant: The better a company's branding strategy is in advance and a brand builds up, the more likely the potential customer will convert into a buyer and choose against a competitor product.

Who hasn't experienced it: You are looking for a specific product and possibly already in the store. A quick grab for the mobile phone to double-check and gather more information. A good branding strategy and optimized online presence can now be decisive for the customer's purchase. Those who have invested well here as a manufacturer can secure the purchase. It isn't necessarily required to have chosen direct sales as a channel, the same principle applies when selling through distribution partners.

Branding Strategy - Why and How

But how can a manufacturer advance brand development? The right branding strategy is crucial. Verticalizing manufacturers offer product services on their own pages that facilitate close and simple customer contact, provide high-quality informational material, and product presentations with high-quality photos and videos, zoom functions, and attractive product descriptions.

All these services offer the potential customer a positive brand and shopping experience, even before purchase. The emotional connection and the build-up of trust between manufacturer and customer significantly contribute to brand identification and formation.

Fig. 2.: Guitar manufacturer Fender (FMIC) showcases information and image material with a zoom function on the website and provides information about delivery times.

A second important point and benefit that results from good branding and the resulting customer contact is the direct customer feedback that can be generated. Manufacturers finally have the opportunity to get to know their customers personally, understand their needs better, and use this valuable information not only for product improvements but also for additional services. This can sustainably improve the entire purchasing experience and strengthen the bond between manufacturer and customer. Targeted marketing further supports this process.

The effect of approaching the customer also shows in product development: Manufacturers can immediately respond to customer wishes through close customer contact. Specific and personalized products are often the result, which in turn can lead to an even better reputation for your company.

Fig. 3.: Example of product customization for customers of the pacifier brand "NUK". Individual design strengthens customer loyalty and builds customer proximity.

When Partners Become Competitors

Whether and to what extent vertical integration can be advanced depends heavily on the industry and the dealer network in which you distribute your products. As mentioned earlier, shifts in power relations occur not only between the retailers themselves but also between manufacturers and retailers.

Where once distribution happened through wholesalers, today it's often the case that e-commerce shops compete not only directly with other brands on the page but across the entire internet. This potential loss of revenue for manufacturers entices companies to start direct sales to withstand the enormous competitive pressure. But caution, acting too quickly can be fatal.

It should not be forgotten that at this point in time, dealers through long-term customer relationships, customer contact, and sales experience know the needs of buyers very well - manufacturers are initially often in a worse position.

Therefore, it is urgently advised to openly disclose and discuss the steps of vertical integration with distribution partners, especially when considering setting up your own shop, so that the dealer network is not undermined and collapses. Also, due to the varying budgets of individual dealers, a sole takeover of direct sales by the manufacturer is generally not advisable.

The establishment of direct sales and thus the positioning as a competitor of distribution partners should therefore be well planned and only occur when there is sufficient end-customer contact and brand building.

Many manufacturers do not want to enter direct sales during vertical integration as such but instead offer specially manufactured product lines or brands in online shops that can be acquired exclusively.

Fig. 4: Chocolate manufacturer Lindt & Sprüngli AG offers limited editions online in its webshop and thus becomes a seller in direct sales.[/caption]

Next to selling selected bestsellers or limited editions, another option is presenting the products with the retailer search option. Here, the manufacturer assists the retailer in gaining customers. The outcome: The main focus here is not on building an e-commerce shop but on brand building and creating a close customer relationship. This brings advantages not only to manufacturers but also to individual retailers.

Fig. 5: Calendar manufacturer "paperblanks" offers on its website not only the opportunity to purchase individual products online but also retailer search for further products.

The technology manufacturer "Fujitsu Limited" also offers on its website the possibility to get more information about products and provides customer contact for this purpose. As a manufacturer, Fujitsu knows its products best; however, distribution continues externally through partners. On the website, the customer has the opportunity to receive accurate and targeted advice.

Fig. 6: Fujitsu guides interested customers to the product through product descriptions and storytelling, demonstrating the company's understanding of customer needs.

Through product videos, storytelling on the product page is further deepened. Also, the customer has all necessary information bundled at a glance, such as product awards, partner search, customer service number, and technical details. Upon the following visit to the retailer, the purchase decision is likely to be influenced by a buying intention for the Fujitsu Limited brand.

Fig. 7: Elements of the website that are customer-focused.

In the meantime, one must not forget that power relations shift mutually between manufacturer and retailer. Vertical integration doesn't only originate from the manufacturer's side; it can also be initiated by the retailer. Two scenarios arise from this:

1. Manufacturer as Retailer

As just presented, manufacturers increasingly take on the functions of retailers, potentially distributing individual product lines through direct sales.

2. Retailer as Manufacturer

But retailers also use their gathered knowledge about sold products and customer profiles. No one knows their customers better than the retailer: Through years of customer service and building trust in services, retailers and their networks possess unique information. They know customer preferences and behaviors and are now increasingly using this knowledge for themselves: They start developing their own brands and branding strategies, leading to new products. These then compete directly with established brands.

Fig. 8: A small selection of the established private labels of the drugstore chain dm – drogerie markt GmbH & Co. KG, which the group has built up over the years.

The adapted product articles and brands cause a stir among some established manufacturing companies as they may feel bypassed, following the motto: "We develop products, and you use your reach to bring cheaper yet similar products to market." However, this is rarely the case, as private labels undertake and support their own product developments.

Ultimately, it is up to both manufacturers and retailers to develop new branding and marketing strategies, use them, and work together symbiotically instead of against one another.

What This Has to Do with Online Marketing Specifically

As already mentioned, users increasingly inform themselves before purchase or directly in-store via smartphones on manufacturers' websites about products and look for reviews and recommendations. Simultaneously, in the omnichannel marketing approach, in-store visits are becoming increasingly important in the online presence to support customers in their purchasing decisions and bind them to themselves.

A good concept and strategy in online marketing that consider all these factors help companies engage directly with customers with comprehensive information and options such as good services and confident appearances, convincing them of their offerings. The introduction of online shops or a B2C website helps secure its place amidst the competition in the long run.

Maintaining customer relationships on the company's own website allows customers to be analyzed through web analytics, providing essential insights for product development and identifying potential opportunities.

If you decide to choose online advertising, like Google Ads, there are some points to consider. How are keyword prices developing for specific generic products? Can I keep up with my budget here? As a smaller company, it is advisable to start with specific products like top sellers and resort to long-tail keywords to optimally invest the existing budget and secure good positions.

Online marketing deliberately intervenes in the users' customer life journey. This must be thoughtfully planned, implemented, and developed long-term to secure customer loyalty. A good marketing strategy for vertical integration propels the company forward, while a poor strategy can have the opposite effect.

An important factor in vertical integration is the expansion of reach. Customer bases can be expanded through perfectly coordinated branding strategies in online marketing. Due to the increasing digitization of the market, online marketing, in particular, is becoming an important component, because: Online trade grows by about 10% annually. Take advantage of this development for yourself!

Branding Strategy or Performance Focus: How Can I Participate in the Process?

Depending on the starting position, different strategies arise. Are you still at the beginning of your online presence, and do you want to increase your reach? Or do you already have an online shop?

1. Pure Product Manufacturers

For product manufacturers who do not yet have an online presence, building a user-friendly website is recommended. Together with the right branding strategy in online marketing, your brand can be further developed, and reach expanded. In the course of this, an online direct distribution can be set up.

2. Manufacturers with Direct Sales Seeking Market Entry

Manufacturers with their own direct sales are also looking for new markets. How can you attract more customers with your direct sales and acquire new customers? How can you bring your offering closer to additional potential customers and advance your company? Through retailer networks and targeted use of the right marketing strategy and advertising opportunities, market entry into new target groups can be successful.

3. Manufacturers with Customer Contact and Sales: Process Optimization and Expansion of Online Commerce

If your company is already known to customers not only as a brand and manufacturer but also in direct sales and as a dealer, the right marketing strategies help optimize processes and further expand online commerce. Many factors must be considered, and with the use of the latest techniques and advertising opportunities, new possibilities arise continuously to strengthen one's position and offer users a unique experience. New strategies not only help increase sales but also reveal new potentials.

Different Industries, Different Customs

In the vertical integration of markets, much depends on the industry one operates in. While some industries are already established in online business, others are only gradually catching up step by step. With fashion and electronics brands firmly established in online business with almost 50% market share in online sales, the healthcare industry is slowly catching up with a share

of 6.2%. In every market entry, legal fundamentals and hurdles must naturally always be checked, which in some industries must first be overcome. The potential exists in all industries, and the market is not saturated.

Fig. 9: Apple Inc. offers special educational discounts on the website and utilizes this as a USP for its own online shop.[/caption]

Especially in high-turnover industries, the direct sales of large companies are usually tolerated by retailers. A good example is the technology company and giant Apple Inc., which can particularly position itself well in its own shop with special discounts like educational discounts.

While some dealers might remove (individual) products from distribution in the case of vertical integration of less known brands in case of poor communication between manufacturer and dealer, direct sales are tolerated in the case of prominent companies. Therefore, strong ties and open communication between manufacturer and dealer are extremely important.

Fig. 10: Technology manufacturer Apple Inc. offers products directly for purchase on its website. Apple directly engages with the customer and understands their needs: a particularly user-friendly and short funnel simplifies the purchase.

There are numerous ways to reposition and expand your company through vertical integration. New strategies, current techniques, and offers in online marketing significantly help achieve these goals. Utilize vertical integration for yourself as well!

Internetwarriors GmbH – Your Partner with Expertise and Industry-Specific Solutions

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