Vertical Integration: Controlling the Entire Value Chain
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Do your prices reflect your entire cost structure?
Schedule a meetingLearn about our operational pricing consulting servicesVertical integration is a strategy whereby a company takes control of several successive links in its value chain. Upstream, a retailer manufactures its own products (Decathlon and its brands); downstream, a manufacturer opens its own stores (Nespresso, Apple Store). In terms of pricing, this strategy provides unprecedented control over the entire cost chain.
The Essentials in 6 Questions
Control production and distribution, or several links in the chain.
Retailers of a certain size; brands with their own store networks.
As part of a growth strategy or a private-label strategy.
Upstream (production) or downstream (retail locations).
Capture two profit margins and be able to lower prices while maintaining the same level of profitability.
Consider the cost chain as a whole, with clear price governance.
Why Vertical Integration Is a Game-Changer in Pricing
Because an integrated player captures both the manufacturing margin and the distribution margin.
- Controlling margins from start to finish: more aggressive pricing while maintaining the same margin.
- Ensure supply and cost stability in the face of partner volatility.
- Continuously adjust the product offering based on sales data, since product design and distribution are linked.
Real-world example: a pair of sneakers that’s €10 cheaper and more profitable
By manufacturing a pair of sneakers in-house, a fashion retailer lowers its price from €49 to €39 and increases its profit margin from 51% to 56%.
Cheaper, more profitable in percentage terms, despite a declining unit margin
Fashion Retailer · Vertical Integration of a Line of Sneakers
margin rate after incorporating in-house production, compared with 51% previously · while the nominal unit margin declined slightly (€22 vs. €25).
New store price, down from €49 before vertical integration (€10 off)
Volume sold for the product after the price repositioning
Purchased for €24 from a supplier, the sneaker costs €17 once produced in an in-house workshop. Sold for €39, it yields a profit margin of €22 per unit instead of €25, but sales volume jumps by 35%.
How to Manage Pricing in an Integrated Organization?
By considering the entire cost chain—not just individual silos—and clarifying who sets the final price.
Traditional trade-offs between manufacturing costs and distribution margins are giving way to joint optimization. Pricing tools must integrate production data (variable costs, capacity, lead times) and distribution data (inventory turnover, margin per channel). Our operational pricing consulting organizes this governance; our pricing strategy consulting positions private label brands against national brands (see private label brands ). Read more: Building an effective pricing strategy .
The 3 Common Mistakes Made After a Vertical Integration
Maintain silos, cannibalize distributed brands, or underestimate the investment.
- Maintaining a siloed organizational structure, which negates the benefits of integration.
- Cannibalizing third-party offerings: An overly attractive private label can cause a loss of traffic from national brands.
- Underestimating the cost of integration, which can weigh on profitability for several years.
Frequently Asked Questions
Short answers to the most frequently asked questions about vertical integration.
What is vertical integration?
Vertical integration is a growth strategy in which a company takes control of several successive links in its value chain: upstream, when a distributor manufactures its own products; downstream, when a manufacturer opens its own retail outlets.
Vertical integration or an exclusive partnership?
Capital integration is more powerful but also more cumbersome; a long-term, exclusive partnership—involving the sharing of information and risk—delivers a large portion of the benefits at a much lower cost and with far less complexity.
Can all retailers integrate?
No: It requires a critical mass and product expertise that not all retailers have.
What impact will this have on relationships with domestic brands?
Relationships are often tense: they view private-label brands as direct competition, which is why it’s important to carefully manage their coexistence.
Key Takeaways
- Vertical integration allows a company to control several links in the chain.
- It allows for lower prices while maintaining the same profit margin, by capturing two profit margins.
- It requires silo-free price governance.
Would you like to manage your pricing across your entire value chain?
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Let's talk about your value chain →Learn about our operational pricing consulting servicesYou might also be interested in these articles
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