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E-M ARKETING /6E
C HAPTER 11
C HAPTER 11 O BJECTIVES
11-2

After reading Chapter 11, you will be able to:
 Describe the three major functions of a
distribution channel.
 Outline the major models used by online
channel members.
 Explain how the Internet is affecting
distribution channel length.
 Discuss trends in supply chain management
and power relationships among channel
players.
 Highlight how companies can use
distribution channel metrics.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
T HE Z APPOS S TORY
11-3




Zappos is the world’s largest online shoe store.
 Sales over $1 billion in 2009.
 Part of amazon.com since November 2009.
Success factors include a culture of outstanding
customer service.
Other success factors: great search engine
marketing, strong word of mouth, and repeat
customers.
http://www.inc.com/ss/zappos-struggle#9
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION C HANNEL
O VERVIEW
11-4

Describe
the three
major
functions
of a
distribution
channel
A distribution channel is a group of
interdependent firms that transfer product and
information from the supplier to the consumer.
 Producers



Intermediaries



Manufacturers & their Suppliers
Originators of the product or service
A firm that matches buyers and sellers
May be independent or represent the parties
involved
Buyers


The end user
Those that consume the product or service
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION C HANNEL
O VERVIEW, C ONT.
11-5


The structure of the channel can make or
impede opportunities for marketing on the
Internet.
Four major elements combine to form a firm’s
channel structure
Types of channel intermediaries
 Length of the channel
 Functions performed by members of the
channel


Physical and informational systems
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
O NLINE C HANNEL
I NTERMEDIARIES
11-6

Outline the
major
models
used by
online
channel
members.



Wholesalers
 buy products from the manufacturer and resell them to
retailers.
 Could be online or offline
Retailers
 buy products from manufacturers or wholesalers and
sell them to consumers.
Brokers
 facilitate transactions between buyers and sellers.
 Do not represent either party
 Do not take title to the goods
 Charge a transaction fee for their service
Agents
 Facilitate transactions between buyers and sellers
 Do represent one of the parties



Manufacturer’s agents represent the seller.
Purchasing agents represent the buyer.
May or may not take title to the goods
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E-B USINESS M ODELS
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C ONTENT S PONSORSHIP
11-8
Firms create websites to attract lots of
traffic and sell advertising on the website
 All the major portals utilize this model:
 Google
 Yahoo!
 MSN
 Content sponsorship is often used in
combination with other models to
generate multiple revenue streams.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
I NFOMEDIARY
11-9
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
An infomediary is an online organization
that aggregates and distributes information.
Market research firms are examples of
infomediaries.



E.g. Google’s DoubleClick uses cookies to
track users as they surf the Web
Another type of infomediary is a variation
on the content sponsorship model.
Some infomediaries pay consumers for
sharing demographic and psychographic
information and receiving ads targeted to
their interests.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
I NTERMEDIARY M ODELS
11-10

Three intermediary models are in
common use on the Internet:
A.
Brokerage models

Online Exchange

Online Auction
B.
Agent models
C.
Online retailing
D.
Direct distribution
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-11
I NTERMEDIARY M ODELS , C ONT.
A . B ROKERAGE MODELS
Creates a market in which buyers and sellers
negotiate and complete transactions.
 Buyer convenience, speed of order execution, and
transaction processing are buyer benefits.
 Seller benefits are a creation of a pool of buyers
 Online Exchange: E*Trade, Schwab and Ameritrade

allow customers to place trades online.
 The B2B market has also produced brokerages.



Converge is the leading exchange for global
electronics.
Guru.com is an exchange for talent in 220
professional categories.
Online Auction (eBay, Amazon): Auctions are
available in the B2B (uBid), B2C (Priceline), and C2C
(ebay) markets.
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I NTERMEDIARY M ODELS , C ONT.
B. A GENT MODELS

a.
Agents do represent either the buyer or the
seller, depending on who pays the fee.
Agent models representing sellers
1. Selling agents

2.
Manufacturer’s agents

3.
Represent a single firm, helps them sell products
Represent more than one seller, e.g. travel
agents, also called catalog aggregators
Metamediaries


Represent a cluster of manufacturers, online
retailers, and content providers e.g. car-buying
market websites.
Solve problems of reducing search times,
providing quality assurance, facilitating
transactions for a group of related purchases,
and providing relevant content information
11-13
I NTERMEDIARY M ODELS , C ONT.
B. A GENT MODELS
4.
Virtual malls

Host multiple online merchants, Similar to
an offline shopping mall, virtual malls
provide multiple customer benefits:
1. Branding: shopping from store listed on
Yahoo may be more comfortable for
customers than buying from one is not.
2. Availability of electronic money
3. Availability of frequent shoppers
programs (rewards)
4. Availability of gift registry
5. Availability of search facility
6. Recommendation services (suggestions
for special event gifts)
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I NTERMEDIARY M ODELS , C ONT.
B. A GENT MODELS
b.
Agent models representing buyers

Shopping agents (BizRate, PriceScan, and
CNET Shopper)



Reverse auction (Priceline, eBay)



Shopping agents measure value, not just price
These are called second generation shopping
agents
The buyer specifies a price and the sellers bid for
the buyer’s business
Priceline.com is a reverse auction
Buyer cooperative


Also known as buyer aggregator
Pools buyers together to drive down price on the
selected items
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11-15
S HOPPING A GENT:
CNET S HOPPER
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11-16
I NTERMEDIARY M ODELS , C ONT.
C. O NLINE R ETAILING
One of the most visible e-business models (e.g.
Zappos).
 Merchants set up storefronts online that can sell a
greater assortment of products in smaller quantities
than offline (advantage).
 The “long tail” refers to the ability to increase
revenue by selling small quantities of large
numbers of products online (e.g. Netflix: DVDs).
 Multichannel marketing is the use of more than one
sales channels such as Web, mobile, brick & mortar,
and catalog.
 Shopping cart abandonment is one of online
retailing’s biggest problems.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-17
I NTERMEDIARY M ODELS , C ONT.
C. O NLINE R ETAILING
a.
Digital goods

b.
The Internet serves as a medium for
distribution of goods and services such as
news, music, software, movies, etc.
Tangible products


Tangible products are distributed through
conventional channels
Digital products are still sent through
traditional channels
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-18
I NTERMEDIARY M ODELS , C ONT.
D. D IRECT D ISTRIBUTION

Manufacturer sells directly to the
consumer or business customer (e.g.
Dell).

Has been successful in B2B markets

Also successful in B2C markets

Manufacturer benefits by keeping margins
set
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11-19
W HAT D O U.S. C ONSUMERS
B UY O NLINE ?
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION C HANNEL
L ENGTH AND F UNCTIONS
11-20
Explain
how the
Internet is
affecting
distribution
channel
length.

Channel length refers to the number of
intermediaries between the supplier and the
consumer.

Direct distribution channels have no intermediaries.

Indirect channels have one or more intermediaries.

Eliminating intermediaries can potentially reduce
costs.


Disintermediation describes the process of
eliminating traditional intermediaries.
It was thought that the Internet would eliminate
intermediaries but the Internet has actually created
new intermediaries, called metamediaries.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
F UNCTIONS OF A
D ISTRIBUTION C HANNEL
11-21

Channel functions can be characterized
as follows:

Transactional

Logistical

Facilitating

Market research

Financing
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TRANSACTIONAL
FUNCTIONS
11-22
1.
Making contact with buyers


The Internet provides a new channel for communication
The Internet channel adds value to the contact process in
several ways:



2.
Contacts can be customized (Honda)
Provides a wide range of referral sources (search engines & social
networks)
Always open for business (7/24)
Marketing communication strategies


Advertising and other product promotions
The Internet channel adds value to the marketing
communication function in several ways:




Previously manual labor functions can be automated (airlines)
Communications can be closely monitored and changed every
minute
Web analytics software for tracking a user’s behavior can be used
The Internet enhances promotional coordination among
intermediaries
TRANSACTIONAL
FUNCTIONS, CONT.
11-23
3.
Matching products to buyer’s needs.
Shopping agents – allow customers to compare
prices and features within a product category
 Collaborative filtering agents – can predict
consumer preferences based on past purchase
behavior

4.
Negotiating price.
Involves offers and counter offers
 Could be in person, over the phone, via e-mail

5.
Processing transactions.

Electronic channels lower transaction costs
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
L OGISTICAL F UNCTIONS
11-24

Logistical functions include
 Physical distribution activities, such as:



Aggregation of products




Transportation
Inventory storage
Suppliers operate more efficiently when they
produce a high volume of narrow range products
Consumers prefer to buy small quantities of a wide
range of products
Channels intermediaries aggregate products from
multiple suppliers to give consumers more choices
in one location. This type of aggregation is known
as a category killer
Third-party logistics – outsourced logistics

Logistical functions are often outsourced to thirdparty specialists such as UPS or FedEx.
11-25
L OGISTICAL F UNCTIONS , C ONT.
T HE L AST M ILE P ROBLEM


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
Delivering small quantities cost more money
25% of deliveries require multiple delivery
attempts.
30% of packages are left on doorsteps, with
possibilities for theft.
Innovative firms are introducing solutions.
 Smart box.
 Retail aggregator model: delivery at
convenience stores or service stations.
 E-stops, storefronts for customer
package pickups.
 Order online for offline retail delivery.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
FACILITATING F UNCTIONS
M ARKET R ESEARCH
11-26
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
Market research is a major function of the
distribution channel
There are costs and benefits of Internet-based
market research.





Some information is free.
Managers and employees can conduct research
from their desks.
Internet-based information tends to be more
relevant and current.
Web-based information is in digital form.
Because of the amount of consumer behavior
information available, E-marketers can receive
detailed reports.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-27
FACILITATING F UNCTIONS , C ONT.
F INANCING


Intermediaries want to make it easy for
customers to pay in order to close the sale.
Credit card companies have formed Secure
Electronic Transactions (SET).
Legitimizes merchants and consumers.
 Protects consumers’ credit card numbers.
 U.S. customers have a maximum $50 liability
for purchases made with a stolen card.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION S YSTEM
11-28


The distribution channel is actually a system of
unified organizations working together to build
value as products proceed through the channel
to the consumer
There are 3 ways to define the scope of the
channel as a system.
 Distribution functions that are downstream
from the manufacturer to the consumer.
 The supply chain, upstream from the
manufacturer, working backward to raw
materials.
 Consider the supply chain, manufacturer,
and distribution channel as an integrated
system called the value chain or integrated
logistics.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-29
N EW D EFINITION
OF S UPPLY CHAIN
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-30
Discuss
trends in
supply
chain
management and
power
relationship
s among
channel
players.
SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) refers to
the coordination of the flow of material,
information, and finance.

Key functions of supply chain management
are continuous replenishment and build to
order to eliminate inventory.

Supply chain participants use enterprise
resource planning (ERP) systems to manage
inventory and processes.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
C HANNEL M ANAGEMENT
AND P OWER
11-31






Internet has increased the power of buyers by
providing access to more information and to more
suppliers
Also, Internet has increased the power of suppliers.
Channel management requires coordination,
communication, and control to avoid conflict among
channel members.
A channel member must emerge to assume
leadership in these measures.
Electronic data interchange (EDI) is effective in B2B
commerce for establishing structural relationships
among businesses.
The goal is to create an Internet-based, open system
so that suppliers and buyers can integrate their
systems.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION C HANNEL M ETRICS :
B2C M ARKET
11-32
Highlight
how
companies
can use
distribution
channel
metrics.

Besides revenue, B2C metrics may
include:
 ROI.
 Customer satisfaction levels.
 Customer acquisition costs.
 Conversion rates.
 Average order values.
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
D ISTRIBUTION C HANNEL M ETRICS :
B2B M ARKET
11-33

B2B metrics may include:

Time from order to delivery.

Order fill levels.

Other activities that reflect functions
performed by channel participants.
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11-34
TOP T EN O NLINE R ETAILERS
©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL
11-35
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Publishing as Prentice Hall