Chapter 15 Electronic Marketing Channels (EMC): Online channels

Major Topics for Ch. 15 What is EMC? Trends in EMC Structure of EMC* Advantages and Disadvantages of EMC* Implications of EMC

Electronic Marketing Channels Topic 1: Electronic Marketing Channels Computers Technology Internet Impact on Design & Management of Marketing Channels

Electronic Marketing Channels Topic 2 Electronic Marketing Channels Not physical availability Internet, Web-TV, Cell Phone The use of online media to make products & services available so that the target market with access to enabling technologies can shop & complete the transaction via interactive electronic means Actually purchasing products through the use of PCs, Web-TV, Cell Phones

Developments & Trends in EMC • Online shopping to $134 billion from mid-1990s to the end of 2009* • Online shopping has become a routine shopping choice* • PCs, peripherals, software, & books accounted for a significant portion of total retail spending on these products Electronic Marketing Channels * U.S. Department of Commerce

Online Sales as a Percentage of Total Retail Sales, Online Retail Sales Online Sales as a Percentage of Total Retail Sales, Holiday Seasons Category Online as % of Total Retail Sales (2004) Revenue in Millions 2004 2005 Apparel/Clothing 16% $3.8B $5.3B Toys/Video Games 11% $2.5B $2.3B Consumer Electronics 10% $2.3B $4.8B Source: A.C. Nielsen’s Holiday E-spending Report

Channel Migration* Holiday Shopping across Channels 2003 Spending Distribution 2005 2002 Stores 68% 72% 74% 78% Catalogs 5% 6% 6% 6% Online 27% 22% 20% 16% 2004 2003 Source: A.C. Nielsen’s Holiday E-spending Report www.internetretailer.com * What do you do if you are a store-based retailer?

Structure of Electronic Marketing Channels* Topic 3 Structure of Electronic Marketing Channels* 1. Reintermediation versus disintermediation Information flow versus product flow Virtual channel structure versus physical channel structure Three Key Phenomena

1. Disintermediation and Reintermediation Shifting, changing, or adding middlemen to the channel Intermediaries become superfluous because producers gain exposure to vast numbers of customers in cyberspace Amazon.com Auto-By-Tel Corp. Peapod, Inc. Dell Computer Corp.

Disintermediation versus Reintermediation* No matter how technologically sophisticated the Internet becomes, the laws of economics as they relate to channel structure do not change. Efficiency in the performance of distribution tasks is what ultimately determines what form channel structure will take. = The Internet has not eliminated middlemen, or caused total disintermediation.

2. Marketing Channel Flows Product Flow Negotiation Flow Ownership Flow Information Flow* Ex) Pharmaceutical Promotion Flow

Channels for Pharmaceuticals Physical Distribution Flow Information Flow Insurer/ HMO Manufacturer Manufacturer Distributor PBM* Doctor Pharmacy Pharmacy DTC patient patient * Pharmacy Benefit Manager (www.medco.com)

Internet Limits Ex) Physical Product Flow in Channel Five Channel Flows Some can not be handled by internet Ex) Physical Product Flow in Channel Cannot be digitized • Processed slowly, often by people • Is basis for all other flows—negotiation, ownership, information, & promotion

3. Virtual (Online) Channel Structure Versus Conventional (Store) Channel Structure Different Market Segments • Different Product or Services • Complements rather than Replaces Each Other*

Advantages & Disadvantages of EMC* Topic 4 Advantages & Disadvantages of EMC* Advantages of Electronic Marketing Channels Global scope & reach Convenience/rapid transaction processing Information processing efficiency & flexibility Data-based management & relationship capabilities Lower sales & distribution costs

Advantages & Disadvantages of EMC* Electronic Marketing Channels Lack of contact with actual products & delayed possession 2. Fulfillment logistics not at Internet speed or efficiency* Clutter, confusion, & cumbersomeness of Internet Nonpurchase motives for shopping not addressed* Security concerns of customers

Objectives & strategies of the firm & EMC* Implications of EMC Topic 5 Objectives & strategies of the firm & EMC* • Role of EMC in the marketing mix • Channel design & EMC* • Channel management & EMC* • Evaluation & EMC

Objectives & Strategies of the Firm* Role of distribution becomes more complex because of electronic marketing channels = How to Integrate Online with Offline channels * Offline only  Online only  Offline + Online (multichannel) Ex) My research project

Impact on The Marketing Mix The Internet arms large numbers of customers with more information about products & services to level the playing field The fourth P, place (distribution), may assume a larger role relative to the other three variables for more & more firms

Channel Design* The channel manager should provide “channel-surfing” consumers with whatever channels or combinations of channels they desire = a) A facet of the development of an effective multichannel marketing strategy b) Unbundle Channel Functions * Special topic: PIC (Partially Integrated Channel)

DUAL DISTRIBUTION WITH EMC : CHANNEL STRUCTURE OPTIONS (a)    Manufacturer has own online presence (e.g., Tupperware) (dotted line indicates common ownership) Manufacturer (Tupperware) Owned Internet Sales Channel (tupperware.com) Standard Channel (independent direct salespeople) Consumers

DUAL DISTRIBUTION WITH EMC: CHANNEL STRUCTURE OPTIONS (b) Manufacturer sells through third-party online reseller (e.g, Callaway Golf selling through buy.com) Manufacturer (Callaway Golf) Standard Channel (pro shops, bricks & mortar sports/golf outlets) Independent Internet Sales Channel (buy.com) Consumers

DUAL DISTRIBUTION WITH ONLINE SELLING: CHANNEL STRUCTURE OPTIONS (c) Manufacturer sells through some standard channels that do operate their own online store, and some that do not Manufacturer (Simon & Schuster, Publisher) Standard Channel (bricks & mortar bookstores) Barnes & Noble Barnes & Noble bricks & mortar bookstores Barnes & Noble Internet Sales Channel (bn.com) Consumers

= Channel Management* Multichannel challenge of conventional and electronic channels = The fundamental issues of motivating channel members, building cooperation, managing conflict, & coordinating elements of the marketing mix requires manager’s full attention Key Issue: Conflict between Channels

Evaluation of Performance Likely to change Unlikely to change Specific criteria for Performance expectations, performing evaluations & criteria, & measurement of technological means for how well they are being met doing so by channel members Ex) Store Traffic Measure

What drives sales impact of online channel addition? Steve Kim (ISU) and Sam Min (CSULB) Question: For store-based retailers, does adding online channel lead to more sales?

Likely Drivers Channel Disruption (Potential for Displacement)* Timing: Chronological Time and Order of addition Incumbent Retailer Resource: Scale of Physical store-based business Incumbent Retailer Resource: Retailer’s Brand Equity

Analysis Results 15 Channel Disruption (Potential for Displacement): Search good > Experience good Timing: Chronological Time (0) and Order of channel addition (+) Incumbent Resource: Scale of Physical store business:(-)* Incumbent Resource: Retailer Brand Equity: (+) How to overcome the conflicting assets?

Chapter 16 Direct Selling & Direct Marketing Channel Systems

Ch. 16 Major Topics - Review on channel choices What are Direct Marketing Channels? - Review on channel choices Structure and Trend of Direct Selling Variables to Consider for Direct Selling* Problems and Prospects of Direct Selling* Direct Marketing Channel

Direct Selling Definition: the sale of a consumer product or service Topic 1 Definition: the sale of a consumer product or service person-to-person, away from a fixed retail location Three key points: • Goes directly to consumers’ homes, offices, or other locations • Concerned with the sale of consumer products in consumer markets rather than industrial products • Involves salespeople meeting fact-to-face with customers

Non-intermediary Channels* Growing in importance Direct Selling (DS) (to consumers) Compare with Direct Salesforce (to businesses)  Sales force Management Direct Marketing (DM) Difference between DS and DM? Difference between DS and Online Channel?

Structure & Trends in Direct Selling Topic 2 - Markets Served - Types of Products Sold - Firms Involved in Direct Selling - Problems & Prospects for Direct Selling

Markets Served Location of Direct Selling Channel Sales Location Percent of Sales Home 64.4 Telephone 14.7 Workplace 8.7 Internet 5.5 Temporary locations 4.1 Other 2.6

Types of Products Sold Major Product Categories Sold through Direct Selling Channels as a Percentage of Total Sales Product Category Percent of Total Sales Personal Care Products 26.4 Home/Family Care Products 33.7 Leisure/Educational 6.5 Services/Miscellaneous/ Other 33.4

Firms Involved in Direct Selling • Hundreds exist • Range in size from those with annual sales over $1 billion to those with sales well under $1 million Facts • Tupperware Corp.* • Avon Products, Inc.* http://www.avon.com/ • Cutco Cutlery Corp. • Amway Corporation Examples

Rationale for Designing Direct Selling Channels Topic 3 Rationale for Designing Direct Selling Channels A method of distribution for providing products & services to customers But: The decision should be based on an objective analysis of the advantages or disadvantages of each channel alternative.

Variables To Consider for Direct Selling* 1) Market variables & DS channel* Product variables & DS channel* 3) Company variables & DS channel 4) Intermediary variables & DS channel Behavioral variables & DS channel Ex) Mary Kay in China

1) Market Variables Developments in consumer attitudes & behaviors that could make direct selling more attractive: 3. Consumers are seeking increased convenience in shopping. 1. Consumers have less time available for shopping in traditional stores. 2. Consumers are becoming more sophisticated and demand more & better product information.

2) Product Variables Products that are high quality, that are unique, or that require specialized information & advice are logical choices for direct selling: Product quality may become apparent only when consumers are informed about them in conjunction with hands-on demonstrations. Consumer satisfaction may depend on whether the consumer has proper information. Product uniqueness may become apparent only through the direct help of salespeople.

policies of the company 3) Company Variables Basic variables to consider: 4. Basic objectives & policies of the company 1. Size of the company Basic objectives: degree of control 2. Financial capacity of the company 3. Managerial expertise in distribution*

4) Intermediary Variables Basic intermediary variables to consider: 3. Services that alternatives are capable of or willing to provide 1. Availability of alternatives 2. Cost of using channel alternatives

5) Behavioral Variables The “people” side of the marketing channel: Communications processes Conflict Power Role

Problems & Prospects for Direct Selling* Topic 4 Lack an awareness of DS as an alternative. Negative impression on DS in general.* Lower availability of consumers for at-home sales calls and parties.* The perceived risk by consumers is high compared to other modes of shopping. 5. Recruitment of salespeople has become difficult.*

Topic 5 Direct Marketing* Definition: An interactive system of marketing that uses more advertising media to effect a measurable response and/or transaction at any location Key Points: Direct marketing is a system or an approach to marketing. Direct marketing relies on one or a combination of advertising media to inform and stimulate customer purchase responses. (including order taking) Direct marketing includes the ability to measure responses. Ex) Dell, L.L. Bean, QVC

Structure & Trends in Direct Marketing Estimating total sales is tricky because various estimates often include different categories of products and/or services as well as different market segments Challenges Some sales data may be included or excluded that may or may not cover direct marketing sales

Structure & Trends in Direct Marketing Markets Served Firms are increasingly targeting affluent customers Types of Products Sold Apparel, sporting goods, consumer electronics, books, records, gourmet foods, insurance, etc. Firms Involved Many are well-known retailers or manufacturers that supplement their conventional methods Problems & Prospects Potential customers cannot examine or touch product; high operating costs; low response rates; intense competition; image problem