The Internet for Distribution E-M ARKETING /6E C HAPTER 11

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-2 C HAPTER 11 O BJECTIVES  After reading Chapter 11, you will be able to:  Describe the three major functions of a distribution channel.  Explain how the Internet is affecting distribution channel length.  Discuss trends in supply chain management and power relationships among channel players.  Outline the major models used by online channel members.  Highlight how companies can use distribution channel metrics.

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-3 T HE Z APPOS S TORY  Zappos is the world’s largest online shoe store.  Sales over $1 billion in  Part of amazon.com since November  Success factors include a culture of outstanding customer service.  Other success factors: great search engine marketing, strong word of mouth, and repeat customers.

©2009 Pearson Education, Inc. Publishing as Prentice Hall  Dell utilizes a direct-distribution model to sell about $50 million per day online, half of its sales.  Wholesalers and retailers are eliminated.  Dell turns its inventory every 10 days.  Through its direct channel, Dell directly monitors its customers’ needs.  Dell handles 10,000 customer communications per day from corporations, government agencies, medical and educational institutions, small businesses, and individuals. T HE D ELL D IRECT M ODEL 12-4

©2009 Pearson Education, Inc. Publishing as Prentice Hall T HE D ELL D IRECT M ODEL, CONT.  Dell operates in B2B and B2C environments in 140 country markets.  Maintains 60,000 custom Web storefronts for major corporate buyers.  Allows online customers to build their own systems and uses the information to guide new product development.  Have you (or has someone you know) benefited from Dell’s mass customization strategy? 12-5

©2009 Pearson Education, Inc. Publishing as Prentice Hall D ISTRIBUTION C HANNEL O VERVIEW  A distribution channel is a group of interdependent firms that transfer product and information from the supplier to the consumer. It is made up of:  Producers  Intermediaries  Buyers  The structure of the channel can make or impede opportunities for marketing on the internet.  Getting someone to answer the phone; waiting time; trying to understand the various options vs seeing the travel agent face to face. 12-6

D ISTRIBUTION C HANNEL O VERVIEW  Important as it involves point of purchase decisions and whether customer received good or service satisfactorily or not.  Suitability of channel is at times dependent on situation – the airline ticket example.  Must be seen to build value as the product moves along the from the producer to the consumer.  Customer ‘reimbursed’ for doing part of the function done by employees before.  Channels gain strength from competing in a unified way with other channels ©2009 Pearson Education, Inc. Publishing as Prentice Hall 7

E LEMENTS OF THE CHANNEL STRUCTURE Four elements of channel structure are:  Types of online channel intermediaries  Length of the online channel  Functions performed by various members of the channel  Physical and informational systems linking the channel members which provides for coordination and management of their collective effort to deliver the product or service. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 8

2  Wholesalers buy products from the manufacturer and resell them to retailers.  Retailers buy products from manufacturers or wholesalers.  Brokers facilitate transactions between buyers and sellers.  Agents may represent either the buyer or seller.  Manufacturers’ agents represent the seller.  Purchasing agents represent the buyer. O NLINE C HANNEL I NTERMEDIARIES 12-9

E-B USINESS M ODELS  Understand online intermediaries through their business models  Ex.12.1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall 12-10

l C ONTENT S PONSORSHIP M ODEL  In this model firms create Web sites, attract traffic, and sell advertising.  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.  Retrieval of archived articles by online newspapers 12-11

©2009 Pearson Education, Inc. Publishing as Prentice Hall I NFOMEDIARY M ODEL  An infomediary is an online organization that aggregates and distributes information.  Market research firms are examples of infomediaries.  Some infomediaries compensate consumers for sharing demographic and psychographic information and receiving ads targeted to their interests.  Cookies gleaned information without the knowledge of the computer user

©2009 Pearson Education, Inc. Publishing as Prentice Hall I NTERMEDIARY M ODELS  Three intermediary models are in common use on the internet:  Brokerage models Brings together seller and buyer to negotiate and carry out transaction. Charges a fee but does not represent either party. Online Exchange Online Auction  Agent models for sellers and buyers  Online retailing models 12-13

©l B ROKERAGE M ODELS  The broker creates a market in which buyers and sellers negotiate and complete transactions.  E*Trade, Schwab and Ameritrade (security trading) allow customers to place trades online.  The B2B market has also spawned brokerages.  Converge is the leading exchange for global electronics – makes money from the difference in selling and purchased price; guarantees product quality. Goods sent anonymously to Converge warehouses for inspection.  Guru.com is an exchange for talent in 160 professional categories – collects a fee when manage to match talent with company looking for the kind of talent  Online auctions are available in the B2B, B2C, and C2C markets.  Can go through specialised bidding sites or do on own site.  Used to sell off inventories/surpluses 12-14

B ROKERAGE M ODEL  Benefits to buyers – covenience, speed of order execution, transaction and cost savings.  Cost savings to buyers – shortened search time, lower prices, preidentified suppliers.  For the sellers, cost saving comes from availability of ready buyers, lowered acquisition cost of customers, lower transaction costs.  Auction houses may not specialise but offer a wide range of products instead.  Some operates in a niche market – Guru.com ©2009 Pearson Education, Inc. Publishing as Prentice Hall 15

©2009 Pearson Education, Inc. Publishing as Prentice Hall  May represent sellers or buyers.  Agent models that represent sellers include:  Selling agents – normally charges a commission; represents one firm per product. Affiliates is a form of selling agent.  Manufacturer’s agents – seller aggregators or catalogue aggregators  Intermediaries that act like agents such as Edmunds.com (vehicle purchasing) and The Knot(bridal market). Do not represent anyone in particular. Makes money from completed sales/sponsored content.  Virtual malls eg Yahoo. A GENT M ODELS R EPRESENTING S ELLERS 12-16

A GENT M ODELS R EPRESENTING B UYERS, CONT.  6 customer benefits from virtual malls: branding; electronic transaction; frequent shopper program; gift registry; search facility for products; recommendation service.  Agents that represent buyers - may represent any number of buyers, and anonymously too. They include:  Shopping agents BizRate.com – rates merchants based on customer satisfaction survey or customer feedback.  Reverse auctions – buyer specifies a price. Sellers bid. Normally representing one buyer at a time. Product differentiated from that sold through other channels.  Buyer Cooperatives (buyer aggregator) pool many buyers together (thus bigger volume) to drive down the price. © 12-17

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL S HOPPING A GENT : CNET S HOPPER

 Online retailing is one of the most visible e-business models.  Online merchants set up storefronts online that can sell a greater assortment of products in smaller quantities than offline.  Shopping cart abandonment during the purchasing process is one of online retailing’s biggest problems.  Digital goods such as news, music, software, movies, etc. may be delivered over the internet.  The manufacturer sells directly to the customer in the direct distribution model as in the case digital goods, computers (eg Dell). O NLINE R ETAILING 12-19

©2009 Pearson Education, Inc. Publishing as Prentice Hall D ISTRIBUTION C HANNEL L ENGTH AND F UNCTIONS  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 12-20

©2009 Pearson Education, Inc. Publishing as Prentice Hall  The length of the channel refers to the number of intermediaries between supplier and consumer  Complete disintermediation, the process of eliminating traditional intermediaries, has not occurred.  Existing distribution system is sufficiently efficient.  Using intermediaries allows companies to focus on what they do best.  Many traditional intermediaries have been replaced with internet equivalents, such as online storefronts. C HANNEL L ENGTH 12-21

©2009 Pearson Education, Inc. Publishing as Prentice Hall F UNCTIONS OF A D ISTRIBUTION C HANNEL  Channel functions can be characterized as follows:  Transactional  Logistical  Facilitating 12-22

©  Transactional Functions include making buyers aware of products. May include product matching, price negotiation and processing of transactions  Making contact with buyers. Contact customised to customer needs, example, Nissan. Provides a range of referral sources – discussion groups, “experts”, opinion sites etc. Internet is 24/7  Marketing communication strategies. Automation - such as sending out promotional materials Close monitoring of promotions; enabling quick changes if required Highly targetted communications – as per web analytics Promotional coordination amongst intermedi aries – no more non-awareness T RANSACTIONAL F UNCTIONS 12-23

T RANSACTIONAL F UNCTIONS  Matching products to buyer needs. Shopping agents use descriptions given by buyers; using softwares to predict based on past purchases; custom-configuration  Negotiating prices. Shopping agents list sellers according to prices offered. Reverse auction  Processing transactions Lower cost compared to traditional processing of transactions – savings are from labour costs. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 24

©2009 Pearson Education, Inc. Publishing as Prentice Hall L OGISTICAL F UNCTIONS  Logistical functions include physical distribution activities, such as:  Transportation – most products still distributed the conventional way.  Inventory storage – uses warehouses in cheaper locations.  Aggregation of products – from multiple suppliers. Conventionally suppliers prefer big volumes and small range.  Logistical functions are often outsourced to third-party specialists – DHL, FedEx.  Used to address the desire for minimal inventory but timely delivery;  returned goods – trial items, damaged goods 12-25

©2009 Pearson Education, Inc. Publishing as Prentice Hall O UTSOURCED L OGISTICS  Third-party logistics providers can manage the supply chain and provide value-added services.  Pos Laju  FedEx  DHL  In the C2C market, eBay has formed a partnership with Mailboxes Etc.-where sellers take their items to be packaged nad shipped

©  A big problem for online retailers is the expense of delivering small quantities to homes and businesses – contrasts that of delivering to wholesalers/retailers; bulk- breaking.  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 – stores specially for customer drive-through and package pick up.  Order online for offline retail delivery. T HE L AST M ILE P ROBLEM 12-27

©2009 Pearson Education, Inc. Publishing as Prentice Hall F ACILITATING F UNCTIONS : M ARKET R ESEARCH  Market research is a major function of the distribution channel.  There are costs and benefits of internet-based market research.  Some information is free, eg some government reports.  Employees can conduct research from their desks- no need for expensive trips.  Internet-based information tends to be timelier, eg response to banner advertising.  Web-based information is in digital form, so can upload and manipulate using various softwares fast.  E-marketers can receive detailed reports due to a lot of available information on customer behavior online

©2009 Pearson Education, Inc. Publishing as Prentice Hall F ACILITATING F UNCTIONS : F INANCING  Intermediaries want to make it easy for customers to pay and to close the sale.  Credit card companies have formed Secure Electronic Transactions (SET).  Legitimizes merchants and consumers. No personal info goes to the seller.  Protects consumers’ credit card numbers.  Consumers have a maximum $50 liability for purchases made with a stolen card.  Legal protection does not exist in all countries.  In Malaysia? 12-29

© D ISTRIBUTION S YSTEM  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 backwards to raw materials.  Consider the supply chain, manufacturer, and distribution channel as an integrated system called the value chain or integrated logistics.  A unified system of interdependent organizations working together to build value as products proceed through the channel to the customer

©l S UPPLY C HAIN + D ISTRIBUTION C HANNEL = N EW D EFINITION OF S UPPLY C HAIN Wholesaler Agent Retailer 1 Retailer 2 Retailer 3 Farmer 1 Steel supplier Fabric supplier Food supplier Parts supplier Parts supplier Farmer 2 Manufacturer or Service Provider Supply Chain Manufacturer or Service Provider Distribution Channel Value chain or integrated logistics supply chain

© S UPPLY C HAIN M ANAGEMENT  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.  Cost savings through no/less inventory to finance; no inventory becoming stale/outdated  Customers want lower prices, quick delivery and customisation.  To do this must coordinate the activities of the three of the supply chain i.e. the upstream suppliers, the firm, and the distribution channel.  Supply chain participants use enterprise resource planning (ERP) systems to manage inventory and processes

©  Channel management requires coordination, communication, and control to avoid conflict among channel members.  Buyers more powerful than before; supermarkets more powerful than their suppliers (e.g Walmart); book buyers more powerful than bookstores.  Electronic data interchange (EDI) is effective for establishing structural relationships among businesses – exchanges of information between organisations via a computerised system.  The internet downplays the importance of location; offers choices in sources of supply  The goal is to create an internet-based, open system so that suppliers and buyers can integrate their systems.  Extensible Markup Language (XML) is the probable technology for achieving the goal. C HANNEL M ANAGEMENT AND P OWER 12-33

©2009 Pearson Education, Inc. Publishing as Prentice Hall D ISTRIBUTION C HANNEL M ETRICS : B2C M ARKET  U.S. consumers spent $131 billion online during  eMarketer concluded that e-commerce sales and influences on off-line sales accounted for 27% of all retail sales in  Besides revenue, B2C metrics may include:  ROI.  Customer satisfaction levels.  Customer acquisition costs.  Conversion rates - % of website visitors who purchases  Average order values

D ISTRIBUTION C HANNEL M ETRICS : B2B M ARKET  B2B e-commerce is huge but cannot be measured due corporate secrecy.  B2B metrics may include:  Time from order to delivery.  Order fill levels.  Other activities that reflect functions performed by channel participants. ©2009 Pearson Education, Inc. Publishing as Prentice Hall 12-35

©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL T OP T EN O NLINE R ETAILERS