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

2. ©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.  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.

3. ©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 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 http://www.inc.com/ss/zappos-struggle#9

4. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-4 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.  Producers Manufacturers & their Suppliers Originators of the product or service  Intermediaries 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 Describe the three major functions of a distribution channel

5. D ISTRIBUTION C HANNEL O VERVIEW, C ONT.  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 11-5

6. 11-6  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 O NLINE C HANNEL I NTERMEDIARIES Outline the major models used by online channel members.

7. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-7 E-B USINESS M ODELS

8. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-8 C ONTENT S PONSORSHIP  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.

9. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-9 I NFOMEDIARY  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.

10. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-10 I NTERMEDIARY M ODELS  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

11. 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.

12. 11-12 I NTERMEDIARY M ODELS, C ONT. B. A GENT MODELS  Agents do represent either the buyer or the seller, depending on who pays the fee. a. Agent models representing sellers 1. Selling agents Represent a single firm, helps them sell products 2. Manufacturer’s agents Represent more than one seller, e.g. travel agents, also called catalog aggregators 3. 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

13. 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)

14. I NTERMEDIARY M ODELS, C ONT. B. A GENT MODELS b. Agent models representing buyers  Shopping agents (BizRate, PriceScan, and CNET Shopper) Shopping agents measure value, not just price These are called second generation shopping agents  Reverse auction (Priceline, eBay) 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 ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-14

15. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-15 S HOPPING A GENT : CNET S HOPPER

16. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-16  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. I NTERMEDIARY M ODELS, C ONT. C. O NLINE R ETAILING

17. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-17 a. Digital goods  The Internet serves as a medium for distribution of goods and services such as news, music, software, movies, etc. b. Tangible products  Tangible products are distributed through conventional channels  Digital products are still sent through traditional channels I NTERMEDIARY M ODELS, C ONT. C. O NLINE R ETAILING

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 ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-18

19. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-19 W HAT D O U.S. C ONSUMERS B UY O NLINE ?

20. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-20 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.  It was thought that the Internet would eliminate intermediaries but the Internet has actually created new intermediaries, called metamediaries. Explain how the Internet is affecting distribution channel length.

21. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-21 F UNCTIONS OF A D ISTRIBUTION C HANNEL  Channel functions can be characterized as follows:  Transactional  Logistical  Facilitating Market research Financing

22. 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:  Contacts can be customized (Honda)  Provides a wide range of referral sources (search engines & social networks)  Always open for business (7/24) 2. 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

23. TRANSACTIONAL FUNCTIONS, CONT. 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 11-23

24. 11-24 L OGISTICAL F UNCTIONS  Logistical functions include  Physical distribution activities, such as: Transportation Inventory storage  Aggregation of products 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 third- party specialists such as UPS or FedEx.

25. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-25  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. L OGISTICAL F UNCTIONS, C ONT. T HE L AST M ILE P ROBLEM

26. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-26 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.  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.

27. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-27 F ACILITATING 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.

28. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-28 D ISTRIBUTION S YSTEM  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.

29. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-29 N EW D EFINITION OF S UPPLY CHAIN

30. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-30 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. Discuss trends in supply chain manage- ment and power relationship s among channel players.

31. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 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. C HANNEL M ANAGEMENT AND P OWER

32. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-32 D ISTRIBUTION C HANNEL M ETRICS : B2C M ARKET  Besides revenue, B2C metrics may include:  ROI.  Customer satisfaction levels.  Customer acquisition costs.  Conversion rates.  Average order values. Highlight how companies can use distribution channel metrics.

33. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-33 D ISTRIBUTION C HANNEL M ETRICS : B2B M ARKET  B2B metrics may include:  Time from order to delivery.  Order fill levels.  Other activities that reflect functions performed by channel participants.

34. ©2012 PEARSON EDUCATION, INC. PUBLISHING AS PRENTICE HALL 11-34 T OP T EN O NLINE R ETAILERS

35. 11-35 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2012 Pearson Education, Inc. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall