Running head: THE EVOLUTION OF MARKETING CHANNELS

The Evolution of Marketing Channels

Lisa Beausoleil, Xaila Navarro, and Derek Rogers

University of Massachusetts Dartmouth

THE EVOLUTION OF MARKETING CHANNELS

Table of Contents

Page No.

Introduction ............................................................................................................................. 1

Marketing Channels ...................................................................................................... 2

Computer Industry ...................................................................................................... 4

Airline Industry .......................................................................................................... 8

Auto Industry .............................................................................................................. 13

Conclusion ............................................................................................................................... 20

References ............................................................................................................................... 21
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Introduction

The landscape of the marketing profession is one of constant change and development. As the

market place and customers’ needs changed, so has the marketing profession, and accordingly,

marketing channels have evolved in response to those forces. This is best summarized by the

statement that “any channel design will become outdated or absolute if it does not change

according to the changes in the marketing environment. Many factors tend to erode the

effectiveness of existing channels and hence the need to change the channel” (Kintu, 2007).

Since each industry and market experience change at different times, we suspect that the

marketing channels will evolve with each industry's specific changes. Also, due to technological

advances and changes in the structure of marketing communication channels, which have

managed to make individual marketing much easier to employ, we suspect that many companies

are moving toward direct marketing channels and channel integration.

While each industry experiences change in the marketing environment at varying times,

focusing on too many industries may lead to an overload of information and confusion to the

reader. Therefore, we will limit our research to three industries for the purposes of this paper.

We will begin with an overview of marketing channels and the role of intermediaries, followed

by an in depth look at the evolution of marketing channels in the computer industry, automotive

industry, and airline industry. Finally, we will assess how marketing channels have evolved in

each of the industries examined and compare the findings with our hypothesis that there is a

movement toward direct marketing channels and channel integration in many industries.

Marketing Channels
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As defined by the American Marketing Association, a marketing channel is:

“A set of practices or activities necessary to transfer the ownership of goods, and to move

goods, from the point of production to the point of consumption and, as such, which

consists of all the institutions and all the marketing activities in the marketing process”

(Wikipedia, 2010).

This definition closely resembles the definition provided in Contemporary Marketing, which

defines a marketing channel – also called a distribution channel – as “an organized system of

marketing institutions and their interrelationships that enhances the physical flow and ownership

of goods and services from producer to consumer or business user” (Kurtz, 2008).

To expand on these definitions, a marketing channel may be direct or indirect. The

simplest channel, a direct channel, “carries goods directly from a producer to the business

purchaser or ultimate user. This channel forms part of direct selling, a marketing strategy in

which a producer establishes direct sales contact with its product’s final users” (Kurtz, 2008).

On the other hand, indirect marketing channels involve an intermediary or multiple

intermediaries who participate in various marketing channel functions. An intermediary, or

middleman, is any “organization that operates between producers and consumers or business

users” (Kurtz, 2008) and may be an agent or broker (an intermediary with legal authority to act

on behalf of the manufacturer), a wholesaler (an intermediary who sells to other intermediaries),

or a retailer (an intermediary who sells to consumers) (Berkowitz, 2000). Figure 1 (University of

Alabama in Huntsville, 2003) provides a graphical representation of alternative marketing

channels that can exist.

Figure 1: Alternative Marketing Channels

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As mentioned above, intermediaries may perform various marketing channel functions

such as transactional, logistical, and/or facilitating functions. Transactional functions carried out

by the intermediary include buying (purchasing products for resale or acting as an agent for

supply of a product), selling (promoting products, contacting potential customers, and soliciting

orders), and risk taking (assuming risks of owning inventory that can become obsolete or

damaged) (Berkowitz, 2000). The intermediary may also perform logistical functions such as

assorting (creating product assortments from several sources to serve customers), storing

(warehousing products at a convenient location), sorting (purchasing in large quantities and

breaking into smaller amounts desired by customers), and transporting (physically moving a

product to customers). Finally, intermediaries may perform facilitating functions such as

financing (extending credit to customers), grading (inspecting or testing products and assigning
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quality grades), and marketing information and research (providing information to customers and

suppliers) (Berkowitz, 2000).

While many channels exist, no channel by itself will meet all of the company’s needs.

Therefore, marketers must constantly reevaluate channel choices in light of changing consumer

needs to determine the most appropriate channel or channels that meet the firm’s objectives.

Personal Computer Industry

In its early years, the personal computer industry revolved around indirect distribution

channels. However, in 1984 pioneer Michael Dell formed PCs Limited which sold IBM PC-

compatible computers built from stock components. This marked the evolution of direct

marketing channels in the computer industry with the company becoming the first to sell custom-

built computers directly to customers (Dell, Inc.). The company’s belief was that by selling

personal computer systems directly to customers, the company could better understand

customers’ needs and provide the most effective and efficient computing solutions to meet those

needs (Wikipedia, 2010). A year later the company designed its own computer and in 1988 it

officially changed its name to Dell Computer Corporation (Wikipedia, 2010). Figure 2 provides

an early example of Dell’s advertisements that emphasized the company’s direct sales strategy

aimed at satisfying individual consumer needs. By 1992, Dell’s success caused many companies

to reconsider the channels they currently employed and “spawned a flurry of direct-response

efforts from influential competitors” (McLeod, 1993) such as Compaq and IBM.

Figure 2: Direct Marketing Channel – Dell Advertisement

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By 1993, the PC had become a commodity and price wars had broadened affordability;

with both corporate and small business owners shopping a widening variety of channels

(McLeod, 1993). As a result, marketing channels for PCs changed dramatically during that time.

Apple, Compaq, and IBM had not only legitimized the direct response channel by firmly

establishing themselves within the channel but also utilized alternative channels of distribution,

including some or all of the following: mass merchants, consumer electronics retailers, catalog

showrooms, and third party mail order (McLeod, 1993). Although Dell products were available
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through retailers in the early 1990s, the company stopped using these channels in 1994 due to

low profit margins.

As the PC market moved further into the “mature” product phase, the marketing channels

continued to evolve. By the mid to late 1990s, most of the major vendors in the computer

industry were utilizing traditional, indirect channels as well as the new, direct channel developed

by Dell. This is of no surprise as the industry sought to alter its channel designs to meet changes

in consumer needs and the marketing environment. However, the once innovative Dell remained

steadfast with its direct sales model only to see its profits decline while rivals, such as HP,

enjoyed much better financial performance. This shift had occurred as consumer needs and

supply chain costs changed in the maturing PC industry (Chopra, 2006).

In the mid 1990s, when Dell’s direct channel model was at its peak, the doubling of chip

speed allowed a typical user to significantly enhance the applications he or she could use.

However, in today’s PC market, almost any 3-year-old computer is capable of handling the

majority of available applications with minimal interference to PC performance. Essentially, this

trend changed the value placed on variety and hardware configuration by the consumer. “In the

past, the ability to customize was highly prized by customers, and any surplus inventory quickly

lost value as newer components became available…Today, however, most customers are happy

to choose from a few standardized, off-the-shelf PC models” (Chopra, 2006). As the market

became more standardized, Dell’s ability to provide customization through its direct channel

became less relevant. Consequently, Dell was forced to reconsider its position and in 2007

began selling its computers through indirect channels (i.e. retailers such as Walmart and Sam’s

Club) in order to remain competitive.

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The research conducted should not be misinterpreted as suggesting that the direct channel

no longer has a role in the computer industry. Rather, the research indicates that companies

should utilize all channels available in order to satisfy customers’ needs. Some highly

recommend a hybrid system whereby individuals who seek customization are served via the

direct channel and the remaining consumers are served through traditional channels.

Dell’s example provides evidence, for all companies, that the choice of marketing

channel(s) should be driven by the product being sold, its lifecycle, and its level of maturity. The

example also provides support that companies cannot select a single marketing channel and

expect it to provide continuous success. Instead, the readings suggest that “success only follows

if the strengths of the channel and the product and market characteristics are appropriately

aligned” (Chopra, 2006).

Therefore, the research suggests that the computer industry, due to the fact that it has

reached maturity, has already experienced the movement toward direct marketing channels and

is now reverting back to traditional channels coupled with direct channels due to changes in the

market and customer’s needs. This is perhaps rather interesting as it is slightly different than our

expectations at the start of the research. While different than our expectations, it still leaves

room for channel integration.

The Seven Myths of Marketing Channel Integration looks at communicating with the

marketer from the consumer’s perspective. The article suggests that a consumer’s choice in

which channel it uses to communicate with the marketer is completely situational. In other

words, an urgent need may warrant a phone call; in performing research, the Web is the preferred

method, and when ready to make a purchase decision, a form of physical interaction may be
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required. At the time the article was written, 43 percent of internet users bought products from a

retailer’s offline store after viewing them on the seller’s website. The article also points out that

many of a marketer’s loyal customers use at least two channels and these multi-channel users

expect an integrated experience among all channels (Fitzpatrick, 2005). Therefore, since many

companies within the industry have come full circle with regards to marketing channels, perhaps

the future lies in a more integrated experience among channels.

Commercial Airline Industry

The history of commercial airlines, as we know it, had its beginnings in the 1930s when

aviation entrepreneurs determined that airplanes were fast and convenient enough to be a

profitable business [ CITATION Kru03 \l 1033 ]. However, only a small group of businessmen and

high society individuals had the means to afford flying. On average, flying cost 5 cents per mile

per passenger, in contrast to 1.3 cents per mile per passenger when traveling by train, which

made it difficult for ordinary people to justify the expense [ CITATION Kru03 \l 1033 ].

Nevertheless, by the 1940s more than three million Americans had experienced the joy of

traveling by plane. With the rapid industry growth, commercial airlines were forced to expand

their operations to include well defined marketing channels. This led to the creation of

reservation centers, which then expanded on to travel agency services[ CITATION Tri \l 1033 ].

In the 1950s flying was a popular trend in the American culture and in several other parts

of the world such as Europe and Latin America [ CITATION Kru03 \l 1033 ]. Pressured to keep up

with the demand, airline managers resorted to developing company-owned reservation centers to

better serve the traveling clients [ CITATION Tri \l 1033 ]. By calling the reservation center, a
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customer could make travel arrangements with the assistance of an operator who had to manually

track the inventory of available seats on each flight through a method of color coded cards

[ CITATION Wik103 \l 1033 ]. With the invention of Sabre (Semi-Automated Business Research

Environment) in the 1960s, operators finally had access to automated bookings and ticketing

processes [ CITATION Wik103 \l 1033 ]. American Airlines and Lufthansa were some of the first

airlines to take advantage of Sabre and it was not long before managers realized that adding

travel agencies to the distribution mix had many benefits [ CITATION Tri \l 1033 ].

Travel agencies had been around since the 1700s, but it was not until the 1960s that they

could offer the sale of airplane tickets [ CITATION Wik103 \l 1033 ]. With the help of Computer

Reservation Systems (CRS), similar to those used by the airlines’ reservation centers, travel

agencies became the one-stop-shop for travelers [ CITATION Tri \l 1033 ]. It was very convenient to

make travel arrangements that included hotel reservations and air transportation from the same

place. In addition, travel agents focused on building a close relationship with their customers

which encouraged repeat customers. Airlines did not miss the opportunity to use travel agencies

as local means of distribution channels and also continued offering the option of purchasing

tickets through the reservation centers and over-the-counter at airports. Up to this point in

history and after a slow start with direct channels, the airline industry began profiting from

indirect distribution channels.

Soon enough, however, the creators of Sabre invented a new program that was bigger and

better, commonly known as Global Distribution System or GDS [ CITATION Tri \l 1033 ]. By

implementing GDS, the airline industry was yet again revolutionized. Suddenly tourism became

easily marketable as airlines had access to information from scheduled domestic and
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international flights all in one place and in real-time. With a simple call or a visit to their nearest

travel agency, future passengers could be given a wide array of schedule options and fares

according to their preferences. For the first time, travelers had the opportunity to customize their

trips which led to a further increase in the popularity of the industry. Thanks to the

implementation of GDS in the 1970s and 1980s, airlines were able to redesign their marketing

distribution channels to be customer-centric. Not surprisingly, in the 1980s travel agencies

became the preferred method of planning airline travel as GDS systems fought hard to gain

global market share[ CITATION Tri \l 1033 ]. However, travel agencies would soon have to forgo

the generous commissions they received from the airlines, as a new invention came to threaten

their business: the Internet.

The birth of the Internet in the 1990s changed the ways in which companies conducted

business. Airlines were certainly not the exception. Aviation managers quickly acknowledged

that the internet was an alternative distribution channel, but its distribution potential was not

seriously considered until the turn of the century [ CITATION Tri \l 1033 ]. Since travel agencies

and airline reservation centers continued to be profitable and fitting for travelers’ preferences,

airline companies did little to use the web for channel distribution. Most major commercial

airlines had their websites up and running before the year 2000, but besides advertisement and

airport information not much else was offered. Expedia emerged in 1996 to be the "first online

travel service to be offered by a major technology company" [ CITATION Fun04 \l 1033 ]. The

travel website became a success with avid travelers in search for low cost airfare and

accommodations. Some of the features offered by Expedia included "airline seat selection, real-

time flight information, and a directory of hotels" and could be accessed via the same reservation

system that travel agencies used [ CITATION Fun04 \l 1033 ].

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Marketing alliances with websites, such as Expedia, Orbitz, and Travelocity, gave

airlines a competitive advantage among other sources of traveling and transportation; which also

lead to other forms of alliance, this time with other competing airlines [ CITATION Wik104 \l 1033 ].

Star Alliance became the first airline alliance when it was founded in 1997 [ CITATION Sta10 \l

1033 ]. Today, there exist three worldwide alliances that combine over 50 international airlines

allowing for code-sharing agreements between them [ CITATION Hoo10 \l 1033 ]. One of several

benefits of code-sharing is that customers of a particular airline can take advantage of more

destinations and schedules through other airlines; this practice provides the passenger with more

options to personalize trips that are most convenient for them. Loyalty program points are also

transferable among alliance members and can be recorded at the time of booking regardless of

where the ticket is purchased (i.e. Internet-based travel reservation website, airline website,

airline call center, airport counters, or travel agencies).

In 2006, forty percent of worldwide online sales were travel related, and more than thirty-

two percent of worldwide airline tickets were sold online, which indicates a clear and successful

use of multi-channel distribution in the airline industry [ CITATION Tri \l 1033 ]. Part of the success

can be attributed to the seamless vertical integration among all the key players who are able to

reach out to a large and diverse market and yet offer tangible added-value services to travelers

(see figure 3). It seems the airline industry will continue to make use of a wide range of

intermediaries to facilitate customer transactions for consolidated purchases of travel

arrangements that include hotel, car rental, air transportation, and other related activities.

Figure 3: Today’s Multi Channel Distribution

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So
urce: FACE – Future Airline Core Environment (Lufthansa): http://www.airlineinformation.org/conferences/

With the crowded environment of multi-channel distribution, airlines need to exert tight

control over the long chain of intermediaries through active management [ CITATION Tri \l 1033 ].

In order to achieve sustainable distribution flexibility in a rapid changing market environment,

distribution cost must be reduced by exploring alternative marketing channels that offer better

coverage and that better satisfy the buying requirements of the target market [ CITATION Ber06 \l

1033 ]. Fortunately, as technology continues to evolve, new distribution channels constantly

emerge, such as the practicality of mobile devices. For example, on June 12, 2010, Air France

launched its corporate website in mobile phone format which could be easily accessed by

"smartphone users (iPhone, Black-Berry etc.), wherever they are and at any time" [ CITATION

Air10 \l 1033 ]. Featuring both English and French contents, the mobile website does not yet offer

the purchase or reservation of plane tickets; nevertheless, Air France is the only airline today

with a website formatted for mobile devices [ CITATION Air10 \l 1033 ].

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In the future, we can expect to see a closer and more complex vertical integration of

channel distributors in the airline industry. A new technology is being developed that will consist

of the sale of tickets through mobile devices and permitting that passengers board the plane by

utilizing ticket information stored in their cell phones. An itinerary barcode will appear on the

passengers' cell phones that will be scanned at the time of check-in and also serve as a boarding

pass [ CITATION OhG07 \l 1033 ].

The airline industry has matured in many forms but it has reinvented the way in which

the products are being delivered to the customers. It has made excellent use of technology and

continues to provide customer-centric convenience to the avid travelers of today's increasingly

interconnected world.

Automotive Industry

The auto industry has always used an indirect marketing channel. The original

intermediary for the auto industry is the auto dealership, which is the retailer between the

manufacturer and the consumer. An intermediary has three main functions, all of which the auto

dealership perform. These functions are: transactional (buying, selling and risk taking),

logistical (assorting, storing, sorting and transporting), and facilitation (financing, grading, and

market and information research). In addition to auto sales, the auto dealer also provides other

products and services such as parts, accessories, financing plans, extended warranties and

insurance. According to a recent report, “the US automobile dealer industry includes about

45,000 new and used vehicle dealers with combined annual revenue of $600 billion” [ CITATION
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Ind10 \l 1033 ]. That means that many dealers would lose their business if the auto industry went

in the direction of direct marketing channels.

The auto industry relied heavily on traditional marketing to local consumers such as

newspaper, radio, television and outdoor billboard advertising. Dealerships benefit from the

larger manufacturers' mass national television advertisements and other offers such as cash

rebates and low interest financing. In recent years, and due to the Wall Street financial crisis,

consumers are not able to get the financing they once could from their banks and hence this is

making financing with the auto dealership more attractive. Interestingly enough, there is a new

federal reform which has been signed on the nation’s financial regulatory system. The auto

industry went to Capitol Hill three times to plea that their financing abilities not be affected by

the bill because they had nothing to do with the Wall Street crisis. David Shepardson, of the

Detroit News Washington Bureau, opens one of his articles with, “Word of caution: [Do not] bet

against the nation's 18,000 new-car dealers” [ CITATION Fro \l 1033 ]. Shepardson was right

because the auto industry succeeded in their plea. The author further commented: “Consumer

advocates and others wanted dealers included under the new agency's supervision because

dealers write $250 billion in car loans annually – nearly 80 percent of all loans" [ CITATION Fro \l

1033 ]. Ed Tonkin, chairman of the National Automobile Dealers Association and a dealer in

Portland, Oregon, also commented on the matter by saying: "Dealer-assisted financing will

continue to provide more convenience, more competition and more choices for car

buyers"[ CITATION Fro \l 1033 ].

New technologies over the past decade, such as the internet and mobile phones, are

opening new marketing communication channels to firms such as inbound marketing and social

media. Companies are now moving toward channel integration. According to the article “Paper,
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Bricks & Clicks; 10 Steps to Channel Integration,” it is important not to abandon traditional

marketing tactics in light of the new marketing channels:

“In plain English, you want to lock in the customers you already 'own' by offering them a

new channel without taking away established shopping options – at the same time

aggressively acquiring new customers who want the convenience of the Internet along

with the merchandising and service expertise of an established cataloger or

retailer"[ CITATION Dei00 \l 1033 ].

Electronic marketing channels use the internet to make goods and services available to

customers, and according to Berkowitz et al. (2006) “a unique feature of electronic marketing

channels is that they combine electronic and traditional intermediaries to create time, place, form

and possession utility for buyers” [ CITATION Ber06 \l 1033 ]. This method suggests that an

additional intermediary would be created for the auto industry (see chart below).

Figure 4: Electronic Marketing Channels

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UPromise will be used as an example to better illustrate this process. UPromise is a

SallieMae company that helps individuals save money for college, by providing points to buyers

for shopping through their website. Once interested parties are registered, they can click on the

shopping tab to purchase items from retailers such as GAP, JC Penney, Barnes and Nobles, and

Best Buy, among others [ CITATION Upr10 \l 1033 ]. When the transaction is completed, UPromise

deposits points into an account which will later translate into cash for the customers. Research

has shown that cars can also be acquired through UPromise. The company's search engine, which

has access to over 2,250 certified dealers, allows buyers to identify the specific type of car they

want, and provides information on the dealership closest to them. In addition to receiving points

for cash, customers also receive additional group discounts on their vehicle as incentives from

UPromise [ CITATION Upr10 \l 1033 ].

The mobile market is another marketing channel that benefits the auto industry.

According to a blog on Qwasi.com:

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“Suzuki is using the Text2Drive Mobile Marketing platform to offer car shoppers a very

quick, easy and hassle-free method of obtaining vehicle information without the need of

the Internet on their phones. Using text messaging (SMS) and picture messaging (MMS),

car shoppers can take home important information on different makes and models

available from Suzuki… Text2Drive allows car shoppers to get instant information on

their cell phone about a specific car including mobile website links and photos sent via

MMS”[ CITATION Qwa10 \l 1033 ].

This Text2Drive technology has created an additional communication channel that the auto

industry can use to target an audience that has not subscribed to an internet service on their

mobile phone. This channel allows the manufacturer to directly connect with the consumer

outside of the internet realm.

When the auto industry first started to launch social media advertisements, they

mistakenly thought that posting the same banner ads they had used for traditional marketing

campaigns would work online. However, the industry quickly found out that such a practice did

not work. The industry then “attempted to register their auto dealer clients as members of the

[online] community to promote themselves from within,”[ CITATION Phian \l 1033 ] but these

tactics were easily spotted and rejected from social media sites. Luckily, a solution was provided

by ronsmap.com:

“A game changing customer centric marketing platform with proprietary applications

including vBack and SellersVantage that generate Intelli-Leads with market and

consumer intelligence not previously available to auto dealers. vBack is a social media

engine that is embedded on the vehicle postings on ronsmap as well as the auto dealer’s

website and linked marketing channels with an Ask-a-Friend/Tell-a-Friend feature

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functionality that develops viral messages trafficked through the social networking

communities that the customer belongs to and trusts”[ CITATION Phian \l 1033 ].

This information is powered by the consumer, not auto dealers. This allows the dealer to tap into

the market created by social media in addition to the other social applications, such as Facebook,

Twitter and blogging, where people can read posts from some very serious car enthusiasts.

Today, websites from auto manufacturers, such as Ford, allow customers to view current

car models, obtain quotes and financing options, and locate dealerships. Moreover, it provides

consumers with the resources to build a customized vehicle and compare it to competitors’

models. The pricing and location features provide additional functionality by allowing buyers to

request local quotes, search for dealers, and see what incentives are offered. Furthermore, the

financing option allows the consumer to apply for credit, calculate monthly payments and

estimate the trade in value of their current vehicle. However, the lack of a logistical function

prevents the website from becoming a direct marketing channel. In other words, the consumer is

still required to go to a dealership to purchase the vehicle. Currently, BMW is the only company

to succeed. In addition to offering an auto dealer finder and a delivery program, the company

created the ultimate European plan. This plan gives shoppers a 7 percent discount on their

purchase by accepting delivery in Europe[ CITATION BMW10 \l 1033 ].

While it is possible for manufacturers to sell directly to the consumer in the auto industry,

the research does not support the movement toward a direct channel. With multiple marketing

channels and marketing communication channels improving sales, it is believed that the auto

industry will continue evolving channel integration. However, this is not to say that future
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changes in technology and customer needs will not call for a shift toward direct marketing

channels.
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Conclusion

In summary, channel integration seems to be a common marketing practice among the

computer, airline, and automobile industries. Marketing managers of the computer industry, who

pioneered the direct form of marketing channels, found that it was more advantageous to utilize

both direct and indirect channels as means of distribution. Similarly, airlines rely on many

intermediaries, as well on its own direct marketing channel efforts, in order to provide the best

coverage for the target market. Lastly, the auto industry has been able to move into direct

distribution channels thanks to the many technological advancements of today; but

simultaneously, this has also increased the use of intermediaries.

These three industries have demonstrated a clear movement towards multi-channel

integration while companies operating in each specific industry fight to achieve a strong and

stable competitive advantage. Through the practice of channel integration, marketing objectives

could potentially be more easily attainable given that direct and indirect distribution methods

would be consistently satisfying unique customer needs. Furthermore, in most cases, these

integrated activities also provide more value than when performed individually.

Companies must purposefully optimize their marketing initiatives by choosing the

distribution channel mix that best serves their interests and those of their customers' buying

requirements. Evidently, some companies may benefit by selecting only direct channels while

the majority will realize the benefits of maximizing vertical channel integration. As new forms

of technology continue to emerge, it is likely that companies will further integrate the process of

making their products or services available for consumers.

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