E-MARKETING/6E

CHAPTER 11
11-2 CHAPTER 11 OBJECTIVES

 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.
 Distinguish among e-commerce, m-commerce,
social commerce, and F-commerce.
 Highlight how companies can use distribution
channel metrics.
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11-3 THE ZAPPOS STORY

 Zappos is the world’s largest online shoe store.

 Sales over $1 billion in 2009.
 Part of amazon.com since November 2009.
 Operates as a wholly owned subsidiary in
Henderson, NV.
 Success factors include a culture of outstanding
customer service.
 Other success factors: great search engine
marketing, strong word of mouth, astute
competitiveness, and repeat customers.
 http://www.inc.com/ss/zappos-struggle#9

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 11-4
DISTRIBUTION CHANNEL
OVERVIEW
 A distribution channel is a group of
Describe interdependent firms that transfer product
the three and information from the supplier to the
major consumer.
functions  Producers
of a  Manufacturers & their Suppliers
distribution  Originators of the product or service
channel  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

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11-5
DISTRIBUTION CHANNEL
OVERVIEW, CONT.
 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

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11-6
ONLINE CHANNEL
INTERMEDIARIES
 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

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11-7
ONLINE CHANNEL
INTERMEDIARIES, CONT.
 Agents
 Facilitate transactions between buyers and
sellers
 may represent either the buyer or seller.
 Manufacturer’s agents represent the
seller.
 Purchasing agents represent the buyer.
 Do not take title to the goods

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11-8 E-BUSINESS MODELS

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11-9 CONTENT SPONSORSHIP

 In this model firms create websites to attract

lots of traffic and sell advertising on the
website.
 All the major portals, Google, Yahoo!, and MSN
utilize this model.
 Online magazines, newspapers… etc. use the
content sponsorship model (Pandora Radio,
Google).
 Content sponsorship is often used in
combination with other models to generate
multiple revenue streams (Buy.com).
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11-10 INFOMEDIARY

 An infomediary is an online organization that

aggregates and distributes information.
 Market research firms and product review sites are
examples of infomediaries.
 Google’s DoubleClick uses cookies to track users as
they surf the Web
 ePinions.com accumulate ratings and written reviews.
 The original idea was to give consumers more control
over how they receive marketing messages.
 The benefit to:
 Infomediary: the consumer information increases the
value of its ad inventory
 Advertisers: they can market to a highly targeted
audience
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 11-11
INTERMEDIARY MODELS

 Three intermediary models are in common

Outline
the major
use on the Internet:
models A. Brokerage models
used by
online  Online Exchange
channel
members.
 Online Auction
B. Agent models for sellers and buyers.
C. Online retailing

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 INTERMEDIARY MODELS,
11-12
CONT.
A. BROKERAGE MODELS
 The broker 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
 Cost saving benefits
 Buyers: low prices, decreased search time and
savings of energy and frustration
 Sellers: lowered customer acquisition costs and
transactions costs
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 INTERMEDIARY MODELS,
11-13
CONT.
A. BROKERAGE MODELS
 Online Exchange: E*Trade, Schwab and
Ameritrade allow customers to place trades
online without a broker.
Autobytel.com is a vehicle exchange and
alibaba.com is a global marketplace.
 The B2B market has also produced brokerages.
 Converge is the leading exchange for global
electronics.
 Guru.com is an exchange for professional talent.
 Online Auction: Auctions are available in the B2B
(uBid), B2C (Priceline), and C2C (ebay) markets.

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 INTERMEDIARY MODELS,
11-14
CONT.
B. AGENT MODELS
 Agents do represent either the buyer or
the seller, depending on who pays the fee.
a. Agent models representing sellers include:
1. Selling agents such as affiliate programs
(Amazon.com)
 Represent a single firm, helps them sell products
a. Manufacturer’s agents, e.g. travel agents
(Expedia)
1. Represent more than one seller,
2. In B2B called catalog aggregators (Arriba,
collegesources.org)

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 INTERMEDIARY MODELS,
11-15
CONT.
B. AGENT MODELS
 Two other intermediaries that act like agents but
confront easy categorization
3. Metamediaries Edmunds.com and TheKnot.com.
 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,
 providing relevant content and unbiased
information.
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 INTERMEDIARY MODELS,
11-16
CONT.
B. AGENT MODELS
4. Virtual malls: (Yahoo! Shopping, Amazon)
 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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11-17 AFFILIATE PROGRAMS

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 INTERMEDIARY MODELS,
11-18 CONT.
B. AGENT MODELS
b. Agent models representing buyers include:
 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 was the first major player in reverse
auctions.
b. Buyer cooperative (buyer aggregator) (Groupon
and LivingSocial)
 Pool many buyers together to drive down prices on
the selected items
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11-19
SHOPPING AGENT:
CNET SHOPPER

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 INTERMEDIARY MODELS, CONT.
C. ONLINE RETAILING: E-COMMERCE
11-20

 One of the most visible e-business models

 In the e-commerce model, merchants (such as Zappos) set
up storefronts online and sell to businesses and
consumers.
 Online companies can sell a wider and deeper assortment
of products in smaller quantities than offline stores
because they are not bound by space constraints
(advantage).
 The “long tail” refers to the ability to increase revenue
by selling small quantities of large numbers of products
profitably online (e.g. Netflix: DVDs).
 Multichannel marketing is the use of more than one sales
channels such as Web, mobile, brick & mortar, and
catalog.
 Omni-channel shopping describes the way consumers
move seamlessly through many shopping channels
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11-21
WHAT DO U.S. CONSUMERS
BUY ONLINE?

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11-22
SHOPPING CART
ABANDONMENT
 Shopping cart abandonment is one of online
retailing’s biggest problems.

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 INTERMEDIARY MODELS, CONT.
11-23
C. ONLINE RETAILING: M-COMMERCE

 Mobile commerce occurs when consumers make a

transaction with a smartphone or other mobile device.
 M-commerce is a subset of e-commerce.
 77% of U.S. population has a mobile phone; half
are smartphones that enable m-commerce.
 M-commerce was projected to reach $11.6 billion
in 2012, 5.9% of all e-commerce sales.
 A rapidly growing area of e-commerce
 Near-field communication (NFC) involves two
devices that communicate by touching each other
or being very close

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11-24
SQUARE CARD FACILITATES
M-COMMERCE

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 INTERMEDIARY MODELS, CONT.
11-25 C. ONLINE RETAILING: SOCIAL
COMMERCE
 Social commerce is a piece of e-commerce that uses
social media and consumer interactions to facilitate
online sales.
 Over half of social media users prefer to use Facebook
to sign into a Web site followed by Google & Yahoo!.
This is called social sign in.
 Demonstrates the shift from corporate to user control
 18-23% of Pinterest users also visited online retailers.
 Product rating, recommendation and review sites
allow for the sharing aspect critical to social commerce
(ePinions, Tripadvisor & Amazon).
 Initiated by customers via online spaces provided by
businesses
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 INTERMEDIARY MODELS, CONT.
11-26 C. ONLINE RETAILING: SOCIAL
COMMERCE

 F-Commerce (Facebook Commerce)

 A subset of social commerce
 Companies use Facebook to facilitate e-
commerce
 Facebook is for communicating not selling,
thus its not always work as well as product
apps and pages

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 INTERMEDIARY MODELS,
11-27 CONT.
C. ONLINE RETAILING
 Tangible products
 Tangible products are distributed through
conventional channels
 Digital products are still sent through
traditional channels
 Digital products / Content sales
 The Internet serves as a medium for
distribution of goods and services such as
news, music, software, movies, education, etc.

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 INTERMEDIARY MODELS,
11-28 CONT.
C. ONLINE RETAILING
 Direct Distribution
 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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 DISTRIBUTION CHANNEL
11-29
LENGTH AND FUNCTIONS

 Channel length refers to the number of

Explain intermediaries between the supplier and the
how the consumer.
Internet is  Direct distribution channels have no intermediaries.
affecting  Indirect distribution channels have one or more
distribution intermediaries.
channel  It was predicted that the Internet would eliminate
length. intermediaries (a process called disintermediation)
but the Internet has actually created new
intermediaries, called metamediaries.
 Eliminating intermediaries can potentially reduce
costs.
 Disintermediation describes the process of eliminating
traditional intermediaries.
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 FUNCTIONS OF A
11-30
DISTRIBUTION CHANNEL
 Channel functions can be characterized as
follows:
 Transactional
 Logistical
 Facilitating
 Market research
 Financing

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11-31 TRANSACTIONAL FUNCTIONS

 Transactional Functions include:

 Contact with buyers
 Marketing communications
 Matching products to buyer’s needs.
 Negotiating price.
 Processing transactions.

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 TRANSACTIONAL FUNCTIONS,
11-32
CONT.
1. Contact with buyers
 The Internet provides a new channel
for making contact with buyers.
 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, shopping agents & social
networks)
 Always open for business (7/24)

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 TRANSACTIONAL FUNCTIONS,
11-33
CONT.
2. Marketing communication
 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
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11-34
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 counteroffers
 Could be in person, over the phone, via e-mail
5. Processing transactions.
 Electronic channels lower transaction costs
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11-35 LOGISTICAL FUNCTIONS

 Logistical functions include

 Physical distribution activities, such as:
 Transportation, Inventory storage, and
Aggregation of products.
 Logistical functions are often outsourced to
third-party specialists such as UPS or FedEx.
 Radio frequency identification (RFID) tags are
used to transmit a signal to scanners.
 Most online products are still distributed
through conventional channels
 Any content that can be digitized can be
delivered electronically

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 LOGISTICAL FUNCTIONS,
11-36
CONT.
 Aggregating 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 (e.g. Amazon.com)

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 LOGISTICAL FUNCTIONS,
11-37
CONT.
 Third-party logistics – outsourced logistics
 Many companies outsource logistics to a
third-party
 Third-party logistics providers can manage
the company’s supply chain and provide
value-added services.
 UPS, USPS and FedEx provide third party
logistics for many firms

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 LOGISTICAL FUNCTIONS,
11-38
CONT.
THE LAST MILE PROBLEM
 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 (FedEx).
 Retail aggregator model: delivery at
convenience stores or service stations.
 E-stops, storefronts exists for customer
package pickups.
 Order online for offline retail delivery.
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11-39
FACILITATING FUNCTIONS
MARKET RESEARCH
 Market research is a major function of the
distribution channel
 The Internet affects the value of market research
in five ways
 Some information is free.
 Managers and employees can conduct research
from their desks.
 Internet-based information tends to be timelier.
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.
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 FACILITATING FUNCTIONS,
11-40 CONT.
FINANCING
 Financing is an important facilitating function in both
consumer and business transactions
 Intermediaries want to make it easy for customers to
pay in order to close the sale.
 Secure Electronic Transactions (SET) is required for
customers to feel comfortable purchasing online
 Credit card companies have formed SET as vehicle for:
 Legitimizes merchants and consumers.
 Protects consumers’ credit card numbers.
 U.S. customers have a maximum $50 liability for
purchases made with a stolen card.

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11-41
DISTRIBUTION SYSTEM
 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.
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11-42
NEW DEFINITION
OF SUPPLY CHAIN

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 11-43 SUPPLY CHAIN MANAGEMENT

 Supply chain management (SCM) refers to the

Discuss coordination of the flow of material, information,
trends in and finance.
supply
chain
 The most important flow is that of information
manage- because creation of physical product and the
ment and financing depend on the information.
power  Key functions of supply chain management are
relationship continuous replenishment and build to order to
s among
channel
eliminate inventory.
players.  Supply chain participants use enterprise resource
planning (ERP) systems to manage inventory and
processes.
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11-44
CHANNEL MANAGEMENT
AND POWER
 Once a channel structure is established, its
viability requires a certain measure of
coordination, communication, and control to
avoid conflict among channel members.
 A channel member must emerge to assume
leadership in these measures.
 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.

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11-45
CHANNEL MANAGEMENT
AND POWER, CONT.
 Electronic data interchange (EDI) is effective in
B2B commerce for establishing structural
relationships among businesses.
 EDI is based on three key variables:
 The openness of the system
 The transport method (internet or non-
internet)
 The type of technology used for
implementation.
 Therefore EDI goal is to create an Internet-based,
open system so that suppliers and buyers can
integrate their systems.
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 DISTRIBUTION CHANNEL
11-46 METRICS:
B2C MARKET
 Besides revenue, B2C metrics may
Highlight include:
how
companies  ROI.
can use
distribution  Customer satisfaction levels.
channel
metrics.
 Customer acquisition costs.
 Conversion rates.
 Average order values.

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11-47 DISTRIBUTION CHANNEL METRICS:
B2B MARKET

 It is impossible to measure B2B revenue

because it happens behind company walls.
 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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11-48
TOP TEN ONLINE
RETAILERS

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11-49

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