Internet Marketing (MM3841)

1. Internet Marketing (MM3841) Week 5 Online Marketing 4P: Place

2. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

3. Distribution Channel Overview • A distribution channel is a group of interdependent firms that work together to transfer product and information from the supplier to the consumer. • Producers • Manufacturers • 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

4. Supply Chain & Distribution Channel Farmer 1 Food supplier Supply Chain Farmer 2 Manufacturer or Service Provider Parts supplier Steel supplier Parts supplier Fabric supplier Wholesaler Retailer 1 Retailer 2 Wholesaler Distribution Channel Agent Retailer 3 Manufacturer or Service Provider 12-4

5. Distribution Channel Overview • 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

6. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

7. Types of Intermediaries • Wholesalers • Buy products from the manufacturer and resell them to retailers • Could be online or offline • 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 agent – represents the seller • Purchasing agent – represents the buyer • May or may not take title to the goods

8. Distribution Channel Lengthand Functions • The length of the distribution channel: • the number of intermediaries between the supplier and the consumer. • Three major functions: • transactional, • logistical, • facilitating. • Disintermediation: • Originally it was thought that the Internet would eliminate intermediaries, but the Internet has actually created new intermediaries, called metamediaries.

9. Disintermediation • Eliminating an intermediary can potentially reduce costs since each intermediary must add to the price of the product in order to profit. • Complete disintermediation tends to be the exception because intermediaries can often handle channel functions more efficiently than producers can handle them. • An intermediary that specializes in one function, such as product promotion, tends to become more proficient in that function than a non-specialist.

10. Disintermediation • Examples include any major manufacturer who has decided to sell directly to the public rather than through distributors. • This could include auto manufacturers, computer manufacturers, DSL providers, etc. • This of course creates channel conflict because manufacturers can offer lower prices than any of their distributors.

11. Metamediaries • Metamediaries solve major consumer problems: • reducing search times, • providing quality assurance about vendors, • facilitating transactions for a group of related purchases, and • providing relevant and unbiased content information about the purchase. • Metamediary business partners benefit by having traffic directed to their sites as well as cobranding with the metamediary. • e.g. Theknot.com and Edmunds.com.

12. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

13. Functions ofa Distribution Channel • A lot of operations and functions are performed along the distribution channel, including holding inventory and the pick, pack, and ship functions. • These functions can be generally categorized as • transactional, • logistical, and • facilitating

14. Transactional functions • Contact with buyers • The Internet provides a new channel for communication • Contacts can be customized • Marketing communications • Advertising and other product promotions • Previously manual labor functions can be automated • Communications can be closely monitored and changed • The Internet enhances promotional coordination among intermediaries

15. Transactional functions • Matching product 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 • Negotiating price • Involves offers and counter offers • Could be in person, over the phone, via e-mail • Process transactions – Electronic channels lower transaction costs

16. Logistical Functions • Physical distribution • Most online products are distributed conventionally • Any content that can be digitized can be delivered electronically • Aggregating product • 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

17. Logistical Functions • Third-party logistics – outsourced logistics • Many companies outsource logistics to a third-party • UPS, USPS and FedEx provide third party logistics for many firms • The last mile problem • Delivering small quantities cost more money • 25% of deliveries require more than one delivery attempt • 30% of packages are left on door steps, increasing the possibility of theft

18. The last mile problem • One big problem facing online retailers and logistics managers is the added expense of delivering small quantities to individual homes and businesses. • It is much less expensive to send cases of product to wholesalers and retailers and let them break the quantities into smaller units for sale.

19. Facility Functions • Market research • Market research is a major function of the distribution channel • The Internet allows for market research in five ways: • Much of the information on the Internet is free • Managers and employees can conduct research from their desks • Information on the Internet tends to be more relevant and current • Web based information is already in digital format • Because of the amount of consumer behavior information available, marketers can receive information in detailed reports

20. Facility Functions • Financing • Financing is a must in both consumer and business transactions • Secure Electronic Transactions (SET) is required for customers to feel comfortable purchasing online • Legitimizes merchants and consumers. • 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.

22. Channel Management and Power • Just as the Internet has increased the power of buyers by providing access to more information and to more suppliers, it has increased the power of suppliers, as well. • Once a channel structure is established, its viability requires a certain measure of coordination, communication, and control to avoid conflict among its members. • A channel member must emerge to assume leadership in these measures. A type of business-to-business commerce known as electronic data interchange (EDI) is effective in establishing structural relationships between businesses.

24. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

25. Classifying OnlineChannel Members • Content Sponsorship • Firms create Web sites to attract lots of traffic • Firms sell advertising on the Web site • Most firms use content sponsorship in conjunction with other models to generate multiple revenue streams • Direct Selling • The manufacturer sells directly to the consumer or business customer • Disintermediation saves customers money by avoiding the middleman • Infomediary • An online organization that aggregates and distributes information • Market research firm that compensates consumers for sharing information

26. Infomediary • An infomediary is an online organization that aggregates and distributes information. • One form of infomediary is a market research firm. Usually the infomediary compensates the consumer for sharing her information. • e.g. comScore (http://www.comscore.com) • e.g. DoubleClick (http://www.doubleclick.com)

27. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

28. Intermediary Models • Brokerage Models • Agents DO NOT represent any party • Agent Model • Agents DO represent either the buyer or the seller, depending on who pays the fee. • Online Retailing Model

29. Intermediary Models Brokerage Models • creates a market in which buyers and sellers negotiate and complete transactions. • Buyer benefits: • Buyer convenience, • speed of order execution, and • transaction processing. • Seller benefits: • a creation of a pool of buyers

30. Intermediary Models Brokerage Models • Examples of Online Exchange • E*Trade • Ameritrade • AutoByTel (allows for brokering of cars) • Examples of Online auction • eBay • Amazon • iOffer • Sell.com • Ubid

31. Intermediary Models • Agent models representing sellers • Selling agents • Represent a single firm • Help them sell products • Manufacturer’s agents • Represent more than one seller • Travel agents are examples • Also called catalog aggregators

32. Intermediary Models • Agent models representing sellers • Metamediaries • Represent a cluster of manufacturers, online retailers, and content providers • Solve problems of reducing search times, providing quality assurance, facilitating transactions for a group of related purchases, and providing relevant content information • Virtual malls • Host multiple online merchants • Similar to an offline shopping mall • Virtual malls provide multiple customer benefits

33. Intermediary Models • Agent models representing buyers • Shopping agents (e.g. BizRate.com) • Shopping agents measure value, not just price • These are called second generation shopping agents • Reverse auction • 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

34. Intermediary Models • Online Retailing • One of the most visible e-business models. Online stores are setup to sell to consumers or businesses. • Digital products • The Internet serves as a medium for distribution of goods and services • Online content includes • Newspapers • Music • movies • Tangible products • Tangible products are distributed through conventional channels • Digital products are still sent through traditional channels

35. Overview • Distribution Channel Overview • Types of Intermediaries • Functions of a Distribution Channel • Classifying Online Channel Members • Intermediary Models • Distribution Channel Metrics

36. Distribution Channel Metrics • Two strategies are particularly effective • A high reach strategy of accumulating large numbers of customers with cost-effective conversion rates for high-frequency purchases of low-margin products and services such as CDs and books (Amazon.com) • A niche strategy with narrow focus on a particular product or service category such as luxury items or apparel. (Dell.com)

37. Distribution Channel Metrics • Additional measures recommended • Which affiliations deliver the most users? • What is happening to users referred from an affiliate site? • When and how do customers arrive at a Web site? • How long do users stay at a Web site? • How is buyer behavior different from other users who do not buy? • How frequently are visitors converted to customers? • Which channel partners deliver the most profitable customers? The most loyal ones?