E-Marketing 4/E Judy Strauss, Adel I. El-Ansary, and Raymond Frost

2. E-Marketing 4/EJudy Strauss, Adel I. El-Ansary, and Raymond Frost Chapter 12: The Internet for Distribution 12-1

3. If I’m selling to you, I speak your language, If I’m buying, dannmussenSieDeutchsprechen. Will Brandt Wealth is in applications of mind to nature; and the art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot. Ralph Waldo Emerson The marketplace and every customer in it wants everything free, perfect, and now. Robert Rodin

4. Chapter 12 Objectives • After reading Chapter 12 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. 12-2

5. The Dell Story • Dell is the number one notebook and desktop PC maker in the world. • Dell utilizes a direct-distribution model to sell about $40 million per day online. • Wholesalers and retailers are eliminated. • Through its direct channel, Dell directly monitors its customers’ needs. • Dell handles 10,000 customer communications per day. 12-3

6. The Dell Story, cont. • Dell operates in both the B2B and B2C environments. • 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. • Dell has a tightly coordinated supply chain that sells in 104 country markets. • Have you (or has someone you know) benefited from Dell’s mass customization strategy? • And why is Dell starting to sell computers at Wal-Mart? • Dells at Wal-Mart 12-4

7. Distribution Channel Overview • A distribution channel is a group of interdependent firms that transfer product and information from the supplier to the consumer. • Producers • Intermediaries • Buyers • Each channel member performs some of the marketing functions. 12-5

8. Producers Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Buyer

9. Types of intermediaries • Wholesalers buy products from the manufacturer and resell them to retailers (or another wholesaler). • 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. 12-6

10. Channel Length and Functions • 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. • But what other functions do you reduce or lose?? 12-7

11. Producers Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Inter- mediaries Buyer

12. Channel Length and Functions • Disintermediation is the process of eliminating traditional intermediaries. • Complete disintermediation has not occurred. • The U.S. distribution system is the most efficient in the world. • Using intermediaries allows companies to focus on what they do best. • Many traditional intermediaries have been replaced with Internet equivalents. • Online storefronts can lower costs of retail space and warehouses. 12-8

13. Functions of a Distribution Channel • Channel functions can be characterized as follows: • Transactional Creating transactions between sellers and buyers • Logistical Moving stuff • Facilitating Helping the process along 12-9

14. Transactional Functions of the Internet • Transactional Functions include: • Making contact with buyers: customized to buyer’s needs, referral sources, 24/24 availability. • Marketing communication strategies: automated marketing campaign, monitored communication, user behavior tracking, coordination among intermediaries. • Matching products to buyer needs: shopping agents, recommendation to buyers. • Negotiating prices. • Processing transactions. 12-10

15. Logistical Functions • Logistical functions include physical distribution activities, such as: • Transportation • Inventory storage • Aggregation of products: channel intermediaries aggregate products from multiple suppliers. • Logistical functions are often outsourced to third-party specialists. 12-11

16. Outsourced Logistics • Third-party logistics providers can manage the supply chain and provide value-added services: assign tracking numbers, reverse logistics. • UPS • FedEx • United States Postal Service (USPS) • In the C2C market, eBay has formed a partnership with Mailboxes Etc and iShip. • Pack and ship sold items • http://www.mbe.com/ambe/prpr_041299.html • iShip eventually acquired by UPS • http://www.iship.com/ 12-12

17. The Last Mile Problem • A big problem for online retailers is the expense of delivering small quantities to homes and businesses. Often the recipient is not there to receive the product • 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. • Order online for offline retail delivery. 12-13

18. Facilitating Functions: Market Research • Market research is a major function of the distribution channel. • There are costs and benefits of Internet-based market research. • Some information is free. • Employees can conduct research from their desks. • Internet-based information tends to be timelier. • Web-based information is in digital form. • E-marketers can receive detailed reports. 12-14

19. Facilitating Functions: Financing • 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. • Protects consumers’ credit card numbers. • However, SET is so technical and costly for a upgrades that most merchants do not want to pay for it. 12-15

20. Distribution System • 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. 12-16

21. 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 12-17

22. VALUE Chain (integrated logistics) Farmer 1 Food supplier Farmer 2 Parts supplier Steel supplier Parts supplier Fabric supplier Wholesaler Retailer 1 Retailer 2 Wholesaler Agent Retailer 3 12-17

23. 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. • Holy grail in SCM: “scan one, make one – and deliver is fast” • Supply chain participants use enterprise resource planning (ERP) systems to manage inventory and processes. • Goal • Increase inventory turns • Decrease working capital 12-18

24. Channel Management and Power • Channel management requires coordination, communication and control to avoid conflict among channel members. • Electronic data interchange (EDI) is effective 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. • Extensible Markup Language (XML) is the probable technology for achieving the goal. 12-19

25. Classifying Online Channel Members • Online intermediaries can be classified according to their business model. • Content sponsorship • Direct selling • Infomediary • Intermediaries in the distribution channel 12-20

26. Content Sponsorship Model • Firms create web sites, attract traffic and sell advertising. • All the major portals utilize this model: • AOL • Yahoo! • MSN • Content sponsorship is often used in combination with other models. • For example, newspapers charge fees for archived articles. 12-21

27. Direct Selling Model • The manufacturer sells directly to the consumer or business customer. • Has been successful in B2B and B2C markets. • Digital products. • Perishable products such as flowers and fresh food. • Dell is the best example of direct selling on the internet 12-22

28. Infomediaries • The infomediary aggregates and distributes information. • http://www.edmunds.com/ • Market research firms are examples of infomediaries. • http://www.forrester.com/ • Some infomediaries compensate consumers for sharing demographic and psychographic information and receiving ads targeted to their interests. • Weatherbug 12-23

30. Intermediary Models • Three intermediary models are in common use on the Internet: • Brokerage models • Agent models • Online retailing models 12-24

31. Brokerage Models • The Broker creates a market in which buyers and sellers negotiate and complete transactions. • E*Trade and Ameritrade allow customers to place trades online.. • The B2B market has spawned brokerages. • Converge is the leading exchange for global electronics. http://www.converge.com/ • Online auctions are available in the B2B, B2C and C2C markets. 12-25

32. Agent Models • May represent sellers or buyers. • Agents that represent sellers: • Selling agents • Manufacturers’ agents • Metamediaries • Virtual malls • Agents that represent buyers: • Shopping agents • Reverse auctions • Buyer Cooperatives 12-26

33. Online Retailing Models • Online retailing is one of the most visible e-business models. • Online merchants set up storefronts online. • Digital goods may be delivered over the Internet. • Physical goods may be shipped via logistic providers. 12-27

34. Distribution Channel Metrics • U.S. consumers spent $114 billion online, 5.4% of all retail sales, during 2003. • This does not include the estimated 24% of brick-and-mortar sales driven by consumer research on the Internet before visiting stores. http://www.census.gov/eos/www/ebusiness614.htm 12-28

35. Distribution Channel Metrics • Besides revenue, B2C metrics may include: • ROI. • Customer satisfaction levels. • Customer acquisition costs. (Avg of $82 per customer) • B2B e-commerce was estimated at $624 billion in 2004. B2B metrics may include: • Time from order to delivery. • Order fill levels. • All about speed and fiscal efficiency • US B2B eCommerce in 2005 > $1.3 trillion • ~ 25% of all B2B transactions • 94% of all ecommerce transactions