Internet Marketing (MM3841)
Week 5
Online Marketing 4P: Place
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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
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Distribution Channel
Overview
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A distribution channel is a group of
interdependent firms that work together to
transfer product and information from the
supplier to the consumer.
Producers
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Intermediaries
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Manufacturers
Originators of the product or service
A firm that matches buyers and sellers
May be independent or represent the parties involved
Buyers
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The end user
Those that consume the product or service
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12-4
Supply Chain & Distribution
Channel
Farmer 1
Farmer 2
Steel
supplier
Food
supplier
Supply Chain
Parts
supplier
Manufacturer or
Service Provider
Parts
supplier
Fabric
supplier
Distribution Channel
Wholesaler
Retailer 1
Retailer 2
Wholesaler
Manufacturer or
Service Provider
Agent
Retailer 3
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Distribution Channel
Overview
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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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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
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Types of Intermediaries
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Wholesalers
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Brokers
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Buy products from the manufacturer and resell them to
retailers
Could be online or offline
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
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Facilitate transactions between buyers and sellers
DO represent one of the parties
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Manufacturer agent – represents the seller
Purchasing agent – represents the buyer
May or may not take title to the goods
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Distribution Channel Length
and Functions
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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. 8
Disintermediation
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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.
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Disintermediation
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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.
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Metamediaries
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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.
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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
12
Functions of
a Distribution Channel
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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
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Transactional functions
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Contact with buyers
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The Internet provides a new channel for
communication
Contacts can be customized
Marketing communications
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Advertising and other product promotions
Previously manual labor functions can be
automated
Communications can be closely monitored
and changed
The Internet enhances promotional
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coordination among intermediaries
Transactional functions
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Matching product to buyer’s needs
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Negotiating price
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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
Involves offers and counter offers
Could be in person, over the phone, via e-mail
Process transactions – Electronic channels
lower transaction costs
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Logistical Functions
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Physical distribution
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Most online products are distributed conventionally
Any content that can be digitized can be delivered
electronically
Aggregating product
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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
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Logistical Functions
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Third-party logistics – outsourced logistics
Many companies outsource logistics to a
third-party
 UPS, USPS and FedEx provide third party
logistics for many firms
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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
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The last mile problem
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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.
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Facility Functions
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Market research
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Market research is a major function of the distribution
channel
The Internet allows for market research in five ways:
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Much of the information on the Internet is free
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Managers and employees can conduct research from their
desks
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Information on the Internet tends to be more relevant and
current
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Web based information is already in digital format
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Because of the amount of consumer behavior information
available, marketers can receive information in detailed
reports
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Facility Functions
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Financing
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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.
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Channel Management and
Power
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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-tobusiness commerce known as electronic data
interchange (EDI) is effective in establishing
structural relationships between businesses.
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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
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Classifying Online
Channel Members
Content Sponsorship
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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
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The manufacturer sells directly to the consumer or business
customer
Disintermediation saves customers money by avoiding the
middleman
Infomediary
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An online organization that aggregates and distributes
information
Market research firm that compensates consumers for sharing
information
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Infomediary
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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)
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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
27
Intermediary Models
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Brokerage Models
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Agent Model
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Agents DO NOT represent any party
Agents DO represent either the buyer
or the seller, depending on who pays
the fee.
Online Retailing Model
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Intermediary Models
Brokerage Models
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creates a market in which buyers and
sellers negotiate and complete
transactions.
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Buyer benefits:
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Buyer convenience,
speed of order execution, and
transaction processing.
Seller benefits:
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a creation of a pool of buyers
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Intermediary Models
Brokerage Models
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Examples of Online Exchange
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E*Trade
Ameritrade
AutoByTel (allows for brokering of cars)
Examples of Online auction
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eBay
Amazon
iOffer
Sell.com
Ubid
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Intermediary Models
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Agent models representing sellers
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Selling agents
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Represent a single firm
Help them sell products
Manufacturer’s agents
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Represent more than one seller
Travel agents are examples
Also called catalog aggregators
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Intermediary Models
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Agent models representing sellers
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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
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Intermediary Models
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Agent models representing buyers
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Shopping agents (e.g. BizRate.com)
Shopping agents measure value, not just price
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These are called second generation shopping agents
Reverse auction
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The buyer specifies a price and the sellers bid for the
buyer’s business
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Priceline.com is a reverse auction
Buyer cooperative
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Also known as buyer aggregator
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Pools buyers together to drive down price on the
selected items
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Intermediary Models
Online Retailing
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One of the most visible e-business models. Online
stores are setup to sell to consumers or businesses.
Digital products
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The Internet serves as a medium for distribution of goods
and services
Online content includes
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Newspapers
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Music
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movies
Tangible products
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Tangible products are distributed through conventional
channels
Digital products are still sent through traditional channels
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Overview
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Distribution Channel Overview
Types of Intermediaries
Functions of a Distribution Channel
Classifying Online Channel Members
Intermediary Models
Distribution Channel Metrics
35
Distribution Channel Metrics
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Two strategies are particularly effective
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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)
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Distribution Channel Metrics
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Additional measures recommended
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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?
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