Abhay kumar(PGDM) Abhay kumar(PGDM) abhay.01icbm@gmail.comabhay.01icbm@gmail.com

The Net As A Channel of Distribution

Learning Objectives

Marketing review– Describe the functions of a distribution channel– Differentiate between an indirect and direct channel

Describe the Internet’s strengths in bringing buyers and sellers together

Explain how the Internet has both shortened and lengthened distribution channels

Discuss the advantages and disadvantages of electronic retailing from the retailer’s perspective

Learning Objectives

Tell how the Internet has added value to the consumer shopping experience

Discuss the importance of shopping agents for the Net retailers

Explain the security risks for online shopping Understand how the Internet has changed the

balance of power in distribution channels

The RealNetworks storyClick here RealNetworks.com

Rob Glaser, founder and CEO of Real Network, Inc.– Creates software to encode and deliver audio and

video content over the Internet– Found a solution to the slow aspect of the Internet

thanks to a 3-key concept:• Compression• Streaming • Caching

– The products:• Real Player G2• Real Server

Audio BooksAuthor Interviews, News Releases…

RadioLocal, Shows…

CD JukeboxListening Parties…

TVLocal, Networks, News, Weather…

VideoEducational, Movies, TV Series…

BroadbandMovies, Music, TV Shows…

Exhibit 5 - 1 Yahoo! Broadcast Content Offerings

RealSlideshowAdds music and narration to digital images in order to Web-enable slideshows

RealProducerConverts existing audio and video files into RealAudio and RealVideo formats

RealPresenterAdds audio and video to Microsoft PowerPoint presentations, then converts them to a format for display on the Web

Exhibit 5 - 2 RealNetworks’ Content Creation Products

The Net as a Distribution Channel

“A group of independent firms that work together to transfer product and information from the supplier and the customer.”

Three perspectives to distribution channels.

1) by type of intermediary

2) by function performed in the channel

3) by flow of products, information and $$$

1. Types of Intermediaries Wholesalers- buy product from the

manufacturer and then resell it to retailers.

E-tailers- buy product from the wholesaler and then sell it directly to consumer.

Brokers- facilitate transactions between buyers and sellers, called market makers.

Agents- Manufacturing or Purchasing agents depending on who they are working for.

2. Functions of Distribution Channels

Transactional– Making contact with buyers – Using communication strategies to make them aware of products.

Two examples of communication strategies is the promotion of a web site via www.did-it.com

Shopping agents such as www.comparenet.com allow the consumer to rapidly compare prices and features within product categories.

– Matching products to buyers’ needs:• Shopping agents• Collaborative filtering agents

– Negotiating prices– Processing transactions

Exhibit 5 - 3 Honda Dealer LocatorSource: www.honda.com

Exhibit 5 - 4 Land Rover Allows Customers to View Options OnlineSource: www.landrover.com

Exhibit 5 - 5 Egghead and Onsale Combine to Form E-Tailer and Auction Site Source: www.egghead.com

Functions of Distribution Channels

Logistical

– The physical distribution such as transportation and storing inventory, often outsourced to third party logistics providers.

www.ups.com and www.fedex.com are the major distributors and even offer packaging that is specific to products their clients sell. It is also beneficial for firms to outsource their entire order processes, to ensure timely delivery of stock.

– Physical distribution– Aggregating products (category killers)– Third-Party logistics (outsourced logistics)

Exhibit 5 - 6 CNET Download.com Carries Thousands of Software Titles

Source: www.download.com

Functions of Distribution Channels

Facilitating Functions– Include marketing research about buyers

Accurate assessment of the size and characteristics of the target audience helps manufacturers with product development and marketing communications.

www.mediametrix.com produces a site interaction report that details to what extent a site shares audience with another site, showing exclusive and duplicated audience.

– Financing of purchases.

Financing purchases is an important function, intermediaries try to do everything possible to make it easy for customers to pay in order to close the sale.

-Secure Electronic Transactions

Raw M aterials C onsum erRetailerWh olesalerM anufac turerSupplier

Supply Chain (traditional) Distribution Channel

Value Chain = Integrated Logistics = Supply Chain (redefined)

Exhibit 5 - 7 Traditional Definition and Redefinition of the Supply Chain

3. The system Perspective:

- Flow of products, information and finance

- Three ways to define the scope of a channel:

Supply Chain Management

The coordination of flows of material, information, and finances.

Enterprise Resource Planning facilitates the interoperability of the SCM system because ERP systems seamlessly share information, which greatly coordinates the chain functions in real time.

Supply Chain Management System

Supplier ERP Manufacturer ERP Buyer ERP

Supplier ERP Manufacturer ERP Buyer ERP

SCM System

Exhibit 5 - 8 SCM System Interfaces with Multiple ERP Systems

Category Total Spent PercentAir tickets $317,608,160 11Books 224,366,970 8Computer hardware 224,363,200 8Software 186,657,790 7Apparel 181,559,600 7Hotel reservations 163,786,610 6Toys/video games 146,064,780 5Music 143,073,410 5

Health and beauty 142,829,050 5Consumer electronics 126,160,790 5Car rental 101,390,580 4Videos 99,514,830 4Office supplies 98,695,570 4Food/beverage 77,649,090 3Jewelry 71,143,500 3Linens/home decor 58,062,380 2Flowers 57,727,530 2Sporting goods 52,905,400 2Footwear 42,212,950 2Small appliances 36,333,310 1Tools and garden 26,679,230 1Furniture 22,839,110 1Appliances 9,751,320 0Other 173,128,090 6Total spending,January 2000 $2,784,503,250Number ofshoppers 13,744,000Average spentper consumer $203

NRF/Forrester Online Retail IndexJan-00

Exhibit 5 - 13 Consumer Online Retail Expenditures January 2000

Source: Adapted from CyberAtlas, www.cyberatlas.com

Length Of Distribution Channel

• Disintermediation: process of eliminating traditional intermediaries

-Internet expected to eliminate intermediaries

• Intermediaries specialize therefore provide better service than the manufacturer.

• Internet disintermediation failed:

1. U.S. Have most efficient distribution system in the world

Length Of Distribution Channel

2. Intermediaries allow corporation to maintain focus on their core business

3. Traditional intermediary simply replaced with their internet equivalent• Online intermediaries are more efficient than their

brick+mortar counterpart. (Cost savings).

• Creation of new intermediary (e.g. yahoo broadcast):

• Shopping agents: www.shopper.com

• Buyer cooperatives

• Metamediaries

Power Relationship Among Channel Players

Introduction of new technology can alter relationships between existing channel players:

– Increased power of supply:• Importance of the location neutralized by the Internet• Buyers have access to more information (suppliers and pricing

information)

– Increased power of suppliers:• Suppliers taking the lead online will receive business from

consumers and firms willing to shop in this channel• Suppliers can establish Structural Relationship with buyers

Exhibit 5 - 9 CNET Shopper Helps Users Find Computer-Related Products

Source: www.shopper.com

Openness Transport Technology

Proprietary Non-Internet Traditional EDI

Open system Non-Internet Standards-based EDI (X.12)

Proprietary Internet Application Program Interface (API)

Open system Internet Open Buying on the Internet (OBI)

Open system Internet Extensible Markup Language (XML)

Exhibit 5 - 10 Flavors of EDI

EDI Electronic Data Interchange

E.D.I. is defined as the transfer of structured data by agreed message standards from computer to computer by electronic means.

In an increasingly global market, companies are seeking methods to communicate, streamline and automate common business transactions.

Electronic Data Interchange or EDI was designed to create a common language for the direct application-to-application transmission of business documents between computers.

EDI improves the speed, economy and accuracy of transmitting documents.

Key Considerations For EDI to be Implemented

The openness of the system.

The transport method (Internet of Non-Internet).

The type of technology used for implementation.

These Variables yield in combination five flavors of EDI that are used in industry today.

Openness Transport Technology

Proprietary Non-Internet Traditional EDI

Open System Non-Internet Standards-based EDI (X.12)

Proprietary Internet Application Program Interface (API)

Open System Internet Open Buying on the Internet (OBI)

Open System Internet Extensible Markup Language (XML)

The Goal of EDI

The goal is to create a standards-based open system that runs over the Internet so that all suppliers and buyers can seamlessly integrate their systems.

The Key: Extensible Markup Language (XML) XML effectively takes html to the next level adding

functionality that HTML does not possess.

XML is the glue that connects SCM, ERP, and other systems together into seamless networks

www.extricity.com

The Benefits of EDI

The New EDI era brings many advantages:

Reduces the delays caused by postal paper chains.

Avoids the need to re-key data and therefore saves time and reduces errors.

Avoids the cost of the creation, recording and storage of paper documents and records.

Facilitates shorter lead times and reduced stock holdings which allow reductions in working capital requirements (i.e. just-in-time policies).

Provides the opportunity to improve customer service.

Provides the opportunity to reduce administrative costs.

An EDI System Example

Value Added Networks, VANS

A direct communication link to any trading partner

Knowledge of EDI standards and evolving EDI technologies

Economy of scale

Ability to support multiple data format standards

Value-added component -training, software, consulting, ...-

VANS System DiagramWarehouse Bank

Air Freight Transporter

Retail Outlet

EDI MailBOX Overland Distributor Transporter

Wholesale Spare PartsGrocer Manufacturer

Pharmaceuticals Finished Goods Manufacturer Manufacturer

Competing Companies in EDI Market

E-business Models

Online intermediaries are classified by the way they make money:

– Content sponsorship– Direct selling– Infomediary– Intermediary model

E-business Models

– Intermediary Models:• Brokerage Models:

– Online Exchange

– Online Auction

• Agent Models:

Agent Model Representing Sellers Selling AgentManufacture’s AgentMetamediaryVirtual Mall

Agent Model representing Buyers Shopping AgentReverse AuctionBuyer Cooperative

 E-tailing Model Bit VendorTangible Products

 1.       Content sponsorship2.       Direct selling3.       Infomediary4.       IntermediariesBroker: Online exchangeOnline auctionAgent: Agent models representing seller

Selling agent (affiliate program)Manufacturer’s agent (catalog aggregator)

MetamediaryVirtual mall

Agent models representing buyer (purchasing agent)Shopping agent Reverse auctionBuyer cooperative

E-Tailer: Bit vendorTangible products 

Exhibit 5 - 11 E-Business Models

E-Business Models

Business Model-Definition

• It defines a revenue stream to the provider.

• It provides benefits to the consumer.

• It provides architecture to deliver those benefits.

Simply put, it is how an organization makes money.

Content Sponsorship E-Business Model

Firms create web sites, attract a lot of traffic, and sell advertising.

Involves using a niche strategy to draw special interest audiences (e.g. www.homearts.com, travel, gardening, dance, transport, food and drink.)

The product sold is a space on the Web.

Similar to traditional media, where television, magazines, and other media sell space and air time.

Major portals such as AOL, Yahoo, MSN, Lycos, Excite use this models. Sometimes used with other models to generate a revenue stream e.g., an online e-tailer, sells ads on its site to generate additional revenue, which helps them to lower prices.

Direct Selling E-Business Model

Manufactures sell directly to customers instead of using intermediaries.

Wholesalers and retailers are not needed causing disintermediation.

The Internet makes it easier to bypass intermediaries.

Used in business to business markets-saves millions of dollars at times in sales related expenses such as personnel, product configuration, and order processing costs.

Also used in business to consumer markets with sales of digital, software, and music, that require no inventory, pick-up, pack and ship.

Direct Selling Considerations

Perishable products, such as fresh foods and flowers are sold using this method. (e.g. pro-flowers delivers flowers fresh from the grower.

Benefits include cost savings and rapid delivery for the consumer.

Benefits to the manufacturer include an ability to claim a piece of the middleman’s margin.

Infomediary E-Business Model

Refers to an online organization that gathers and distributes information (e.g. Market Research Firms).

Usually compensates the consumer for sharing information.

Others like DoubleClick use cookies to track users as they surf the web without compensation.

Consumers are paid to buy space on the permission marketers website, thereby generating attention-the scarcest commodity cyberspace.(e.g. www.alladvantage.com and www.sharkhunt.com

Infomediary Considerations

The space is resold to other advertisers.

Consumers have the benefit of receiving ads targeted to their interests, thereby providing them with control concerning the ads they receive

Benefit to the infomediary is that consumer information increases the value of its ad inventory.

Benefit to advertisers is that they can reach a highly targeted audience even while the consumer is on a competitor’s site.

Brokerage Models

The broker creates a market in which buyers and sellers negotiate and complete transactions. They typically charge a fee.

Example:NYSE

www.TradeCast.com

www.Ameritrade.com

Brokerage Model Considerations

Benefits to the Buyer:

1. Convenience2. Speed of order execution 3. Transaction processing4. Cost savings through Lower prices5. Decreased search time6. Savings of energy and frustration in

locating appropriate sellers.

Brokerage Model Continued

Benefits to the Seller

1. Creation of a pool interested buyers.

2. Cost savings in the form of lowered customer

acquisition costs and transaction costs.

Agent E-Business Models

Agents do represent either the buyer or seller depending on who pays their fees.

Selling Agents:

Represent a single firm to help it move product and normally work for a commission.

Other Types of Agent E-Business Models

Manufacturer’s Agent:

Represent more than one seller. www.travelcity.com www.expedia.com

Metamediary

An agent that represents a cluster of manufactures, e-tailers and content providers organized around a life event or major asset purchase.

www.peoplefirst.com

Benefits of Metamediaries

They solve four major consumer problems: Reduce search times Provide quality assurance about vendors Facilitate transactions for a group of related purchases. Provide relevant and unbiased content information

about the purchase.

They benefit business partners by : Having traffic directed to their sites Co-branding with the metamediary

Virtual Malls

Host multiple online merchants in a model similar to a shopping mall. Hosted merchants gain exposure from traffic coming to the mall.

www.yahoo.com www.women.com

Six benefits: Branding Digital wallets Frequent shopper programs Gift registry Search facility Recommendation service

Agent Models Representing Buyers

Shopping Agent

Second –generation shopping agents

www.evenbetter.com

www.bizrate.com

Reverse Auction

www.nextag.com

Agent Models Representing Buyer Examples

Buyer Cooperative

E-Tailing

Use of bit vendors

Review Questions

1. What is a distribution channel?

Question 1:

A distribution channel is a group of interdependent firms that work together to transfer product and information from the supplier to the consumer.

2. What are the types of intermediaries in a distribution

channel?

Question 2:

The types of intermediaries in a distribution channel are wholesalers, retailers, brokers, and agents.

3. What are the functions of a distribution channel?

Question 3:

The functions of a distribution channel are transactional, logistical, and facilitating.

4. What is the systems approach to distribution channels?

Question 4:

The systems approach views the channel as a unified system of interdependent organizations. Intermediaries work together to build value as products proceed through the channel to the consumer.

5. What is supply chain management (SCM)?

Question 5:

Supply chain management (SCM) refers to the coordination of flows along the value chain from manufacturer to end-user.

6. What is disintermediation? Give an example.

Question 6:

Disintermediation refers to the elimination of channel intermediaries. One example, is a software manufacturer selling direct through their Web site rather than through a retailer.

Note that online travel agents are NOT a good example of disintermediation since they merely replace an offline intermediary with an online one.

7. What is a business model?

Question 7:

A business model defines a revenue stream to the provider, benefits to the consumer, and an architecture to deliver those benefits.

8. What is an infomediary? Give an example.

Question 8:

The term infomediary refers to an online organization that aggregates and distributes information. One example is a market research firm; another example is a permission marketing firm.

9. What is a metamediary? Give an example.

Question 9:

A metamediary is an agent that represents a cluster of manufacturers, e-tailers, and content providers organized around a life event or major asset purchase.

One example is TheKnot, which assists consumers with wedding planning.

10. What is the difference between a broker and an agent?

Question 10:

A broker does NOT represent either the buyer or the seller whereas an agent represents one party or the other.

11. What is the difference between a selling agent and a

manufacturer’s agent?

Question 11:

A selling agent represents a single firm whereas a manufacturer’s agent represents multiple firms.

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