A distribution channel is a group of interdependent firms that work together to
transfer product and information from the supplier to the consumer. It is composed
of the following participants:
• Producers: Manufacturers and their suppliers, or originators of the product or
service.
• Intermediaries: Firms that match buyers and sellers and mediate the transactions
among them (e.g., wholesalers and retailers).
• Buyers: Consumers or users of the product or service.
Online Channel intermediaries
Page for e-business model graph
For some digital products, such as software or music, the entire distribution
channel may be internet based. When a consumer buys software online, the
supplier often delivers it over the internet to the buyer’s computer.
Channel intermediaries include wholesalers, retailers, brokers, and agents:
• Wholesalers buy products from the manufacturer and resell them to retailers.
• Brokers facilitate transactions between buyers and sellers without representing
either party. They are market makers and typically do not take title to the goods.
• Agents usually represent either the buyer or seller, depending upon who hires
and pays them. Manufacturer’s agents represent the seller, whereas
purchasing agents represent the buyer.
1. Content sponsorship
content sponsorship: Companies create Web sites, attract a lot of traffic, and sell
advertising.
Web properties using the content sponsorship model include all the major portals:
Google, Yahoo!, online magazines and newspapers also use this model;
The content sponsorship model is often used in combination with other models to
generate multiple revenue streams. For example, [Link], an online retailer, sells
ads on its site to generate additional revenue, which in turn allows it to lower
prices.
2. Infomediary
An infomediary is an online organization that aggregates and distributes
information, acting as a personal agent for Web users.
Product review sites, such as [Link], are another type of infomediary. These
sites accumulate ratings and written reviews on Web pages that provide
information to other consumers and the reviewed companies.
The original idea behind the infomediary model was to give consumers more
control over how they receive marketing messages. The benefit to the infomediary
is that the consumer information increases the value of its ad inventory.
3. Intermediary models
Three main intermediary models are in common use on the internet:
(A) Brokerage models,
(B) Agent models,
(C) Online retailing.
(A) Brokerage models,
The broker creates a market in which buyers and sellers negotiate and complete
transactions. Brokers typically charge the seller and/or buyer a transaction fee, but
they don’t represent either party for providing exchange and negotiation services.
• online exchange
E * T R A D E , allow customers to place equity and other trades from their
computers without phoning or visiting a broker. These brokerages pass along the
cost savings to the buyer in the form of lower transaction fees.
[Link] is a marketplace for global buyers and sellers. In June 2012, it had
nearly 30 million registered users from over 240 countries and 2.5 million supplier
online stores. When a buyer orders something from another country, the money
goes to Alibaba and is held in escrow until the goods are delivered in good shape.
After the buyer completes a form as such, the money is released to the seller.
• online auction
When merchants auction items on their own Web sites, they become direct sellers
using dynamic pricing. Third-party auctioneers are broker intermediaries.
(B) Agent models,
• Agents model representing sellers
Selling agents represent a single organization, helping it sell its products; these
agents normally work for a commission. For example, affiliate programs pay
commissions to Web site owners for customer referrals.
[Link] pioneered one of the first affiliate programs.
Manufacturer’s agents represent more than one seller.
[Link] could be considered a virtual mall now that it offers such a huge
variety of products and second-party retailers.
• Agent models representing buyers
Reverse auctions help individual buyers obtain the prices they want, while buyer
cooperatives pool buyers for larger volume buys and, thus, lower prices.
A reverse auction occurs at a Web site serving as purchasing agent for individual
buyers. In a reverse auction, the buyer specifies a price and sellers bid for the
buyer’s business.
The buyer cooperative pools many buyers together to drive down the price of
selected items. The more buyers that join the pool, the lower the price drops,
usually in a step function.
For example, 1 to 5 buyers pay $69 each; 6 to 10 buyers pay $58 each, and so on.
(C) Online retailing.
• E-COMMERCE
E-commerce is one of the most visible e-business models. In this business model,
merchants set up online storefronts and sell to businesses and consumers.
E*TRADE is one of the more prominent example.
Multichannel marketing is the use of more than one sales channel, such as Web,
mobile, brick-and-mortar, and catalog.
Omni-channel shopping is the shopper’s perspective of multichannel marketing,
describing the way consumers move seamlessly through many shopping channels:
Web, brick-and-mortar store, computer, mobile device, catalog.
• M-COMMERCE
Mobile commerce (m-commerce) occurs when consumers make a transaction
with a smartphone or other mobile device (e.g., iPhone, iPad, Android). M-
commerce is a subset of e-commerce.
Mobile user purchases include ordering products from Web sites (including tickets,
services, and more), paying for online content (such as apps or music), online
banking, and more.
Exhibit-11.7
• SOCIAL COMMERCE
Social commerce is a piece of e-commerce that uses social media and consumer
interactions to facilitate online sales.
For example, over half of social media users prefer to use Facebook to sign into a
Web site, followed by Google and Yahoo!: This is called social sign-in.
In one social commerce example, Best Buy, the consumer electronic retailer,
answers product and service questions via its Twitter account.
Product rating, recommendation, and review sites that provide space for users to
post allow for the sharing aspect critical to social commerce.
Examples of social commerce tactics: Dell computer claims to have made a $6.5
million profit by selling computers on Twitter in 2 years.
• F-COMMERCE
F-commerce (Facebook commerce) is a subset of social commerce, where
companies use Facebook to facilitate e-commerce. Because of Facebook’s huge
number of users and activity, many companies have attempted to sell products on
the network.
For example, Disney sells tickets on Facebook and Delta Airlines allows users to
search and purchase tickets right on its Facebook page.
There are many successful stories, such as when a user buys a ticket from the
Ticketmaster Facebook page and shares this in the newsfeed, friends also purchase
tickets to the tune of an additional average of $5.30 in ticket purchases.
Online retailing attributes are:
• Tangible Products
All tangible products sold online, such as books and furniture, are distributed
through conventional channels
• Digital Products
The internet serves as the actual distribution channel itself for digital goods and
services such as news, music, software, movies, education (online classes), and so
forth.
• Direct Distribution
The manufacturer sells directly to the consumer or business customer in the direct
distribution model, as does Dell, Inc. (also called direct selling).
Direct distribution saves customers money by avoiding intermediaries; sometimes
it leads to more rapid delivery of the product.
Distribution Channel length and Functions
The length of a distribution channel refers to the number of intermediaries
between the supplier and the consumer.
The shortest distribution channel has no intermediaries—the manufacturer deals
directly with the consumer, the way Dell sells directly to customers in a direct
distribution channel.
An indirect distribution channel. A typical indirect channel includes suppliers, a
manufacturer, wholesalers, retailers, and end consumers.
Disintermediation describes the process of eliminating traditional intermediaries.
Eliminating intermediaries can potentially reduce the costs.
1. Functions of a Distribution Channel
Distributors perform many value-added functions. The functions can be broadly
characterized as
I. Transactional,
II. Logistical
III. Facilitating.
Transactional
Transactional functions refer to making contact with buyers and using marketing
communication strategies to make buyers aware of products.
(A) Contact with buyers
(B) Marketing Communications
(C) Matching Product to buyer’s needs
(D) Negotiating Price
(E) Process transactions
(A) 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.
First, contact can be customized to the buyer’s needs. For example, the
Honda site ([Link]) allows customers to find a dealer in their area where
they can buy Honda vehicles.
Second, the internet provides a wide range of referral sources such as search
engines, shopping agents, social networks, e-mail, Web pages, andaffiliate
programs.
Third, the internet is always open for business, 24 hours a day, 7 days a
week.
(B) Marketing Communications
Marketing communication encompasses advertising and other types of product
promotion.
For example, a manufacturer may launch an ad campaign while its retailers offer
coupons. Cooperative advertising is another example, with manufacturers sharing
advertising costs with retailers.
(C) Matching Product to buyer’s needs
Given a general description of the buyer’s requirements, shopping agents can
produce a list of relevant products. Online retailers can also help consumers match
products to needs.
Collaborative filtering agents, which can predict consumer pref- erences based on
past purchase behavior. Amazon uses a collaborative filtering agent to recommend
books and music to customers.
(D) Negotiating Price
True price negotiation involves offers and counteroffers between buyer and seller
such as might be conducted in person, over the phone, or via e-mail—a two-way
dialog.
Many businesses currently conduct bidding online.
(E) Process transactions
Studies show that electronic channels lower the cost to process transactions
dramatically.
Logistical Functions
Logistical functions include physical distribution activities such as transportation
and inventory storage, as well as the function of aggregating product.
(A) Physical Distribution
(B) The last mile Problem
(A) Physical Distribution
Most products sold online are still distributed through conventional channels. Yet
digital content can be transmitted less expensively from producer to consumer over
the internet: text, graphics, audio, and video content.
(B) 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.
Facilitating Functions
Facilitating functions performed by channel members include market research and
financing.
(A) Market research
(B) Financing
(A) Market research
Market research is a major function of the distribution channel. The benefits
include an accurate assessment of the size and characteristics of the target
audience.
(B) Financing
Financing purchases is an important facilitating function in both consumer and
business markets. Intermediaries want to make it easy for customers to pay in order
to close the sale. Most online consumer purchases are financed through credit cards
or special financing plans, similar to traditional store purchases.
2. Distribution system
Defining the scope of the channel as a system can be done in three ways:
I. The first is to consider only distribution functions that are downstream
from the manufacturer to the consumer, the traditional definition of the
distribution channel.
II. The second is to consider only the supply chain upstream from the
manufacturer working backward to the raw materials, the traditional
definition of the supply chain.
III. The third view is to consider the supply chain, the manufacturer, and the
distribution channel as an integrated system called the value chain (a
more recent name for the value chain is integrated logistics). Many refer
to the supply chain as the value chain. By this definition, the supply chain
includes upstream and downstream activities as well as processes internal
to the firm.
Exhibit 11.10 Supply Chain + Distribution Channel = New Definition of
Supply Chain.
Distribution channel metrics
1. B2C Market.
2. B2B Market.