Chapter 15Chapter 15

New (and Old) Marketing Channels: Electronic Marketing Channels and Direct Selling

Major Topics for Ch. 151.What is EMC?

2.Trends in EMC

3.Structure of EMC*

4.Advantages and Disadvantages of EMC*

5.Implications of EMC

6. Direct Selling

Electronic Marketing Electronic Marketing

ChannelsChannels

Topic 1:

TechnologyInternet

Computers

Impact on

Design & Management of Marketing Channels

Electronic Marketing Electronic Marketing ChannelsChannels

The use of online media to make products & servicesavailable so that the target market with access to

enabling technologies can shop& complete the transaction via interactive electronic means

Topic 2

Not physical availabilityInternet, Web-TV, Cell Phone

Actually purchasing products through the useof PCs, Web-TV, Cell Phones

Developments & Trends in Developments & Trends in EMCEMC

• Online shopping to $134 billion from mid-1990s to the end of 2009*

• Online shopping has become a routine shopping choice*

• PCs, peripherals, software, & booksaccounted for a significantportion of total retail spending onthese products

• Online shopping to $134 billion from mid-1990s to the end of 2009*

• Online shopping has become a routine shopping choice*

• PCs, peripherals, software, & booksaccounted for a significantportion of total retail spending onthese products

ElectronicMarketingChannels

* U.S. Department of Commerce

Channel Migration*

Spending

Distribution

2005

2002

Stores 68% 72% 74% 78%

Catalogs 5% 6% 6% 6%

Online 27% 22% 20% 16%

Source: A.C. Nielsen’s Holiday E-spending Report

2004 2003

Holiday Shopping across Different Channels

www.internetretailer.com

* What do you do if you are a physical store-based retailer?

Future of Online Shopping

Year Online as % of

Retail Sales

% Change from Previous

Year

2002 1.3 19.7

2010 8.0 0.0

2011 9.0 12.5

2012 10.0 11.1

2013 10.0 0.0

Online Sales as a Percentage of Total Retail Sales

Electronic Channels on Social Network Sites

• By 2009, almost ½ of Americans had a Facebook or MySpace account

• Among American, age 18-33, almost ¾ were registered with Facebook or MySpace

• Businesses are now rapidly engaging in F-commerce (Facebook Commerce)

• By 2009, almost ½ of Americans had a Facebook or MySpace account

• Among American, age 18-33, almost ¾ were registered with Facebook or MySpace

• Businesses are now rapidly engaging in F-commerce (Facebook Commerce)

Structure Structure of Electronicof ElectronicMarketing Channels*Marketing Channels*

ThreeKey

Phenomena

1. Reintermediation versus disintermediation

2. Information flow versus product flow

3. Virtual channel structure versus physical channel structure

Topic 3

1. Disintermediation and1. Disintermediation andReintermediationReintermediation

Disintermediation Reintermediation

Intermediaries becomesuperfluous because producers

gain exposure to vast numbers of customers in cyberspace

Shifting, changing, or addingmiddlemen to the channel

Amazon.comAuto-By-Tel Corp.

Peapod, Inc.Dell

Computer Corp.

Disintermediation Disintermediation versusversusReintermediation*Reintermediation*

No matter how technologically sophisticated the Internet becomes, the laws of economics as they relate to channel structure do not change.

Efficiency in the performance of distribution tasks is what ultimately determines what form channel structure will take.

=The Internet has not eliminated middlemen,

or caused total disintermediation.

2. Marketing Channel Flows2. Marketing Channel Flows

Product Flow

Promotion Flow

Information Flow*

Ownership Flow

Negotiation Flow

Ex) Pharmaceutical

Marketing Channels for Pharmaceuticals

Physical Distribution Flow Information Flow

Manufacturer

Distributor

Pharmacy

patient

Manufacturer

PharmacyDoctor

patient

Insurer/HMO

PBM*

* Pharmacy Benefit Manager (www.medco.com)

DTC

Internet Limits as a Stand-alone Internet Limits as a Stand-alone ChannelChannel

Five Channel FlowsSome can not be handled by internet

Five Channel FlowsSome can not be handled by internet

Ex) Physical Product Flow in Channel• Cannot be digitized

• Processed slowly, often by people

• Is basis for all other flows—negotiation, ownership, information, &promotion

3. Virtual (Online) Channel Structure Versus Conventional (Store) Channel Structure

• Different Market Segments

• Different Product or Services

• Complements rather than Replaces Each Other*

Advantages & Advantages & Disadvantages of EMC*Disadvantages of EMC*

Topic 4

Advantages ofElectronic

Marketing Channels

1. Global scope & reach2. Convenience/rapid transaction processing3. Information processing efficiency & flexibility4. Data-based management & relationship

capabilities5. Lower sales & distribution costs

Disadvantages ofElectronic

Marketing Channels

1. Lack of contact with actual products & delayedpossession

2. Fulfillment logistics not at Internet speed or efficiency*

3. Clutter, confusion, & cumbersomeness of Internet

4. Nonpurchase motives for shopping not addressed*

5. Security concerns of customers

Advantages & Disadvantages of Advantages & Disadvantages of EMC*EMC*

Implications of EMC Implications of EMC Topic 5

• Objectives & strategies of the firm & EMC*

• Role of EMC in the marketing mix

• Channel design & EMC*

• Channel management & EMC*

• Evaluation & EMC

Objectives & Strategies of the Objectives & Strategies of the Firm*Firm*

• Role of distribution becomes more complex because of electronic marketing channels

=• How to Integrate Online with Offline channels

* Offline only Online only Offline + Online (multichannel)

Ex) My research project

The Internet arms large numbers of customers with more information about products & services

to level the playing field

The fourth P, place (distribution), may assume a

larger role relative to the other three variables for

more & more firms

Impact on The Marketing MixImpact on The Marketing Mix

Channel Design*Channel Design*

The channel manager should provide “channel-surfing” consumers with whatever channels or combinations of channels they desire

=

a) A facet of the development of an

effective multichannel marketing strategy

b) Unbundle Channel Functions

* A special topic: PIC (Partially Integrated Channel)

DUAL DISTRIBUTION WITH EMC : CHANNEL STRUCTURE OPTIONS

(a)    Manufacturer has own online presence (e.g., Tupperware)

(dotted line indicates common ownership)

Manufacturer(Tupperware)

Owned Internet Sales Channel

(tupperware.com)

Standard Channel(independent

direct salespeople)

Consumers

DUAL DISTRIBUTION WITH EMC: CHANNEL STRUCTURE OPTIONS

(b) Manufacturer sells through third-party online reseller

(e.g, Callaway Golf selling through buy.com)

Manufacturer(Callaway Golf)

Independent Internet Sales Channel

(buy.com)

Standard Channel(pro shops, bricks &

mortar sports/golf outlets)

Consumers

DUAL DISTRIBUTION WITH ONLINE SELLING: CHANNEL STRUCTURE OPTIONS

(c) Manufacturer sells through some standard channels that do operate their own online store, and some that do not

Manufacturer(Simon & Schuster, Publisher)

Standard Channel(bricks & mortar

bookstores)Barnes & Noble

Barnes & Noble bricks & mortar

bookstores

Barnes & Noble Internet Sales Channel

(bn.com)

Consumers

Channel Management*Channel Management*

Multichannel challenge of conventional and

electronic channels

=

The fundamental issues of motivating channel members, building cooperation, managing conflict, & coordinating elements of the marketing mix requires manager’s full attention

Key Issue: Managing Conflict between Marketing Channels

Evaluation of PerformanceEvaluation of Performance

Likely to change Unlikely to change

Specific criteria for Performance expectations,

performing evaluations & criteria, & measurement of

technological means for how well they are being met

doing so by channel members

Ex) Store Traffic Measure

What drives sales impact of online channel addition?

•Steve Kim (ISU) and Sam Min (CSULB)

•Question: For store-based retailers, does adding online channel lead to more sales?

0.00

0.05

0.10

0.15

0.20

0.25

98 99 100 101 102 103 104 105

Calendar Year less 1900

Sh

are

Clothes

Book & CD

Sports

Off ice

Electronics

Likely Drivers

•Channel Disruption (Potential for Displacement)*

•Timing: Chronological Time and Order of addition

•Incumbent Retailer Resource: Scale of Physical store-based business

•Incumbent Retailer Resource: Retailer’s Brand Equity

Analysis Results 1515

•Channel Disruption (Potential for Displacement): Search good > Experience good

•Timing: Chronological Time (0) and Order of channel addition (+)

•Incumbent Resource: Scale of Physical store business:(-)*

•Incumbent Resource: Retailer Brand Equity: (+)

Direct SellingDirect SellingTopic 6

Definition: the sale of a consumer product or service person-to-person, away from a fixed retail location

Three key points:• Goes directly to consumers’ homes, offices, or other locations

• Concerned with the sale of consumer products in consumer markets rather than industrial products

• Involves salespeople meeting fact-to-face with customers

Structure & Trends Structure & Trends in Direct Sellingin Direct Selling

- Markets Served

- Types of Products Sold

- Firms Involved in Direct Selling

- Problems & Prospects for Direct Selling

Markets ServedMarkets Served

Location Percent of Sales

Home 64.4

Telephone 14.7

Workplace 8.7

Internet 5.5

Temporary locations 4.1

Other 2.6

Location of Direct Selling Channel Sales

Types of Products SoldTypes of Products Sold

Product Category Percent of Total Sales

Personal Care Products 26.4

Home/Family Care

Products

33.7

Leisure/Educational

Products

6.5

Services/Miscellaneous/

Other

33.4

Major Product Categories Sold through Direct SellingChannels as a Percentage of Total Sales

Firms Involved in Direct SellingFirms Involved in Direct Selling

• Hundreds exist• Range in size from those with annual sales over $1 billion to those with sales well under $1 million

• Tupperware Corp.*• Avon Products, Inc.* http://www.avon.com/• Cutco Cutlery Corp.• Amway Corporation

Facts

Examples

Rationale for DesigningRationale for DesigningDirect Selling ChannelsDirect Selling Channels

A method of distribution for providing products & services to customers

The decision should be based on an objective analysis of the advantages or disadvantages of each channel alternative.

But:

Variables To Consider for Direct Variables To Consider for Direct Selling*Selling*

1) Market variables & DS channel*

2)Product variables & DS channel*

3)Company variables & DS channel

4)Intermediary variables & DS channel

5)Behavioral variables & DS channel

Ex) Mary Kay in China

1) Market Variables1) Market Variables

Developments in consumer attitudes & behaviors

that could make direct selling more attractive:

1.Consumers have less

time available for shoppingin traditional stores.

2. Consumers are becoming more sophisticated

and demand more & better product information.

3. Consumers are seekingincreased convenience

in shopping.

2) Product Variables2) Product Variables

Products that are high quality, that are unique, orthat require specialized information & advice are logical

choices for direct selling:

Product quality may become apparent only when consumers

are informed about themin conjunction with hands-on

demonstrations.

Product uniqueness may become apparent only throughthe direct help of salespeople.

Consumer satisfaction maydepend on whether the consumer has proper

information.

Basic variables to consider:

2.Financial capacityof the company

3) Company Variables3) Company Variables

3. Managerial expertise

in distribution*

1.Size of the company

4.Basic objectives &

policies of the company

4) Intermediary Variables4) Intermediary Variables

Basic intermediary variables to consider:

1.

Availability ofalternatives

2.

Cost of using channelalternatives

3.Services that

alternatives arecapable of or

willing to provide

The “people” side of the marketing channel:

Conflict Communicationsprocesses

RolePower

5) Behavioral Variables5) Behavioral Variables

Problems & ProspectsProblems & Prospectsfor Direct Selling*for Direct Selling*

1. Lack an awareness of DS as an alternative.

2. Negative impression on DS in general.*

3. Lower availability of consumers for at-homesales calls and parties.*

4. The perceived risk by consumers is high compared to other modes of shopping.

5. Recruitment of salespeople has become difficult.*

Topic 4