Digital marketing

The manufacturer sells directly to the consumer or business customer in the direct distribution

model (also called direct selling). This practice is commonly used in offline selling; however, the

Internet made it much easier for producers to bypass intermediaries and go directly to consumers or

business customers.

Direct distribution has been successful in some B2B markets and B2C markets with sales of digital

products, which require no inventory and no pick, pack, and ship logistics. Perishable products such

as flowers and fresh food are also well served by direct channels. As one example, Proflowers

delivers flowers fresh from the grower. Flowers that don’t pass through an intermediary tend to be

fresher and last longer, and are in many cases less expensive.

Direct distribution saves customers money by avoiding intermediaries; sometimes it leads to more

rapid delivery of the product.

Benefits to the manufacturer include the ability to claim a piece of the intermediary’s margin, but,

of course, someone has to perform the functions of those intermediaries. The major costs of direct

distribution for the customer include higher search costs to locate individual manufacturers, the time

costs of transacting with each manufacturer, and delivery costs.

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. Most distribution channels incorporate one or more intermediaries in an

indirect distribution channel. A typical indirect channel includes suppliers, a manufacturer,

wholesalers, retailers, and end consumers. Intermediaries help to perform important functions.

What is disintermediation? Give an example.

Disintermediation describes the process of eliminating traditional intermediaries. Eliminating

intermediaries can potentially reduce the costs. Taken to its extreme, disintermediation allows the

supplier to transfer goods and services directly to the consumer in a direct channel. Complete

disintermediation tends to be the exception because intermediaries can often handle channel

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functions more efficiently than producers. An intermediary that specializes in one function, such as

product promotion, tends to become more proficient in that function than a nonspecialist.

Originally, it was predicted that the Internet would eliminate intermediaries, thereby creating

disintermediation in distribution channels and decreasing prices. This line of reasoning failed to

recognize some important facts. First, the U.S. distribution system is very efficient. Second, using

intermediaries allows manufacturing companies to focus on what they do best. Third, many

traditional intermediaries have been replaced with Internet equivalents. In many cases, the online

intermediaries are more efficient than their brick-and-mortar counterparts.

The Internet has added new intermediaries that did not exist previously, such as shopping agents

and buyer cooperatives.

What are the three major functions of a distribution channel?

Intermediaries can perform many functions. For example, online retailers normally hold inventory

and perform the pick, pack, and ship functions in response to a customer order. Alternatively, the

retailer might outsource the pick, pack, and ship functions to a logistics provider.

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

Transactional functions refer to:

1. 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. Second, the Internet provides a wide range of referral

sources such as search engines, shopping agents, social networks, e-mail, Web pages, and

affiliate programs. Third, the internet is always open for business, 24/7;

2. marketing communications: marketing communication includes advertising and other types

of product promotion. This function is often shared among channel players. 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.

The Internet adds value to the marketing communications function in several ways. First,

functions that previously required manual labour can be automated. Second,

communications can be closely monitored and altered minute by minute. Third, Web

analytics software for tracking a user’s behaviour can be used direct highly targeted

communications to individuals. Finally, the Internet enhances promotional coordination

among intermediaries;

3. 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. Pinterest lets consumers mix and match clothes to

create outfits. Most automobile sites allow consumers to custom-configure vehicles. Of

particular interest are collaborative filtering agents, which can predict consumer preferences

based on past purchase behaviour. Amazon uses a collaborative filtering agent to

recommend books and music to customers;

4. 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;

5. process transactions: electronic channels lower the cost to process transactions dramatically.

Logistical functions are often outsourced to third-party logistics specialists:

1. 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;

2. aggregating product: in general, suppliers operate more efficiently when they produce a high

volume of a narrow range of products. Consumers, on the other hand, prefer to purchase

small quantities of a wide range of products. Channel intermediaries perform the essential

function of aggregating product from multiple suppliers so that the consumer can have more

61 choices in one location. Examples of this traditional form of aggregation include online

category killers such as Amazon, with a broad product mix;

3. third-party logistics – outsourced logistics: a major logistics problem in the B2B market is

reconciling the conflicting goals of timely delivery and minimal inventory. One solution for

many companies is to place inventory with a third-party logistics provider such as UPS or

FedEx.

In the B2C market, a major logistics problem is product return (reverse logistics). Customers

frequently complain about the difficulty and expense of return. Some Web sites offer to pay

return shipping.

In the C2C market, eBay has formed a partnership with brick-and-mortar Mail Boxes Etc.

After auctions close, sellers take their item to Mail Boxes Etc. to be packaged and shipped;

4. the last mile problem: one big problem facing online retailers and logistics mangers is the

added expense of delivering small quantities to individual homes and businesses. It is much

less expensive to send cases of products to wholesalers and retailers and let them break the

quantities into smaller units for sale. Another problem is the possibility of theft when the

packages are left on doorsteps when no one is home.

Innovative firms have tried four solutions. First is a smart box. The consumer buys a small

steel box that comes with a numeric keypad connected to the Internet via a two-way modem.

Deliver people, such as FedEx, receive a special code for each delivery and use it to open

the box and leave the shipment. This solution is efficient and secure for consumers who are

willing to pay the hefty box fee.

A second solution involves a retail aggregator model. Consumers can have packages shipped

to participating retailers, such as local convenience stores or service stations; then,

consumers pick up the package – not as convenient as the current method. The third solution

calls for special e-stops, storefronts that exist solely for customer drive-through and package

pickup. Finally, many multichannel retailers allow customers to order online for offline

retail delivery.

Facilitating functions performed by channel members include:

1. market research: Information gathered by intermediaries helps manufacturers plan product

development and marketing communications.

The Internet affects the value of market research in five ways. First, some of the information

on the Internet, especially government reports, is available for free. Second, managers and

employees can conduct research from their desks rather than making expensive trips to

libraries and other resource sites. Third, information from the Internet tends to be timelier, as

when advertisers monitor banner and click-through. Fourth, Web-based information is

already in digital form, so e-marketers can easily load it into a spreadsheet or other software.

Finally, because so much consumer behaviour data can be captured online, e-marketers can

receive detailed reports.

Nonetheless, little market research is free;

2. financing: 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. However, some consumers are concerned about

divulging credit card information online.

Online merchants have a major concern as well: how do they know that they are dealing

with a valid consumer using a legitimate credit card? The major credit card companies have,

therefore, formed Secure Electronic Transactions (SET) as a vehicle for legitimizing both

the merchant and the consumer as well as protecting the consumer’s credit card number.

Under SET, the card number goes not to the merchant but to a third party with whom the

merchant and consumer communicate to validate one another as well as the transaction.

Distribution system

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The distribution channel is actually a system, when viewed by the flow of products, information,

and finances along the channel.

The supply chain, the manufacturer, and the distribution channel is an integrated system called the

value chain (or integrated logistics). Value chain, integrated logistics, and supply chain are

equivalent terms. Supply Chain Management refers to the coordination of flows in three categories:

material (e.g., physical product), information (e.g., demand forecast), and financial (e.g., credit

terms). The word flow evocates the image of a continuous stream of products, information, and

finances flowing among the channel members. The most important flow is that of information

because creation of the physical product and the financing depend on the information.

Channel management and power

Once a channel structure is est