Electronic B2C Marketing Channel Strategy

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A managerial Framework for Analysis

Remco de Back

September, 2004

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Electronic B2C Marketing Channel Strategy

A managerial Framework for Analysis

Remco de Back

Student number: 0991384

First supervisor: Drs. H. Bos Second supervisor: Drs. M.E. Boon

Rijksuniversiteit Groningen September, 2004

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Abstract

During the past decade a set of developments has reinforced the position of marketing channel strategy in the marketing mix. By enabling the development of electronic marketing channels, the emergence of Internet technology strongly added to this revival.

Social-economical and technological developments indicate a continuing growth of e-commerce in the coming years. In fact, it’s hardly arguable that the Internet will continue to

expand its role in consumer markets. Yet, the scope of the role that the Internet will (grow to) play in the distribution of goods and services is less certain, and more difficult to predict. As a result, it’s not easy for managers to assess the potential of an electronic marketing channel strategy for their business. This research aims to provide a framework that guides decision makers through such an analysis. By means of this framework for analysis it should be avoided that critical factors that affect the potential of an electronic B2C marketing channel strategy are disregarded or overlooked.

The following research objective and main question are formulated:

Research objective:

To provide a managerial framework for analysis of an electronic B2C marketing channel strategy for originators of products

Research question:

How can originators of products assess an electronic B2C marketing channel strategy for their business?

The research starts with an exploration of the marketing channel concept. Then, this general concept is applied to explore the advantageous and disadvantageous features of electronic marketing channels. After that, the following criteria against which an electronic marketing channel strategy must be judged are identified.

• Compatibility: an electronic B2C marketing channel strategy must be compatible with the organization’s target market.

• Feasibility: an electronic B2C marketing channel strategy must be feasible to perform.

• Advantage: an electronic B2C marketing channel strategy must provide for the creation of a competitive advantage.

For each of these criteria it is analyzed how they should be assessed, which subsequently results in the development of a framework for analysis of an electronic B2C marketing channel strategy.

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1 Introduction

Marketing channel strategy is one of the major strategic areas of marketing management.

Together with logistics management it comprises the distribution variable in the marketing mix.¹ This is illustrated in figure 1.1.

Figure 1.1 Strategic variables in the marketing mix – Source: Rosenbloom (1999: 15)

Marketing channel strategy and logistics management are strongly related, but the focus of these components differs significantly. Logistics is mainly concerned with the flow of physical products through the channel, whereas the strategy component concentrates on the entire process of meeting an organization’s distribution objectives.² Based on Kotler’s definition of marketing strategy, marketing channel strategy can be defined as:³

The broad principles by which the organization expects to achieve its distribution objectives for its target market(s)

For quite a long time many firms viewed marketing channel strategy as somewhat of a leftover after the ‘more important’ product-, price-, and promotional strategies had been considered (Rosenbloom, 1999). Throughout the past decade at least three developments have caused a change in this perspective.

A first reason for this change is the fact that it’s currently more difficult to attain a sustainable competitive advantage (SCA) through product, price, and promotional strategies.⁴ Globalization has made it much easier for competitors to copy product design, quality, and so forth. Product lifecycles are generally shorter, which makes it more difficult to hold on to a competitive advantage through product strategy. In addition, more and more firms are able to operate production facilities all over the world, which has created severe price competition in many different product categories. Thus, gaining a SCA through pricing strategy is probably even less viable. Furthermore, the impact of promotion strategy has been reduced drastically,

1 Bert Rosenbloom, Marketing Channels, a management view, The Dryden Press, 6^th ed., 1999

2 Anne T. Coughlan et al, Marketing Channels, Prentice-Hall, 6^th ed., 2001

3 Philip Kotler, Marketing management: analysis, planning, implementation and control, Prentice Hall, 8^th ed., 1994

4 Bert Rosenbloom, Marketing Channels, a management view, Thomson South-Western, 7th ed., 2003 Marketing

Mix

Promotion Strategy Pricing

Strategy

Distribution Strategy Product

Strategy

Logistics management component Channel

Strategy component

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as consumers are exposed to an overwhelming amount of commercial messages on a daily basis.

Marketing channel strategy offers greater potential for gaining a sustainable competitive advantage than the other “P’s” in the marketing mix. Channel strategy is long-term. It requires long-term strategic commitment and substantial investment in building and maintaining a marketing channel. Consequently, in the short run, channel strategy is much more difficult to copy for competitors.

A second development that changed the general perspective on marketing channels is the shift in economic power from the manufacturers of products to the distributors of products.⁵ Manufacturers (or producers) have seen their early dominance in the 1970s continuously undermined by their more sophisticated, larger, demanding distributors. Their strong bargaining position enables distributors to demand higher functional discounts (margins), thereby increasingly pressurizing manufacturers’ profits. As a consequence of this development, manufacturers and producers are (should be) stimulated to explore channel strategies even more carefully. An overview of these changes in retailer-manufacturer relationships is shown in figure 1.2.

‘Manufacturers ‘Retailers ‘Retailers ‘New

Dominate’ Consolidate’ Sophistication’ Equilibrium?’

Manufacturers Retailers grew Seized initiatives Manufacturer bigger/ more larger in logistics and resurgence?

sophisticated supply chains Back brands with Learnt to leverage Manufacturers

heavy advertising their direct relation- found in defensive ship with consumers reactive mode

New product Development of technologies led private label

by manufacturers competition

Growing Retail Power

Figure 1.2 Retailer-Manufacturer Relationships – Source: de Kare-Silver (2000: 175)

Lastly, a development that really put new light on marketing channel strategy is the emergence of Internet technology. The Internet enables the development of electronic (or internet-based) marketing channels. An electronic marketing channel is here defined as:

Any channel system that involves the use of the Internet to make products available so that the target market with access to computers or other enabling technologies can shop and complete the transaction for purchase via interactive electronic means

5 Michael de Kare-Silver, E-shock 2000, Macmillan Press Ltd., 2000

1980s 1990s 2000

1970s

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Electronic marketing channels are the focal theme of this paper. Yet, firstly the next paragraph briefly addresses the general role of the Internet in commerce.

1.1 Internet & Commerce

Since the Internet went commercial, the scope of its effect on business has been a subject of many discussions, and even more disagreements. Unquestionably however, Internet technology presented a foundation for reconsidering ‘the way things are done’. Ten years after the commercial introduction of the Internet, organizations are generally using their presence on the Internet for one or more of the following activities:⁶

Corporate communication:

By means of corporate communication, organizations aim to transfer the corporate identity to stakeholders.⁷ Apart from the products that are being produced, the corporate identity is formed by a diversity of characteristics such as organizational structure, environmental consciousness, financial health, quality of personnel management, and so forth. The Internet is an excellent medium for communicating the (desired) identity to stakeholders. In this context one can also think of placing vacancies on the website and/or offering the possibility to actually apply for jobs online (e-recruitment).

Pre-sales:

The website is used as a pre-sales instrument. Information about the company’s assortment of products is presented. The main objective is to persuade people to visit an actual point-of- sales. Diverse promotional activities can be used as an incentive. The website functions as a brochure.

Database filling:

The site is used to acquire customer data. Usually organizations create an incentive in order to generate response.

After sales:

The website is used for after sales services. Examples are the well-known concept of Frequently Asked Questions (FAQ), online instruction manuals, e-mail service addresses, et cetera. The main objective is to reduce the costs of after sales activities.

Sales:

Products are offered to customers on the website. An order can be made online, and the transaction for purchase can be completed via electronic means. This application is generally known as e-commerce, although it’s currently more common to take a broader perspective on e-commerce. The definition used by the UK government illustrates this well:

E-commerce is the exchange of information across electronic networks, at any stage in the supply chain, whether within an organization, between business, between businesses and consumers, or between the public and private sector, whether paid or unpaid

(e-commerce@its.best.uk, 1999)

6 Roughly based on: Gerard van Vliet, Handboek E-commerce, geld verdienen met Internet, Media Business Press, 2000

7 P.S.H. Leeflang, Probleemgebied Marketing ΙΙ, de marktinstrumenten, Stenfert Kroese, 3rd ed., 1994

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Notenbomer (2000) states a broad definition of e-commerce as well:⁸

By electronic applications aided processes that support the communication and/or transactions between an organization and her environment

So, many observers choose to emphasize that e-commerce is not limited to buying and selling products using the Internet, but includes pre-sales and post-sales activities as well. This means, for example, that a customer’s online request for additional product information is also considered to be a part of e-commerce.

Since this paper revolves around the Internet as an actual point-of-sales, a somewhat more basic definition of e-commerce is preferred.

Electronic commerce is the process of buying and selling products on the Internet, whereby the transactions for purchase can be completed via electronic means

By now many organizations utilize the Internet for one purpose or another. But, although e- commerce is already playing a significant role in some consumer markets, it has not quite made the giant leap that was sometimes so excitedly prophesized in the early days of commercial Internet. There are (still) many more successful e-commerce applications in the Business-to-Business sphere than in the Business-to-Consumer sphere. In the following subparagraph this distinction will be briefly addressed.

1.1.2 B2B versus B2C

As mentioned, the majority of successful e-commerce activities is to be found in a B2B environment. Here, the Internet is often used to facilitate the process of recurring orders from known customers. Of course it’s not really surprising that the Internet as a point-of-sales thrives better (or at least faster) in a B2B environment than in a B2C environment. For many organizations the use of Internet technology was in fact just one step further than the already widely applied EDI projects.⁹ In addition, the proportion of adopters with access to the Internet is also (still) much higher among businesses.

Another explanation is the fact that in transactions between businesses generally all parties will be focused on efficiency, which is certainly not always the case in a B2C environment.

Finally, there are simply many more opportunities for Business-to-Business transactions than for Business-to-Consumer transactions. Figure 1.3 illustrates this.¹⁰

8 J.R.Notenbomer, Dotcom, leidraad voor het bepalen van uw e-commerce-strategie, Academic Service economie en bedrijfskunde, 2000

9 Gerard van Vliet, Handboek E-commerce, geld verdienen met Internet, Media Business Press, 2000

10 Illustration obtained from: Dave Chaffey, E-business and E-commerce management, Prentice Hall, 2002

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Figure 1.3 B2B and B2C interactions between an organization, its suppliers, and its customers

Hence, several factors cause (d) e-commerce to flourish faster and better in the B2B environment. Still, development can’t be stopped, and e-commerce will grow significantly in a B2C context as well.

1.1.3 Developments fueling e-commerce

It cannot be denied that e-commerce, especially in relation to consumer markets, has made a

‘slow start’. That is to say, ‘slow’ in comparison to the overenthusiastic ‘predictions’ in the early years of commercial Internet. However, social-economical developments and technological advancements are intensifying each other, thereby progressing the role of electronic shopping in commerce and in daily life. To a degree, this has already become evidential in markets for consumer electronics, software, books, holidays, and a variety of others.

Consumer developments

Consumers have become more and more time-constrained. Increasing numbers of working women, single-parent households, and homemakers with part-time jobs lie on the basis of this trend.¹¹ ‘Spare time’ is more precious and consumers are constantly searching for products that help save time, improve lifestyles or make it easier to do things. They no longer want to be dependent on shop opening hours or the physical location of retailers. Consumers are more

11 Anne T. Coughlan et al, Marketing Channels, Prentice-Hall, 6^th ed., 2001

Organization

Channel partners (suppliers)

Channel partners (organization)

Suppliers Consumer

Customers

Business Customers

Business-to-consumer (B2C) transactions Business-to-business (B2B) transactions

Suppliers Intermediaries Customers

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demanding, expectations of service and convenience are high and they search restlessly for new ways of meeting these needs.¹²

These developments cannot be ignored in the distribution of goods and services. It is not a trend that eventually fades away. Our 24-hour economy will increasingly call upon the flexibility of people, in return people will increasingly demand for convenient and flexible ways to shop. In addition, the group of the technological unfamiliar and unwilling is diminishing, while simultaneously the youngest generations are growing up with the Internet as a normal part of life.

Convergence of technologies

Another factor that fuels electronic commerce is the convergence of technologies.

Developments in information technology, communication technology, and media technology are increasingly influencing and stimulating each other (Kooij, 2000). In this context one can think of the influence of progressively minimized IT-systems such as smart cards, which for example enable the electronic wallet. Developments like these are playing (and will play) an important role in breaking down possible barriers for electronic shopping. In addition, swift technological developments and increasing international competition force organizations to focus on their core competencies. As a result of this, there have been many alliances, fusions, and takeovers in the area of telecom, IT, and media in recent years.¹³ These partnerships between companies from different sectors - and the fusion of technologies and skills as a result of that - are revolutionizing electronic commerce.

1.2 Conclusion

During the past decade a set of developments has reinforced the position of marketing channel strategy in the marketing mix. By enabling the development of electronic marketing channels, the emergence of Internet technology strongly added to this revival. Social-economical and technological developments indicate a continuing growth of e-commerce in the coming years.

In fact, it’s hardly arguable that the Internet will continue to expand its role in consumer markets. Of course, these developments as such do not necessarily have to be an incentive for organizations to engage in electronic selling, but it does however present a ground for exploring electronic marketing channels. If not with the intention to implement an internet- based distribution strategy, then at least to reflect on the threat it potentially poses if the competition does. This paper aims to provide a framework that supports such an analysis. In the next chapter the exact focus, objective and structure of this research paper will be discussed in detail.

12 Michael de Kare-Silver, E-shock 2000, Macmillan Press Ltd., 2000

13 Anne Kooij, Electronic commerce: to be or not to be?, ten Hagen & Stam Uitgevers, 2000

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2 Research framework

In a relatively short period of time the Internet has already become seemingly indispensable in the daily lives of numerous people. Especially young people and scholars in many (developed) countries consider the Internet - and all it’s applications - as just a normal part of life. As stated in the introduction of this paper, this development must not be underestimated.

Unquestionably, electronic commerce will continue to grow in consumer markets. However, the scope of the role that the Internet will (grow to) play in the distribution of products is less certain, and more difficult to predict. As a result, it’s not easy for managers to assess the potential of an electronic marketing channel strategy for their business. This research aims to provide a framework that guides decision makers through such an analysis. By means of this framework for analysis it should be avoided that critical factors that affect the potential of an electronic B2C marketing channel strategy are disregarded or overlooked.

2.1 Problem statement

In view of the above, the following research objective and (main) research question are formulated:

Research objective:

To provide a managerial framework for analysis of an electronic B2C marketing channel strategy for originators of products

Research question:

How can originators of products assess an electronic B2C marketing channel strategy for their business?

Two components of the research question need to be defined:

• Originators of products

• An electronic B2C marketing channel strategy Originators of products:

For this research originators of products are defined as producers or manufacturers of goods or services. As this research is focused on consumer markets, it’s explicitly intended for originators of products that operate in a B2C environment. Of course, even more specific, this research is meant for the relevant decision makers in these firms.

An electronic B2C marketing channel strategy:

In order to define an electronic B2C marketing channel strategy properly, the exact perspective on strategy that applies in this context must be addressed. The literature on strategy contains numerous definitions, and probably an even greater variety of interpretations. Hence, it’s important to be clear about how strategy is viewed in this research.

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Mintzberg suggested 5 different definitions or aspects of strategy:¹⁴

• Strategy as a Plan

• Strategy as a Ploy

• Strategy as a Pattern

• Strategy as a Position

• Strategy as a Perspective

Although these aspects of strategy are distinct, they can occur at the same time, as they are complementary- and not exclusive categories (Adcock, 2000).

A plan is some sort of consciously intended course of action. By this definition strategies have two essential characteristics: they are formed in advance of the actions, and they are developed in a purposeful manner.

If a plan is in fact just a specific maneuver intended to outwit or confuse an opponent or competitor then the strategy is actually a ploy. For example, an organization may threaten to lower prices in order to discourage another company from entering the market. In this case the real strategy is the threat, not the price reduction itself, and therefore it’s a ploy.

A third definition is: strategy is a pattern – to be precise, a pattern in a stream of actions (Mintzberg and Waters, 1985). By this definition, strategy is consistency in behavior, although this does not mean that a pattern necessarily has to be intended. A pattern in behavior may also appear without an underlying predetermined plan.

The fourth definition is that strategy is a position. In this context, strategy is the mediating force between an organization and the environment, that is, between the internal and external context. The idea of strategy as a position to be achieved in the marketplace could be seen as a goal or objective, but it is also part of strategy and can be consistent with both predetermined plans and specific patterns of behavior (Adcock, 2000). Position can be defined with respect to a single competitor, but it can also be considered in the context of a large number of competitors or simply with respect to markets or an environment at large (Mintzberg, 1999).

Mintzberg’s fifth aspect of strategy is: strategy as a perspective. Here, strategy refers to an organization’s ingrained way of viewing the external market.¹⁵ From this perspective, strategy is to the organization what personality is to the individual. This definition of strategy underlines the fact that all strategies are abstractions, which only exist in the minds of interested parties.¹⁶

In principal, all these aspects of strategy could apply to an electronic marketing channel strategy. However, in this research, strategy is foremost defined as a position, that is, a mediating force between the internal and external environment. This mediating force consists of an organization’s specific deployment of the marketing mix, which accordingly determines its position in the market. This research concentrates on one particular strategic area of the marketing mix, namely marketing channel strategy. The use of a particular marketing channel is an element of a firm’s position in the market, and therefore can be viewed as a strategy as such. Hence, an electronic B2C marketing channel strategy is here defined as:

The appliance of an electronic marketing channel to make products available for consumer markets

14 Henry Mintzberg et al, The Strategy process, Revised European Edition, Prentice Hall, 1999: (originally published in the California Management Review, 1987)

15 Dennis Adcock, Marketing Strategies for Competitive Advantage, John Wiley & Sons, Ltd, 2000

16 Henry Mintzberg et al, The Strategy process, Revised European Edition, Prentice Hall, 1999

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2.1.1 Sub questions

In order to reach the research objective systematically, a set of sub questions is formulated.

1. What is a marketing channel?

2. What is the function of a marketing channel?

3. Which advantages of electronic marketing channels can be identified?

4. Which disadvantages of electronic marketing channels can be identified?

5. Against which criteria must originators of products analyze an electronic B2C marketing channel strategy?

6. Which key factors must originators of products assess with regard to those criteria?

2.1.2 Research model

The model below shows schematically how an exploration of the diverse aspects should lead to the achievement of the research objective.

Figure 2.1 Research model

Advantages of electronic marketing channels

Managerial framework for analysis of an electronic B2C marketing channel strategy

Key factors with regard to the relevant criteria Exploration of the marketing channel concept

Disadvantages of electronic marketing channels

Criteria for the analysis of an electronic B2C marketing channel strategy

The potential of electronic marketing channels

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Clarification of the research model:

The research starts of with an exploration of the marketing channel concept. In order to be able to identify the advantages and disadvantages of electronic marketing channels, this general concept has to be addressed first.

Subsequently, an assessment of advantageous and disadvantageous features is performed to explore the general potential of electronic marketing channels. This general potential might form an incentive for originators of products to engage in electronic selling. Though, clearly, decisions regarding the appliance of an electronic marketing channel should be supported by a thorough analysis. In order to perform the analysis in a comprehensive and structured manner, the criteria against which the strategy must be analyzed have to be established first.

After that, key factors that affect the extent to which those criteria are (can be) met have to be identified and analyzed.

Finally, the above must result in the development of a managerial framework for analysis of an electronic B2C marketing channel strategy.

2.1.3 Methodology

This research can be characterized as a theoretical survey. The general concept of marketing channels is applied to explore electronic channel systems. Subsequently, these insights are integrated with principles of strategic marketing management. The integration of these aspects enables the development of a comprehensive structure for analyzing an electronic B2C marketing channel strategy.

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3 Marketing channels

Marketing channels form the infrastructure of commerce. Every channel can be viewed as a specific route that leads from an originator of a good or service - through a process of buying and selling - to an end-user. But why do products follow these routes? To answer this question we first have to establish what a marketing channel precisely is, and even more important, what it does. As with most concepts though, the concept of marketing channels can be interpreted and defined in many ways. Naturally, differences in interpretation result from differences in perspective. In the above a marketing channel was described as a route taken by goods and services towards the end-user. But that doesn’t tell us a lot about why these channels exist. In his book, Rosenbloom views the marketing channel through the eyes of marketing management in producing and manufacturing firms.¹⁷ He defines a marketing channel as:

The external contactual organization that management operates to achieve its distribution objectives

(Rosenbloom, 1999) Another definition by Coughlan et al (2001) stresses the interdependency between the participating organizations, as well as the importance of all channel members focusing their attention on the end-user.¹⁸

A marketing channel is a set of interdependent organizations involved in the process of making a product or service available for use or consumption

(Coughlan et al, 2001) These two definitions show a subtle difference in perspective on marketing channels. In the perspective taken by Rosenbloom (1999), the marketing channel is viewed mainly as a means for producers and manufacturers to reach their distribution objectives. Coughlan et al (2001), though, view the marketing channel as the whole of channel members involved in the process of satisfying the end-user. It’s certainly important to recognize the interdependency of channel members, as the performance of a channel depends on the cooperation of all participating organizations. Still, the driving force behind a marketing channel is usually the manufacturer or producer of a product. It must however be emphasized that this does not mean that originators of products also have power and control over the channel. Since they control access to the marketplace, intermediaries, specifically retailers, are quite often the dominant organizations in marketing channels. Nevertheless, marketing channels typically emerge when originators of products need or want to make use of intermediaries to reach their distribution objectives. In addition, producers and manufacturers generally take, of all channel members, the greatest interest in the workings of a specific channel.

Yet, these perspectives on marketing channels involve - what might be referred to as - conventional or traditional marketing channel systems. Although such conventional channel systems (still) account for the distribution of the vast majority of goods and services, alternative channel systems do exist, and their importance has been growing.¹⁹ Two of these alternative channel systems will be briefly addressed: direct selling and direct marketing.

17 Bert Rosenbloom, Marketing Channels, a management view, The Dryden Press, 6^th ed., 1999

18 Anne T. Coughlan et al, Marketing Channels, Prentice Hall, 6^th ed., 2001

19 Bert Rosenbloom, Marketing Channels, a management view, Thomson South-Western, 7th ed., 2003

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Direct Selling:

Direct selling can be referred to as door-to-door retailing.²⁰ A direct selling channel goes directly to consumers’ homes, offices, and the like. Salespeople meet face-to-face with customers, either one-on-one or in party- plan situations where the sales presentation is made to a group of people invited to someone’s home (Rosenbloom, 2003). The Tupperware parties of Tupperware Corp are a well-known example of this mode of distribution. The business literature shows little consensus on the exact definition of direct selling, yet most definitions more or less reflect the definition developed by the Direct Selling Association (DSA):²¹

Direct selling is the sale of a consumer product or service person-to-person away from a fixed retail location

It must be emphasized that direct selling is exclusively concerned with the sale of consumer products in consumer markets.

Direct Marketing:

Direct marketing uses various advertising media to interact directly with costumers, generally calling for the costumer to make a direct response.²² Direct advertising is applied to obtain immediate orders directly from targeted costumers. This can be achieved by means of direct mail and mail order catalogs, but also through telemarketing, direct radio and television marketing, as well as, Internet marketing. The Direct Marketing Association (DMA) suggests the following definition:²³

Direct marketing is an interactive system of marketing that uses one or more advertising media to effect a measurable response and/ or transaction at any location

Unlike direct selling, direct marketing can involve both consumer and industrial markets. In fact B2B sales has been one of the fastest growing areas of direct marketing over the past decade.²⁴

These (alternative) channel systems do not (necessarily) correspond with the definitions of marketing channels presented in the above. Still, this thesis revolves around electronic channels, and in chapter 1 of this paper an electronic marketing channel was defined as:

So, by this definition, an electronic marketing channel can take on the structure of an indirect

‘conventional’ channel (containing one or more intermediary levels), as well as the structure of a direct channel (without independent intermediary levels). Therefore, for this research a broad definition of marketing channels is preferred. Furthermore, as this research focuses on originators of products, a perspective on marketing channels - through the eyes of marketing management in producing and manufacturing firms - is most appropriate.

20 P. Kotler and G. Armstrong, Principles of marketing, International Edition, Prentice Hall, 7^th ed., 1996

21 http://www.dsa.org

22 Kotler et al, Principles of marketing, Prentice Hall, Third European Edition, 2001

23 http://www.the-dma.org

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Hence, a marketing channel is here defined as:

The channel system that management operates to make products available for the market As mentioned, most originators of products use intermediaries to make their products available for the market. But, why do they need or want to make use of intermediaries? The next paragraph addresses the rationale behind the use of intermediaries in marketing channels.

3.1 The rationale behind the use of intermediaries

Coughlan et al (2001) make a distinction between demand-side factors and supply-side factors to rationalize the deployment of intermediaries in marketing channel systems.²⁵

Demand-side factors

Facilitation of Search:

Without intermediaries it’s far more difficult for sellers and end-users to find each other.

End-users would not know where to find a product, whereas producers would be uncertain about how to reach their target market. Consequently, producers, especially those without a known brand name, would have a hard time generating sales. By using intermediaries producers and manufacturers get access to a large base of potential buyers. In addition, consumers don’t have to search the whole market for a certain product; the name or characteristics of a retailer signifies availability.

Adjustment of Assortment Discrepancy:

Intermediaries in marketing channels perform the function of sorting goods. Especially for wholesalers the sorting process is the key to economic viability (Bradley, 1995). The sorting function includes the following activities:²⁶

• Sorting out. This involves breaking down a heterogeneous supply into separate stocks that are relatively homogenous.

• Accumulation. The intermediary brings similar stocks from a number of sources together into a larger homogeneous supply. (Wholesalers accumulate for retailers, and retailers accumulate for consumers).

• Allocation. The breaking down of a homogeneous supply into smaller lots. This is also known as Bulk Breaking.

• Assorting. This refers to the building up of an assortment of goods for resale in association with each other. (Wholesalers build assortments for retailers, and retailers build assortments for consumers).

Supply-side Factors

Routinization of Transactions:

Each purchase transaction involves ordering, valuating, and paying for goods and services.

Buyer and seller must agree on the amount, mode, and timing of payment. By standardization of transactions (i.e. using fixed channel partners) it’s avoided that every transaction is subject to bargaining. As a result the costs of distribution related to these activities can be minimized.

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Reduction in Number of Contacts:

By using intermediaries, the number of contacts needed to cover a market can be reduced.

Without channel intermediaries, every producer would have to interact with every potential buyer in order to create all possible market exchanges (Coughlan et al, 2001). The examples below illustrate this quite clearly:

Selling directly to retailers:

Originators of products

Retailers 24 contact lines

Figure 3.1 – Source: based on Coughlan et al (2001: 8)

Selling to retailers through a wholesaler:

Originators of products

Wholesaler

Retailers 10 contact lines

Figure 3.2 – Source: based on Coughlan et al (2001: 8)

It’s not hard to imagine what the complexity of the exchange system would be when originators of products were to sell directly to individual end-users. However, of course, the costs and effectiveness of each contact line in the market is not necessarily always the same.

Moreover, technological advancement has enabled a significant cost reduce in carrying a contact line. Nevertheless, the above demonstrates how the use of intermediaries reduces the number of contacts needed to cover a market.

3.2 Marketing Flows

As indicated, a marketing channel moves products from their originator to end-users. It fills the main time-, place-, and possession gaps that separate goods and services from those who would use them (Kotler et al, 2001). In the course of this process channel members perform several marketing flows. It should be recognized that originators of products and end-users are members of the marketing channel as well. The literature contains some disparity regarding

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the categorization of marketing flows, but in principal most observers refer to the same functions or activities.²⁷ The main marketing flows are here defined as:

1. Product flow 2. Negotiation flow 3. Ownership flow 4. Promotion flow 5. Information flow

1. The product flow refers to the physical movement of products through the channel from the originator to end-users.

2. The negotiation flow includes the activities related to attaining an agreement on price and a variety of other terms, so that the right of ownership can be transferred.

3. The ownership flow represents the movement of the right of ownership through the channel.

4. The promotion flow contains activities like advertising, sales promotion, personal selling and publicity.

5. Finally, the information flow involves the collection and exchange of information throughout the marketing channel in order to optimize the efficiency and effectiveness of the channel.

Some of these flows move forward through the channel, whereas others move in both directions. See for example the theoretical B2C marketing channel - containing originators of products, wholesalers, retailers, and consumers - that is shown in figure 3.3.

Product flow Product flow Product flow

Negotiation flow Negotiation flow Negotiation flow

Ownership flow Ownership flow Ownership flow

Promotion flow Promotion flow Promotion flow

Information flow Information flow Information flow

Figure 3.3 Marketing flows

Marketing flows form the connection between the participating organizations in the channel.

However, specific channel members do not necessarily participate in each flow. A marketing

27 See for example: Bert Rosenbloom, Marketing Channels, a management view, Thomson South-Western, 7th ed., 2003; Anne T. Coughlan et al, Marketing Channels, Prentice Hall, 6^th ed., 2001; Frank Bradley, Marketing Management, Providing, communicating and delivering value, Prentice Hall, 1995

Originators of Products

Wholesalers

Retailers

Consumers

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channel can also contain so-called specialized intermediaries. These intermediaries participate in the performance of a specific flow, and are typically not heavily involved in the core business represented by the products sold.²⁸ Finance companies, credit card companies, advertising agencies, logistics and shipping firms, and the like, are examples of specialized intermediaries. Some observers do not consider these types of intermediaries to be actual members of the channel. Rosenbloom (2003), for example, defines only those parties that participate in the negotiation or ownership flow as channel members. Yet, in this paper specialized intermediaries are considered to be members of the channel as well, since the focus on electronic channel systems demands for an as open perspective on marketing channels as possible.

It becomes clear from figure 3.3 that the information flow is of particular importance.

Retailers obtain information from their customers and subsequently inform producers and manufacturers about sales trends; producers and manufacturers share product information with their distributors and retailers, etcetera. Hence, all parties participate in the exchange of information. As Coughlan et al (2001) rightfully state: producing and managing information well is at the core of developing distribution channel excellence.

The above shows that the work of marketing channels goes far beyond the physical movement of products. Still, it must be recognized that it’s the product flow upon which all the other flows are based. Evidently, there would be little need for the other flows in the absence of a product flow.

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4 Electronic marketing channels

In the previous chapter the general concept of marketing channels was addressed. In this chapter this concept is applied to explore the advantages and disadvantages of electronic marketing channels.

4.1 Electronic marketing channels: advantages

A basic presence on the Internet can offer several benefits to organizations, like for example:

• Reduced printing and distribution costs of marketing communication

• Reduced time in customer service

• Administrative cost reductions (e.g. e-recruitment)

An internet-based marketing channel has some additional (potentially) advantageous features.

To avoid ambiguity the definition of electronic marketing channels that is used in this text is here restated. An electronic marketing channel is:

Four key advantages that embody the strength of electronic channels will be addressed:

1. Potential savings on sales and distribution costs 2. Customer convenience

3. Customer scope

4. Customer relationship development 1. Potential savings on sales and distribution costs

Internet-based marketing channels have the potential to result in lower sales and distribution costs in comparison to conventional channels. In the early years of commercial Internet many observers predicted major changes in the field of marketing channels. Who needs costly middlemen when there is a medium like the Internet? ‘Eliminating middlemen in the channel’, which has also become known as disintermediation, was and is often thought to be the key to better efficiency. But does the emergence of the Internet necessarily stimulate disintermediation? And in what way should this result in lower sales and distribution costs?

These issues will be explored by using the concept of transaction costs.

The transaction costs theory was initially formulated by Ronald Coase in his article ‘The Nature of The Firm’, in which he unfolded a rationalization for the emergence of organizations through the concept of transaction costs.²⁹ Based on his fundamentals Oliver Williamson later on developed the theory for transaction costs economics (TCE).³⁰

A transaction is an event in a process of exchange. In this process three phases can be identified: contact, contract, and control.³¹ Transaction costs emerge as a result of the tasks or

29 Ronald H. Coase, ‘The Nature of The Firm’, Economica Vol 4., No 4, 1937

30 O.E. Williamson, Markets and Hierarchies, The Free Press, 1975

31 Bart Nooteboom, Management van Partnerships, over allianties tussen bedrijven, Academic Service, 2^nd ed., 1999

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activities that have to be performed in each of these phases. Naturally, before a contract can be set up, one first has to find a ‘contract partner’ to set it up with. This leads to transaction costs: search costs on the buyer’s side and marketing costs on the supplier’s side. The costs related to the contract phase stem from preparing and setting up a contract, agreement, or sale. In the control phase monitoring and reviewing the performance can bring about transaction costs.

So transactions lead to costs as a result of inefficiencies in the process of exchange. These inefficiencies are mainly caused by information problems (i.e. a lack of information - for example information about where one can find a certain product).³² Though, information problems as such are not responsible for transaction costs. They only lead to costs in combination with a set of interrelated factors: human factors and environmental factors.³³ Human factors consist of bounded rationality and opportunism, whereas environmental

factors involve uncertainty, complexity, and (the level of) competition in the market.

Information problems mainly lead to transaction costs when the environment is characterized by uncertainty or complexity - which correlates with rationality - and when there is a threat of opportunistic behavior.³⁴

Yet, how does all this relate to the Internet and the position of intermediaries in (electronic) marketing channels? To answer this question, we turn back to Ronald Coase’s rationalization for the emergence of organizations.³⁵ Coase reasons that an organization is, next to the market, an alternative way to perform a transaction. Accordingly, he argues, an organization emerges when it’s cheaper to perform a transaction within the borders of the organization, instead of having it done by a variety of entities in the market. Evidently, the same rule applies the other way around. So, there are two coordination mechanisms for transactions: the market and the organization. In any particular transaction both mechanisms have their specific transaction costs and, naturally, the cheapest alternative is to be preferred.

Over the last fifty years computing technology has enabled organizations to carry out more and more activities at lower costs within the organization, than via the market.³⁶ The inefficiencies (or information problems) of the market could largely be overcome by performing activities internally. Accordingly, organizations grew larger in this period of time.

With the emergence of Internet technology the advantages of relatively inexpensive information communication are no longer just enjoyed within organizations, but by anybody with access to the Internet. Different entities on the market can communicate much more effectively and efficiently with each other. So, while intermediaries often derive their value for transactions from inefficiency in the market, they are faced with a significant decline in the transaction costs of the free market.

However, does this imply a rationale for drastic disintermediation of marketing channels?

Let’s recall the drivers behind the development of marketing channels (containing intermediaries), and consider the influence of Internet technology on each of them.

32 John Caspers e.a., de Piranha-economie, E-commerce, strategie, markten, en toepassingen, Addison Wesley Longman Nederland BV, 1999

33 O.E. Williamson, Markets and Hierarchies, The Free Press, 1975

34 For an extensive elaboration on this subject see the work of R.H. Coase and O.E. Williamson; or, for example, Bart Nooteboom, Management van Partnerships, over allianties tussen bedrijven, Academic Service, 2^nd ed., 1999

35 Ronald H. Coase, ‘The Nature of The Firm’, Economica Vol 4., No 4, 1937

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• Facilitation of Search (demand-side factor)

• Adjustment of Assortment Discrepancy (demand-side factor)

• Routinization of Transactions (supply-side factor)

• Reduction in Number of Contacts (supply-side factor) Facilitation of Search:

Probably the most apparent influence of the Internet on transaction costs is the effect it has on search costs. Through the Internet customers can much more easily find producers and gather

information about product-price combinations themselves. The transaction costs (the effort) related to performing these activities have decreased significantly, which consequently reduces the value offered by intermediaries. The same can be said with regard to the product knowledge of sales people at retail locations, although this naturally depends on the degree of specificity of that knowledge.

Yet, the Internet does not necessarily reduce the transaction costs related to the contact phase on the supplier’s side: the marketing costs. Only when an originator of products is able to cut out retailers without losing access to a significant amount of potential buyers, the savings on functional discounts might result in a cost reduction. This is however highly dependable on whether or not the target market will search for (and find) a particular producer or manufacturer on the Internet. In this context a strong brand name can be very important.

Though, in order to gain a strong brand name huge investments have to be made, which in turn leads to an increase of marketing costs.

Adjustment of Assortment Discrepancy:

The sorting function derives its value from the natural discrepancy between the assortment of goods made by a particular producer and the assortment of goods demanded by end-users.³⁷ This discrepancy results from the fact that manufacturers typically produce a large quantity of a limited variety of goods, whereas consumers usually demand only a limited quantity of a wide variety of goods (Coughlan et al, 2001). Intermediaries create value for customers by breaking down large homogeneous quantities (bulk-breaking) and building up assortments that contain a wide variety of goods. However, through Internet technology customers are enabled to review an enormous amount of product alternatives without being in the same place as those products. The transaction costs of the free market have decreased, and as a result, a broad (or deep) assortment at a physical location has lost part of its value for transactions.

Routinization of Transactions:

Quite obviously, routinization of transactions leads to better efficiency in performing channel activities, and thus to lower transaction costs. However, this aspect does not so much refer to the value that intermediaries have for transactions, but to the significance of developing a marketing channel with a set of fixed partners in general. In subsequence of EDI projects, Internet technology is already widely applied to facilitate recurring transactions between channel partners. This is, for example, also very favorable in relation to inventory management. Since the Internet enables highly efficient communication between anybody with access to the Web, new opportunities have emerged for routinizing transactions directly with end-users as well. This potential for customer relationship development will be discussed later on in this chapter.

37 Anne T. Coughlan et al, Marketing channels, 6th ed., Prentice Hall, 2001

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Reduction in number of contacts:

On this subject, Rosenbloom (2003) speaks of contactual efficiency. Contactual efficiency refers to ‘the level of negotiation effort between sellers and buyers relative to achieving a distribution objective’.³⁸ As pointed out in chapter 3, the use of (additional) intermediaries will often increase the level of contactual efficiency. Yet, by means of Internet technology originators of products can efficiently interact with end-users directly, which, to a certain extent, undermines the significance of this driver behind the use of intermediaries: a reduction in the number of contacts (or exchanges) needed to cover a market.

Two factual conclusions can be drawn from the above:

1. Originators of products are presented with the possibility to efficiently interact with end-users directly.

2. Especially for buyers, intermediaries have indeed lost part of their value for transactions.

Hence, does the decline of transaction costs on the Internet enforce disintermediation? The answer to this question has to be ‘no’. Essentially, there is no direct relation between reduced transaction costs through Internet/ computing technology and redundancy of intermediaries.

Sure, it’s possible for producers and manufacturers to get access to - and efficiently interact with - a broad base of potential buyers, but the Internet is not free of transaction costs. For one thing, the necessity to find each other remains. The vast amount of information about products that is available to potential buyers on the Internet also results in transaction costs (search costs). New Internet intermediaries can reduce these transaction costs by offering all sorts of product information on the Internet (e.g. infomediairies such as Yahoo! and eBay).

Another source of transaction costs that could play a role on the Internet is a lack of trust.

Internet Intermediaries with an already established reputation can be of value in solving this problem as well (e.g. online retailers such as Amazon.com). These sources of transaction costs can be particularly problematic for originators of products without a well-known brand name. In order to deal with this they might want (or need) to employ new online middlemen in the channel, which in turn can be called reintermediation.³⁹

So, internet technology does not offer a rationale for ‘eliminating middlemen’ in marketing channels as such. It does however present a strong basis for considering replacement of (inefficient) conventional intermediaries. Bear in mind the five flows that occur in marketing channels, and which embody the work of the channel:

1. Product flow 2. Negotiation flow 3. Ownership flow 4. Promotion flow 5. Information flow

Since the flows 2, 3, 4, and 5 involve information, these can be performed on the Internet with supreme efficiency. Significant cost savings can be obtained by handling the channel

38 Based on the work of Wroe Alderson (1954): Bert Rosenbloom, Marketing Channels, a management view, Thomson South-Western, 7th ed., 2003

39 Philip Anderson and Erin Anderson, The New E-commerce Intermediaries, MIT Sloan Management Review, 2002

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activities related to these flows on the Internet (either by means of online middlemen or not).

This in itself suggests that replacing and/ or eliminating conventional intermediaries improves the efficiency of channel systems. However, the Internet enables transfer of data, not physical products. (Regarding products that are or could be digitized, like for example music, computer software, and a variety of services, the supremacy of electronic channels is evident.

The implications of product characteristics will be addressed later on in this paper.) The distribution tasks that have to be performed in order to actually get a physical product in possession of the buyer (e.g. storage, transportation) cannot be conducted on the Internet. So, even if the negotiation flow, the ownership flow, promotion flow, and information flow are processed on the Internet, the product flow still has to be carried out by means of people, pallets, warehouses, and trucks, trains, or airplanes.⁴⁰ Therefore, whether or not a particular conventional intermediary can be removed or replaced strongly depends on the efficiency of the alternative(s) for its participation in the product flow. The ‘cost saving potential’ of electronic marketing channels can only be fully exploited, when producers and manufacturers are also able to manage the product flow efficiently.

Hence, the main challenge in distribution through electronic channels is to get the product in the buyer’s possession after the purchase. This places the emphasis in electronic marketing channels on physical distribution (logistics), which demands for different capabilities of distributors. For this distribution task delivery service companies (e.g. TNT, UPS, FedEx) might be more suitable than traditional intermediaries (at least from a cost perspective). These companies are increasingly expanding their services by offering total solutions for the distribution of goods that are purchased in online-shops.⁴¹ After the initially negative influence of the Internet on their business (e.g. lost market share to e-mail), delivery service companies can grow to be stronger than ever by playing an important role in e-business logistics.

Yet, an electronic channel structure can take on many forms, and better efficiency could (to a degree) also be obtained without removal or replacement of intermediaries. An electronic channel structure does not necessarily imply a direct or short channel. In fact, electronic channels might even contain more rather than fewer middlemen relative to conventional marketing channels. The example in figure 4.1 illustrates this.

Conventional channel Electronic channel

Figure 4.1 Conventional auto channel structure vs. an electronic channel structure – Source: Rosenbloom (1999: 454)

Auto manufacturer

Autobytel Auto dealer

Consumer

Auto manufacturer

Consumer Auto dealer

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Here, an extra level, Autobytel, was added to the channel structure. By means of their Website Autobytel brings consumers and dealers together. In return, Autobytel receives monthly fees from dealers for referrals of consumers. Both consumers and auto dealers benefit from this structure. Consumers have access to an enormous amount of information from a wide variety of dealers, whereas dealers benefit from a much larger customer base and lower selling costs (e.g. advertising costs).

In this example there has been neither removal nor replacement of intermediaries. Instead, a broker has been added to the channel. This (auto) broker, Autobytel, adds value to the channel by its contribution in the information-, promotion-, and ownership flow. However, with regard to the product flow, the use of Autobytel apparently does not allow the manufacturer to efficiently and/ or effectively bypass auto dealers. Buyers still visit dealers at their physical location to actually get the car in possession. Hence, the tasks related to the product flow (e.g.

storage, transportation, but also repair services) are performed in the same way as prior to the addition of Autobytel. The participating auto dealers have simply outsourced part of ‘their work’ to Autobytel.

Now, what does the inclusion of an Internet broker like Autobytel mean for the distribution costs of the auto manufacturer (the originator of the product)? Since dealers pay for the services of Autobytel themselves, it’s not likely that the manufacturer is able to negotiate lower functional discounts. Therefore, the manufacturer does not so much benefit from a (significant) reduction in the total cost of distribution, but in fact from an increase in promotional activity at the same expense.

It will have become clear from the above that the product flow truly is ‘the bottleneck’ in the development of highly efficient electronic marketing channels. Major cost savings can be obtained by handling the negotiation flow, ownership flow, promotion flow, and information flow on the Internet. Still, the efficiency of the product flow eventually determines whether or not an electronic channel structure enables a (significant) reduction in the total cost of distribution relative to the use of a conventional channel.

2. Customer convenience

Electronic channels enable customers to review and purchase products from the convenience of their homes. In sub paragraph 1.1.3 it was already addressed how social-economical developments increase consumers’ need for convenient and flexible shopping. Since consumers (or humans for that matter) adjust their expectations and demands to what’s (technological) possible rather quickly, technological advancement itself even enhances those needs. Electronic marketing channels can provide for this increasing need for flexibility and convenience.

3. Customer scope

In principal the customer scope of electronic channels is only limited by the global number of people with access to the Internet. Consumers around the world can visit any seller’s Website and order the products that are offered. The absence of geographic boundaries presents sellers with opportunities for new markets and/ or new customers. Still, as pointed out in the above, geographic boundaries have only been lowered regarding the communication of information.

Of course, these problems of distance were already overcome by telecommunication technology, however the efficiency of transferring and processing data by means of the

Electronic B2C Marketing Channel Strategy

A managerial Framework for Analysis

Remco de Back

September, 2004

Electronic B2C Marketing Channel Strategy

A managerial Framework for Analysis

Remco de Back

Student number: 0991384

First supervisor: Drs. H. Bos Second supervisor: Drs. M.E. Boon

Rijksuniversiteit Groningen September, 2004

Abstract

Contents

1 Introduction

2 Research framework

3 Marketing channels

4 Electronic marketing channels