Marketing Channels 8e

Chapter 15

ELECTRONIC MARKETING CHANNELS

Teaching Notes
This chapter discusses the advantages and disadvantages of electronic marketing
channels, namely the Internet. If possible, the instructor may want to ensure that his/her
classroom is connected to the Internet during this lecture to allow for “visits” to some of
the Web sites mentioned throughout the chapter. If Internet access is available to the
students via computer labs or wireless connections, this should be encouraged as well
while discussing this chapter.

Chapter Objectives
This chapter examines the emerging topic of electronic marketing channels, their
structure, development, and trends, as well as the advantages and disadvantages of these
channels. This chapter closes with the consideration of and the implications of electronic
marketing channels for channel strategy and management.

Learning Objectives
1) Recognize that electronic marketing channels have become an everyday reality.
2) Understand and be able to define what is meant by electronic marketing channels.
3) Appreciate the difference between the uses of the Internet for information
gathering versus true Internet-based interactive shopping.
4) Realize that electronic marketing channels can result in both disintermediation
and reintermediation in channel structure.
5) Know the limitations of the Internet in terms of product flow and order
fulfillment.
6) Be familiar with developments and trends in electronic marketing channels.
7) Be aware of the advantages and disadvantages of electronic marketing channels.
8) Be cognizant of the key implications of electronic marketing channels for the six
major decision areas of marketing channel strategy.

Chapter Topics
1) Electronic Marketing Channels Defined
2) Structure of Electronic Marketing Channels
3) Developments and Trends in Electronic Marketing Channels
4) Advantages and Disadvantages of Electronic Marketing Channels
5) Implications for Marketing Channel Strategy and Management

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Electronic Marketing Channels
Chapter Outline

Electronic Marketing Channels Defined

Key Term and Definition

 Electronic marketing channels: Defined as “the use of the Internet to make products
and services 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”.

Several points of clarification are needed before proceeding.

 First, the term available does not imply the physical availability of the product
over the Internet.
 Second, the term other enabling technologies includes accessing the Internet from
any and all other electronic means in addition to or besides, the personal
computer.
 Third, the completion of the transaction through interactive electronic means is
used to convey the idea of “stepping over the line” from merely using the Internet
as a kind of electronic mail-order catalog.

Structure of Electronic Marketing Channels

We need to take a more in-depth look at channel structure in terms of three key
phenomena:

 Disintermediation versus reintermediation

 The information flow versus the product flow
 Virtual channel structure versus physical channel structure

A) Disintermediation versus Reintermediation

Recall from Chapter 1 that channel structure was defined as “the group of channel
members to which a set of distribution tasks has been allocated”.

A term has emerged to describe this concept called disintermediation.

Key Term and Definition

 Disintermediation: This concept is defined as when intermediaries become
superfluous because producers gain exposure to vast numbers of customers in
cyberspace.

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 Marketing Channels 8e
In fact, some of the most popular and frequently mentioned examples of Internet firms
that supposedly show the disintermediation process in action are examples of
reintermediation.

Key Term and Definition

 Reintermediation: The process of shifting, changing, or adding middlemen to the
channel.

For example, Amazon.com® is very much a middleman.

Figure 15.1 shows Amazon.com as a cyber middleman in an electronic marketing

channel.

What has actually happened is reintermediation in the form of an online retailer

(Amazon.com) that augments and in some cases replaces conventional store and/or
catalog retailers as another type of intermediary in the marketing channel.

Figure 15.2 shows the addition of Autobytel (Autobytel.com) as a middleman because it

facilitates the transfer of title from seller to buyer. Autobytel in fact, lengthens the
channel by adding an extra level to the channel structure.

Figure 15.3 examines an additional example for an Internet grocery channel versus a
conventional grocery channel.

There are examples of where disintermediation has been successfully applied by certain
firms. Dell Computer® is such an example.

What we can say at this point, is that the Internet does not, by itself, repeal the laws of
economics as they relate to channel structure: Efficiency in the performance of
distribution tasks is what determines what form channel structure will take.

B) Information Flow versus the Product Flow

In the very first chapter, we discussed a series of five flows that occur in the marketing
channel: (1) product flow, (2) negotiation flow, (3) ownership flow, (4) information flow,
and (5) promotion flow.

The Internet can facilitate the negotiation flow, ownership flow, information flow, and
promotion flow but it cannot convey product flow. This is perhaps one of the most
frequently forgotten limitations of the Internet.

Despite the awesome speed and information flow over the Internet, the actual fulfillment
of transactions between buyers and sellers still mostly takes place the “old-fashioned”
way by trains, trucks, and planes.

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Electronic Marketing Channels
What can be concluded is that electronic marketing channels based on the Internet are not
“complete” marketing channels because they cannot handle the crucial physical product
flow.

This inherent limitation means there are also limits as to how much of a role it will play
in the distribution of goods and services.

C) Virtual Channel Structure versus Conventional Channel Structure

Customer demands for real rather than virtual stores, malls, and service facilities will
assure that the major portion of the channel structure will still be composed of bricks and
mortar rather than Web sites.

Developments and Trends in Electronic Marketing Channels

Online shopping grew to almost $175 billion by the end of 2010.

Table 15.1 shows anticipated online retail sales (2009-2015).

Table 15.2 shows projected online sales as a percentage of total sales (2009-2012).

Table 15.3 shows projected online sales for selected product categories (2009-2012).

Table 15.4 displays online shopping usage by household (2009-2012).

Table 15.5 presents the age range of online shoppers for 2009.

Table 15.6 represents the income levels of online shoppers for 2010.

Here the instructor may want to open up the class for discussion on the facts and figures
contained in these four tables to ask whether or not their perceptions of Internet shopping
mirrors these findings.

A) Mobile Electronic Channels

Mobile commerce or m-commerce refers to electronic marketing channels that enable

consumers to conveniently shop online from a variety of electronic devices but became
more common with the introduction of smartphones. Smartphones provided an easy
means for consumers on the move to make purchases regardless of the time or of their
location.

Figure 15.4 provide examples of some popular Smartphone applications.

Table 15.7 shows the types of products bought by consumers using smartphones for
online shopping in 2009.
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 Marketing Channels 8e
Table 15.8 shows the reasons consumers give for not purchasing using smartphones.

B) Electronic Channels on Social Network Sites

Table 15.9 the demographics of social network users..

Social networking sites such as Facebook, MySpace, and Twitter, are becoming
increasing important to Americans with a growing number registering on one or more of
the sites. Many businesses are already utilizing social networks to communicate with
consumers and engage in commerce.

Table 15.10 lists categories of applications used by 18-24 year olds on social networks.

Advantages and Disadvantages of Electronic Marketing Channels

A) Advantages of Electronic Marketing Channels

Five advantages of electronic marketing channels are frequently mentioned for Internet-
based online shopping. These are:

A) Global scope and reach

B) Convenience/rapid transaction processing
C) Information processing efficiency and flexibility
D) Data-based management and relationship capabilities
E) Lower sales and distribution costs

1) Global Scope and Reach

This high-tech channel structure offers consumers around the world the capability to visit
any seller’s Web site and place an order. The same geographical scope and reach is
available to the seller.

From both the demand and supply side of the marketplace, electronic marketing channels
offer the potential for global commerce at a level of convenience and timeliness that does
not exist in alternative channels–at least for the flow of information between buyers and
sellers.
2) Convenience/Rapid Transaction Processing
Shopping via electronic marketing channels offers greater convenience. Whether or not
this advantage would also hold over mail order/catalog shopping or direct selling in
consumers’ homes is still very much open to question.

3) Information-Processing Efficiency and Flexibility

From both the customers’ and sellers’ perspectives, electronic marketing channels
provide the potential for great efficiency and flexibility. The most obvious information
advantage is the vast array of content on the Internet.

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Electronic Marketing Channels
The potential to the seller to create, and customers to use, sophisticated screening and
sorting capabilities provides great flexibility in the use of product information. At the
most advanced level, a high degree of customization along with a high level of
interactivity is possible via electronic marketing channels.

Here the instructor may want to visit Lands’ End site and call up their feature called “My
Virtual Model™” as an example of this kind of interactivity.

4) Data-Based Management and Relationship Enhancement

The technology underlying electronic marketing channels enables firms to target
customers efficiently on both a large and small scale, niches and microsegments of a very
small group of customers with similar demands. Even one-to-one marketing is feasible
via Internet-based online shopping.

Still a further potential advantage of the Internet is the ability to track customer visits to
the firm’s Web site and develop a continuing dialogue and relationship over time.

5) Lower Sales and Distribution Costs

In theory, the use of electronic marketing channels can reduce sales and distribution costs
by making it possible to perform distribution tasks more efficiently than through
conventional channels.

If the use of the Internet can enable a firm to centralize inventory in a single location and
ship orders at lower costs then indeed electronic marketing channels may reduce the cost
of distribution.

Although the superiority of electronic marketing channels over conventional channels as

a means of reducing sales and distribution costs has not yet been demonstrated to any
substantial extent, the potential of electronic marketing channels for reducing costs can
be glimpsed in the anecdotal evidence from particular firms that have realized substantial
cost savings.

Figure 15.5 shows Wine.com home page one of the most successful firms to implement
cost savings via the Internet.

B) Disadvantages of Electronic Marketing Channels

Four disadvantages of electronic marketing channels are:

1) Lack of contract with actual products and delayed possession

2) Fulfillment logistics not at Internet speed or efficiency
3) Clutter, confusion, and cumbersomeness of the Internet
4) Nonpurchase motives for shopping not addressed

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 Marketing Channels 8e
1) No Contact with Product and Delayed Possession
Products available for sale over the Internet do not allow the customer direct contact with
their products. Moreover, products cannot be demonstrated or tried out and the ambience
of shopping in stores is missing in cyberspace. Finally, the instant gratification of buying
and then possessing the product immediately is not available through electronic
marketing channels.

Although electronic marketing channels offer a new technology for at-home shopping,
this technology does not overcome the inherent problems of no product contact and no
immediacy of possession.

2) Fulfillment and Logistics Lag

The Internet does not process and transport physical products. So with the exception of
products that can be “delivered” electronically – mainly music, written materials, travel
tickets and reservations, and financial investments – the majority of products and services
require logistical fulfillment capabilities that the Internet cannot provide.

3) Web Clutter
Literally hundreds of thousands of sellers have established Web sites, making clutter a
real problem in cyberspace for consumers to navigate.

From a supply (seller) side, large sellers are more likely to have the capacity to pay for
search engine optimization that results in prominent placement of their sites. This
suggests that even though smaller sellers can create sites, they will have to compete hard
to be noticed by consumers.

4) Ignores Personal and Social Shopping Motives

Edward Tauber in an article published over three decades ago entitled “Why Do People
Shop?” found that people do not shop simply to make purchases. Rather the desire to
make a purchase is just one part of a complex set of personal and social motives for
shopping.

Personal motives for shopping include: diversion from the routine of daily life, self-
gratification, the need to play the role of shopper, physical activity, and sensory
stimulation.

Social motives include: gaining social experience outside the home, communication with
others having similar interests, peer group attraction, status and authority, and for some
shoppers the pleasure of bargaining.

Online shopping therefore fails to satisfy most of these consumer motives for shopping.

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Electronic Marketing Channels
Implications for Marketing Channel Strategy and Management

In Chapter 5, we discussed the six basic distribution decisions that many firms and
virtually all manufacturers must address in order to meet their distribution objectives.
Electronic marketing channels do not fundamentally alter these six decision areas.

A) Objectives and Strategies of the Firm and Electronic Marketing Channels

Probably the most basic issue the channel manager will need to consider is whether
Internet-based channels fundamentally affect the firm’s decision about the priority it will
give to distribution strategy. Amazon.com and Dell computers are examples of firms that
believe that electronic marketing channels play a vital role in their distribution strategy.

B) Role of Electronic Marketing Channels in the Marketing Mix

Electronic marketing channels made possible by the Internet may change the blend of the
marketing mix. Specifically, the fourth P, place (distribution) may assume a larger role
relative to the other three variables.

Why? Because the Internet, with its vast capacity to convey information, may reduce the
potency of the first three Ps as a basis for gaining a sustainable competitive advantage.

If the Internet can provide a level of information flow that approaches the theoretical
ideal of “perfect information”, it will be more difficult for firms to differentiate products
based on customer ignorance of product attributes.

If pricing information is widely available, no firm will have a pricing advantage because
customers will know about all prevailing prices.

If a large number of consumers use the Internet to learn about products and services,
firms that enjoyed a significant promotional advantage based on inadequate consumer
information will find themselves at a disadvantage.

C) Channel Design and Electronic Marketing Channels

The seven-phase channel design paradigm, as a framework for setting up new channels of
distribution or modifying existing channels does not change in any fundamental sense
with the emergence of electronic marketing channels. This relatively new technology
should alert the channel manager to the additional channel structure options available
based on the Internet.

Channel design decisions must now include consideration of the Internet as a marketing
channel. Indeed, markets are demanding more channel choices because today’s
consumers are not one-dimensional in their shopping behavior.

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 Marketing Channels 8e
The challenge for the channel manager is to provide consumers whatever channels or
combination of channels they desire. Consequently, developing an effective
multichannel marketing strategy has become a crucial goal of channel design.

This same argument also holds in industrial or business-to-business (B2B) markets,

where more and more firms are demanding that all suppliers provide Internet-based
channels as an option.

D) Channel Member Selection and Electronic Marketing Channels

It is key to recognize that, despite the Internet, channel member selection will remain an
important decision for most producers and manufacturers. Why?

First, we showed with our discussion on disintermediation versus reintermediation that

marketing channels do not necessarily result in a reduction in the number of channel
intermediaries and often more intermediaries appear in electronic marketing channels.

Second, conventional marketing channels will continue to exist right alongside electronic
marketing channels. The selection decision may be further complicated by the need to
avoid conflict with conventional channel members.

E) Channel Management and Electronic Marketing Channels

What is important to keep in mind about the implications of electronic marketing

channels for channel management decisions is that channel management is likely to be
more challenging and complex because of this technology.

F) Evaluation and Electronic Marketing Channels

Nothing much of the substance of channel member performance evaluation is likely to

change as a result of electronic marketing channels. Performance expectations, criteria,
and measurement on how well they are being met by channel members will still go on
very much as before the advent of Internet-based channels. What will change, however,
are some of the specific criteria used for performing evaluations and the technological
means for doing so.

Figure 15.6 provides a brief overview of ten of the key metrics that have been widely used
in e-commerce.

Answers to Review Questions

1. The Internet has augmented traditional retailing and wholesaling structure, shopping
centers, malls, and mail order. The impact of this new technology could be profound
in terms of altering traditional patterns of retailing and wholesaling. The “changing
distribution landscape” is simply a shorthand way of describing this phenomenon.

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Electronic Marketing Channels
2. Electronic marketing channels are defined in the text as the use of the Internet to
make products and services available so that target markets with access to computers
(or web TVs) can shop and complete transactions for purchase via interactive
electronic means.

Several key points should be noted in this definition:

a. Available does not mean physical availability of tangible products that cannot be
digitized and moved electronically.
b. Personal computers are not the only means for gaining access to the Internet. Web
TVs and possibly some other even cheaper technologies may come along in the
future.
c. The buyer and seller must be able to consummate the transaction via interactive
electronic means.

3. Not necessarily. Often and perhaps in the majority of cases, customers use the
Internet for information gathering purposes. Then they either go to a store to buy the
product or order via mail order using the telephone.

4. Disintermediation refers to the elimination of intermediaries from the channel

structure while reintermediation means the addition of intermediaries to the channel
structure. In both cases, the structural dimension referred to is that of channel length.

5. Not necessarily. It is commonly believed that the use of the Internet as an electronic
channel will reduce the role of middlemen because producers and final customers all
over the world can be directly linked to each other electronically. However, even this
awesome capability does not repeal the economic principle of specialization and
division of labor. Thus, even with the electronic capabilities of the Internet, if
intermediaries are able to perform distribution tasks more efficiently than producers
or final customers, they will remain or indeed reappear even in electronic marketing
channels.

6. As discussed in question 5 above, basic economic principles still hold over new
technologies no matter how powerful these technologies may be. Thus, in the end,
economies of scale, economies of scope, and specialization and division of labor will
still be the basic determinants of channel structure. In addition, in numerous cases
these channel structures may add rather than reduce the use of intermediaries because
even with the Internet, the Intermediaries may enhance efficiency or add values that
make them economically viable.

7. The five flows in channels are: 1) product flow, 2) negotiation flow, 3) ownership
flow, 4) information flow, and 5) promotion flow.

The Internet is very efficient at handling the last four of the flows because all can be
moved from producer to final customer electronically. However, for the most basic
flow of product, only in the case of such products as printed material and music that
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 Marketing Channels 8e
can be transmitted electronically can the Internet handle the product flow. So, the
Internet is still severely constricted as a marketing channel because of this limitation.

8. That depends. Virtual channel structure may be appealing to significant segments of

consumers who love to shop online. But the inherent limitations of the virtual channel
structure of the Internet such as no product contact, having to wait for later delivery
of the product and the lack of atmosphere of “bricks and mortar” available in real
channels, may, even in the future, be unacceptable to vast segments of consumers. At
this point, of course, no one knows for sure the answer to this question.

9. Some of the developments and trends are:

 Consumers of all ages shop online, but the highest percentages are the age range
of 25-54. The oldest age group (over 65) accounts for the smallest percentage.
 For incomes under $25,000 up to $75,000, there appears to be a positive
relationship between higher income and inclination to shop online. After
$75,000-threshold, the relationship becomes an inverse one.
 Only 17 percent of online shopping is done by those with a high school education
or lower, while over 54 percent is accounted for by college graduates and those
with postgraduate education.
 The most common occupations of online shoppers are those in the
professional/managerial category, which is the occupational group that receives
the highest salaries and requires the strongest educational backgrounds.

10. Key advantages of electronic marketing channels:

1) global scope and reach
2) convenience/rapid transaction processing
3) information processing efficiency flexibility
4) data-based management and relationship building capabilities
5) lower sales and distribution costs

11. Key disadvantages of electronic marketing channels:

1) lack of contact with actual products and delayed possession
2) fulfillment logistics not at Internet speed or efficiency
3) clutter, confusion, and cumbersomeness of the Internet
4) non-purchase motives for shopping not addressed
5) security concerns of customers

12. The key implications of electronic marketing channels for the major areas of channel
decision making are as follows:
1) Electronic marketing channels have broadened the range of channel options
available to the firm.
2) The Internet with its vast capacity to convey information may reduce the potency
of the other Ps (product, price, and promotion) for gaining a competitive
advantage.
3) Channel design decisions must now include consideration of the Internet as a
potential marketing channel.
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Electronic Marketing Channels
4) Management of marketing channels is likely to be more complex rather than less
as a result of the Internet because the channel manager must deal not only with
the more formalized conventional channels but with electronic marketing
channels as well.
5) The criteria for channel member performance evaluation may change such as the
use of “hits” on Web site and information gathering and performance may be
carried out over the Internet.

13. The answer to this question hinges on the word fundamentally. If it means the
underlying concepts based on economic and organizational theory, the answer is no.
The Internet has not resulted in the “repeal” of the laws of economics or the basic
concepts of organizational behavior. Channel strategy and management must still be
based on sound economics and an understanding of how channel members operate
and relate to each other in the interorganizational context of marketing channels.

Commentaries on Issues for Discussion

1. While students may debate both sides of this question, and although there is no
definitive answer to it, reasonably strong arguments can be made for disagreeing with
the question. First, is the problem of order fulfillment of physical products that cannot
literally be transported over the Internet. Consequently, various kinds of
intermediaries at the wholesale and retail levels as well as facilitating agencies will
still be needed to handle the logistical tasks of providing transportation, storage of
inventory, and ordering processing.

Second, the laws of economics particularly with regard to economies of scale and
economies of scope may still favor the use of various kinds of wholesale and retail
middlemen simply because they may still be able to perform distribution tasks more
efficiently than producers or final users.

Finally, from a behavioral standpoint, many consumers may still prefer to shop in the
bricks and mortar environment of real retail structures where they can physically see,
touch, smell, try-on and possess the product immediately which are not available in
the Cyberspace environment of Internet based electronic marketing channels.

2. Answers in the affirmative will suggest that Maytag® has identified that their
decision not to allow consumers to purchase products online meets the synergy and
congruency of the channel decision with the company’s corporate objectives. In
addition, the selectivity of the channel members, the market variables such as
geography, size, density, buying behavior of the consumer, bulk and weight of the
units, unit value, standardization, and technical aspects of their products support their
decision. Also, the company’s size in relation to their channel members and the need
for intermediaries for service and support after the sale confirms that Maytag is
making the correct decision.

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 Marketing Channels 8e
Due to the above criteria, Maytag is not missing out by not having another channel
for the consumer to purchase their products. Answers in the negative cannot be
adequately defended.

3. Considering the target market for Office Depot® is small to mid-size firms or
independent business owners, the speed and convenience of ordering online is a
competitive advantage to Office Depot because it saves their customers time and
trouble.

Customers that can spend extra time shopping for office supplies, or need additional
expertise before deciding on a purchase can take advantage of Office Depot retail
store locations and associates for these needs.

Office Depot, by having its customers familiar with and accustomed to ordering
consumable supplies from Office Depot on a regular basis, is counting on Office
Depot being the customers’ first choice when it comes to the need to visit a retail
store location for additional information or for a shopping occurrence.

Any disadvantages to this multichannel strategy will be due to the ineffectiveness of

the execution of the strategy by Office Depot in terms of order foul-ups that will
cause consumers to switch office supply firms. In other words, it is in the “hands” of
Office Depot to see that this strategy will continue to be successful.

4. Flash sales are members only luxury online shopping sites that offer deep discounts
for a limited time. While Gilt.com is one of the best known sites, others like
Amazon.com which launched MyHabit.com, and Nordstrom Inc which bought
HauteLook, are also well known for their flash sites. Such sites offer up to 70 percent
or more off on a number of designer brands like Calvin Kline.

However, the use of flash sales to promote product may be losing some of its luster
causing companies like Gilt to alter their business models. This may be due in part to
the changing economic environment. When Gilt began in the fashion business, it was
during the height of the recession and there were large inventories of luxury clothes to
sell. This has changed as inventories have been reduced and flash sites proliferate.
Like other forms of online sales, flash sales are succumbing to web clutter making it
more difficult for sites to be noticed among the growing number of flash sites. That
has caused companies to or find other ways to get their products to consumers.

Even Gilt, which represents the largest flash sales business in the United States is
having to reduce discounts from 70 percent to less than 50 percent. This does not
mean flash sales will disappear only that like many marketing techniques, flash sales
will become one of many methods which businesses rely upon to promote their
products.

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Electronic Marketing Channels
5. Without a doubt m-commerce is already well established as an important marketing
channel. What is exciting about proximity marketing is that it continues to adapt by
incorporating applications that respond to changing needs and technology. With the
new applications developed by ShopKick and others, retailers are able to engage in
relationship marketing with its customers. Thus it is now possible for retailers to
communicate only with potential customers who are conveniently located to take
advantage of new retail promotions. Like any promotional technique, proximity
marketing can be overused and consumers may begin to block such messages if these
promotions are deemed a nuisance. However, it is likely that retailers will learn how
to use proximity marketing without alienating its client base and add it to their arsenal
of promotional tools.

6. Taube argued that people do not shop simply to make purchases, rather shopping is a
social experience related to a range of personal and social motives. Perhaps it is the
social motives for shopping (e.g., gaining social experience outside the home,
communication with others having similar interests, peer group attraction, status and
authority, etc.) that are particularly relevant to the practice of utilizing electronic
marketing channels to social networks. Because social networking sites have become
proxies for personal interactions, it is assumed that marketing as a social interaction
can be incorporated into sites like Facebook and Twitter.

Since Facebook and Twitter are social networking sites, a great deal of interaction
occurs which includes discussions about favorite and hated products. In this setting,
frequent and regular interactions occur. It may be more difficult for some businesses
to adapt to this mode of interaction unless they accept the need to interact frequently
and in some cases personally. While some aspects of this can be automated, the
process can be more time consuming and absorbing than organizations such as 1-800
Flowers.com might expect, or are willing to partake.

Discuss with your students their experiences and opinions pertaining to the use of
electronic marketing on their favorite social media sites.

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