Chapter 11:
The Internet for Distribution
Learning Objectives
Distribution Channel Overview
A distribution channel is a group of interdependent firms that work together to
transfer product and information from the supplier to the consumer. The channel
is composed of producers, intermediaries and buyers. These members transfer
products from the point of origin to the point of consumption.
Online Channel Intermediaries
A good way to classify online intermediaries is according to their business
models, which are: content sponsorship; direct selling infomediary, or
intermediary (three separate models).
Content Sponsorship
Firms create websites in hopes of attracting traffic and selling advertising.
This model is often used in conjunction with other models to generate
multiple revenue streams.
Infomediary
An infomediary is an online organization that aggregates and distributes
information. This could be in the form of a market research firm or a
variation on the content sponsorship model, using permission to buy space
on a computer screen.
Intermediary Models
There are three main intermediary models on the Internet.
Brokerage Models – A broker creates a market in which buyers
and sellers negotiate and complete transactions, then charge a
transaction fee for their service. Examples may be online exchange
or online auction services. Brokers do not represent either party in
the transaction.
Distribution Channel Length and Function
The length of the distribution channel refers to the number of
intermediaries between the supplier and the consumer. In direct distribution, the
product goes directly from the manufacturer to the end user. An indirect channel
includes one or more intermediaries. Originally, experts believed the Internet
would wipe out intermediaries, but instead new intermediaries are emerging,
called metamediaries.
Functions of a Distribution Channel
Intermediaries perform a multitude of tasks and functions along the
distribution channel including: holding inventory or performing the pick,
pack, and ship functions.
Transactional Functions – making contact with buyers and using
marketing communication strategies to make them aware of
products. Activities may include: contact with buyers, marketing
communications, negotiating prices, processing transactions, and
matching products to buyer’s needs.
Distribution System
The distribution channel is actually a unified system of interdependent
Channel Management and Power
Just as the Internet has increased the power of buyers by providing access
to more information and to more suppliers, it has increased the power of
suppliers, as well. Once a channel structure is established, its viability requires a
data interchange (EDI) is effective in establishing structural relationships
between businesses.
Distribution Channel Metrics
Distribution channel metrics help e-marketers determine if e-commerce works.
Firms must consider its effectiveness in terms of reaching target market segments
efficiently and enticing them to purchase online.
B2C Market
The Business to Consumer market accounted for $194.3 billion in online
B2B Market
Impressive as the B2C figures are, they are nothing compared to the B2B
Chapter Summary
The Internet increased the power of buyers and suppliers. It also changed
the way electronic data interchange is used to establish structural relationships
between suppliers and buyers. The major business models used by online
intermediaries can be categorized as content sponsorship, direct distribution,
A distribution channel is a group of interdependent firms that work
together to transfer product and information from the supplier to the consumer.
The transfer may be either direct or through a number of intermediaries that
perform certain marketing functions in the channel between suppliers and
customers. By specializing, intermediaries are able to perform functions more
efficiently than a supplier could.
Channel intermediaries include wholesalers, retailers, brokers, and agents.
The length of a distribution channel refers to the number of intermediaries
between the supplier and the consumer. The shortest distribution channel has no
Chapter Outline
Opening Vignette: The Zappos Story
Have the class read the opening vignette on Zappos. Zappos has become the
largest online retailer in the world and a big reason for that is their business
model and their distribution channels. How can Zappos continue to serve its vast
customer base online? Has anyone in class bought from Zappos? Was it a good
experience? Why is Zappos so much more successful than other competitors are?
How has the adoption of new products other than shoes affected Zappos
distribution model?
I. Distribution Channel Overview
A distribution channel is a group of interdependent firms that work together to
transfer product and information from the supplier to the consumer.
A. Producers
2. Originators of the product or service
B. Intermediaries
2. May be independent or represent the parties involved
C. Buyers
2. Those that consume the product or service
D. Four major elements combine to form a firm’s channel structure
2. Length of the online channel
4. Physical and informational systems
II. Online Channel Intermediaries
A. Wholesalers
B. Brokers
1. Facilitate transactions between buyers and sellers
3. Do not take title to the goods
4. Charge a transaction fee for their service
C. Agents
1. Facilitate transactions between buyers and sellers
2. DO represent one of the parties
3. May or may not take title to the goods
D. Content Sponsorship
1. Firms create websites to attract lots of traffic
3. Most firms use content sponsorship in conjunction with other
E. Infomediary
1. An online organization that aggregates and distributes
information
F. Intermediary Models
1. Brokerage Models – creates a market in which buyers and
sellers negotiate and complete transactions. Buyer
convenience, speed of order execution, and transaction
processing are buyer benefits. Seller benefits are a creation of
a pool of buyers
a. Online Exchange
i. E*Trade
b. Online auction
i. eBay
2. Agent Models – agents do represent either the buyer or the
a. Agent models representing sellers
i. Selling agents
2) Helps them sell products
ii. Manufacturer’s agents
2) Travel agents are examples
3) Also called catalog aggregators
iii. Metamediaries
1) Represent a cluster of manufacturers,
online retailers, and content providers
2) Solve problems of reducing search
times, providing quality assurance,
iv. Virtual malls
2) Similar to an offline shopping mall
3) Virtual malls provide multiple customer
benefits
b. Agent models representing buyers
i. Shopping agents
2) These are called second generation
ii. Reverse auction
1) The buyer specifies a price and the
iii. Buyer cooperative
1) Also known as buyer aggregator
3. Online Retailing: E-Commerce – one of the most visible e-
business models. Online stores are set up to sell to consumers
or businesses.
a. Clothing and accessories are the top sellers
b. Digital goods may be delivered over the Internet
4. M-Commerce (Mobile Commerce)
a. Occurs when consumers make a transaction with a
5. Social Commerce
a. Utilizes social media and consumer interactions to
facilitate online sales
6. F-Commerce (Facebook Commerce)
7. Tangible products
a. Distributed through conventional channels
b. Digital products/content sales
i. The Internet serves as a medium for distribution
8. Direct Distribution
a. manufacturer sells directly to the consumer or business
customer.
III. Distribution Channel Length and Functions
The length of the distribution channel refers to the number of intermediaries
between the supplier and the consumer. This channel may be direct or indirect.
Originally, it was thought that the Internet would eliminate intermediaries (a
process called disintermediation), but the Internet has actually created new
intermediaries, called metamediaries.
A. Functions of a Distribution Channel – a multitude of operations and
functions are performed along the distribution channel, including
holding inventory and the pick, pack, and ship functions. These
functions can be generally categorized as transactional, logistical, and
facilitating.
1. Transactional functions
a. Contact with buyers
ii. Previously manual labor functions can be
automated
iii. Communications can be closely monitored and
changed
iv. The Internet enhances promotional coordination
among intermediaries
c. Matching product to buyer’s needs
i. Shopping agents – allow customers to compare
d. Negotiating price
i. Involves offers and counteroffers
ii. Could be in person, over the phone, via e-mail
e. Process transactions — electronic channels lower
transaction costs
2. Logistical Functions
a. Physical distribution
i. Most online products are distributed
conventionally
ii. Any content that can be digitized can be
delivered electronically
b. Aggregating product
i. Suppliers operate more efficiently when they
produce a high volume of narrow range
products
c. Third-party logistics – outsourced logistics
i. Many companies outsource logistics to a third-
party
ii. UPS, USPS and FedEx provide third party
logistics for many firms
d. The last mile problem
iii. 30% of packages are left on door steps,
increasing the possibility of theft
3. Facilitating Functions
a. Market research
i. A major function of the distribution channel
ii. The Internet allows for market research in five
ways
1) Much of the information on the Internet
is free
3) Information on the Internet tends to be
more relevant and current
5) Because of the amount of consumer
behavior information available,
marketers can receive information in
detailed reports
b. Financing
i. Financing is a key function in both consumer
The distribution channel is actually a system of unified organizations working
together to build value as products proceed through the channel to the consumer.
To define the scope of the channel as a system:
1. Consider only distribution functions that are downstream from
the manufacturer to the consumer
2. Consider only the supply chain upstream from the
IV. Channel Management and Power
Just as the Internet has increased the power of buyers by providing access
to more information and to more suppliers, it has increased the power of
suppliers, as well. Once a channel structure is established, its viability requires a
certain measure of coordination, communication, and control to avoid conflict
among its members. A channel member must emerge to assume leadership in
V. Distribution Channel Metrics
Does online commerce work? Firms must consider its effectiveness in
terms of reaching target market segments efficiently and enticing them to
purchase online to be able to answer this question.
A. B2C Market
1. U.S. consumers spent $194.3 billion online in 2011
3. Two strategies are particularly effective
a. A high-reach strategy of accumulating large numbers of
customers with cost-effective conversion rates for high-
frequency purchases of low-margin products and
B. B2B Market
1. The B2B market is big business
3. The Internet is more efficient for firms to order from each other