Marketing 624

1
Marketing 624
Channels of Distribution Management
Paradigms Underlying the American E-Commerce
Culture
Dr. Bert Rosenbloom Professor of Marketing
and Rauth Chair in Electronic Marketing
2
Disintermediation Paradigm

• Elimination of middlemen in distribution
  channels
• Intermediaries become superfluous because
  producers gain exposure to vast numbers of
  customers in Cyberspace
• All thats needed is a Web site
• Millions of customers have access to thousands of
  producers via the Internet. So, who needs
  middlemen.

• Dell Computer 40 million per day

3

Reintermediation Paradigm
Addition of Middlemen in Distribution
Channel Specialized intermediaries are needed to
efficiently link buyers and sellers together in
Cyberspace
4
Average Total Cost Paradigm Conventional vs.
Internet Distribution Channels
Per Unit of Product Sold
Conventional Channel
ATC
C1
0
Q1
Units of Products Sold
Per Unit of Product Sold
Internet Channel
C1
ATC
0
Q1
Units of Products Sold
5
Profit After Break-Even Point Paradigm
Conventional vs. Internet Distribution Channels
Conventional Model
TR
Costs Revenues
Profit
TC
Loss
FC
Sales (units)
Internet Model
TR
Costs Revenues
Profit
TC
Loss
FC
Sales (units)
6
Five Flows in Marketing Channels
Marketing Channel Flows Paradigm

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

• Internet superb at handling 2,3,4, and 5
  because these can be digitized and moved at
  speed of light.
• Product flow cannot be digitized and is
  processed (often by humans) and moves at best
  at speed of sound.
• Product flow may be the Achilles' Heel of
  E-commerce.

7
Profits Can Wait Paradigm
WHY

• Because in the world of E-commerce, if the firm
  has earned a profit too soon it is probably
  spending too little to stake its claim by
  establishing infrastructure and customer
  recognition as a destination Internet player

8
Get on the Internet First Paradigm

• Its not important to have a perfected or even a
  carefully considered business concept or plan
  to operate on the Net.
• The same goes for offering an IPO.
• What is important is to be first because the
  first is the one customers remember.

First Mover Advantage
9
Valuation by Press Release Paradigm

• Publicity, promotion, and hype generated by the
  dot.com firm its executives, investment bankers,
  and the media create a buzz.
• Excitement and wild expectations about the firm
  drive up its stocks price drastically.

• IPO mania creates
• Stock price of dot.com correlated to news
  releases.
• Positive spin must be fostered and
  maintained.
• Generating news releases becomes more
  important then substantive progress.

10
Brand Equity is Key Paradigm
Brand equity has shifted from product namesin
the conventional world to the names of Internet
firms in the E-commerce world

• Everybody knows them and everybody goes
  there. Brand equity has evolved into channel
  equity.

Netquity
11
Who cares about sales, earnings, real assets and
people. The only thing that matters is the size
of your market capitalization
Market Cap is All That Matters Paradigm
12
Anything Counts as RevenueParadigm

• Because profitability for dot.coms is so remote,
  attention focuses on top line or revenue
  growth.
• Enormous pressure on firm to show spectacular top
  line growth leads to
• Booking revenues before actually realized
• Counting barter as revenue
• Drastically inflating revenues by adding price of
  goods or services to commission
• Priceline.com recent quarter
• Reported revenue 152 million
• Cost of service 134 million
• Net revenues 18 million

13
Lifetime Value of Customer Paradigm

• How much revenue and/or profit will a customer
  generate over the course of a lifetime of doing
  business with you?
• Old concept----- not new to E-commerce
• What is new is the use of LVC by Internet firms
  to justify

• Lack of profits
• Huge market caps
• Current users X projected growth X revenue
  produced by each over their lifetimes
• A Whole Bunch!

14
Perfect Market Segmentation Paradigm
Perfect Market Aggregation
Perfect Market Segmentation
100 million customers in market
Segmented marketing Niche marketing Micro-marketi
ng One -to-one marketing Relationship building
(100 million different products)
(1 product)
If we have 4.5 million customers we shouldnt
have one store. We should have 4.5 million
stores . Jeff Bezos, CEO Amazon.com
15
Its Your Marketing Channels Only Paradigm

• Marketing Mix Strategic Variables (4Ps)
• Product Strategy
• Pricing Strategy
• Promotional Strategy
• Place (channel) Strategy

• Sustainable competitive advantage too difficult
  to achieve with first three Ps
• Internet provides a new frontier for creating a
  sustainable competitive advantage through the
  fourth P, channel strategy.

16
Customer tracking and profiling capabilities via
the Internet provide near perfect information
about customer purchasing and usage patterns.
Optimum Customer Service Paradigm

• Therefore
• Heavy buyers get heavy service and
• Light buyers get light service.
• Heavy service demand customers who
• dont spend much get cut off.

17
Channel Conflict Paradigm

• In the world of E-commerce, new start-ups have a
  huge advantage over firms with established
  conventional marketing channels because they can
  avoid channel conflict.
• Conventional channels of existing companies
  become baggage when they attempt to sell via
  the Internet. The poster child is

• Compaq Computer

18
Convergence Paradigm

• Amazon.com will not become the Wal-Mart of the
  Internet.
• Wal-Mart will become the Wal-Mart of the
  Internet.
• Pure-play Internet firms operating only in
  cyberspace had the early advantage.
• But long-term future belongs to the bricks and
  mortar, legacy based firms.
• The old economy firms have the name
  recognition, resources, and infrastructure to
  overwhelm the new kids on the block.
• Clicks ad Mortar (B2C)
• Clicks and Smokestacks (B2B)

19
Convenience and Efficiency Paradigm

• Business to Consumer Market
• E-commerce via the Internet must grow
  spectacularly because consumers want
  convenience and Internet shopping provides the
  ultimate in convenience.
• Caveat
• How about behavioral motives for shopping?
• Business to Business Market
• E-commerce via the Internet will be virtually
  the only way
• businesses deal with each other because of the
  cost effectiveness and efficiency of the
  technology.
• Caveat
• Non-rational motives also exist in the B-to-B
  market.

20
We lose 50 on each room but well make it up
in volume.Silly or possible?Answer possible
Variable Cost Pricing Paradigm
21

• As long as excess capacity exists and price
  charged is above variable unit costs
• Regular price of hotel room 180
• Occupancy rate 60
• Average Fixed Cost 100
• Average Variable Cost 40
• Average Total Cost 140.
• Hotel offers half price on rooms 90
• Less AVC 40
• Contribution to FC 50

Internet is a near perfect source for this type
of information
22
Procurement as Competitive Strategy Paradigm

• Procurement via E-Commerce is the ultimate
  competitive strategy in the B2B space
• Firms that are linked to all of their suppliers
  electronically have a huge competitive advantage.
• Greater efficiency , flexibility, speed, as well
  as lower costs.
• Therefore E-Commerce companies that can help old
  economy companies to link up by providing
  knowledge, technology, and software are hot in
  the B2B space.
• Ariba
• Commerce One
• Verticalnet

23
Unless you are
Internet is a Whole New Culture Paradigm

• Under 30
• Have virtually no experience
• Untainted by having worked at a conventional
  company
• Guaranteed substantial stock options
• Convinced you are a master of the Web universe
• You are not suitable to work for, provide
  consulting to, or even mix socially with the
  Internet elite.

24
Technological Equality Paradigm

• Internet technology in E-commerce becomes
  virtually equal among firms.
• Like air conditioning and elevators, everybody
  has them and is expected to have them.
• Therefore
• Technology no longer offers any given firm a
  differential advantage
• Playing field becomes technologically level
  and so firms quest for sustainable competitive
  advantage reverts back to old fashioned
  strategy.
• For related discussion see Michael Porter,
  What is Strategy? Harvard Business Review.
  (Nov-Dec. l996).