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
Disintermediation Paradigm Elimination of middlemen in distribution channels Intermediaries become superfluous because producers gain exposure to vast numbers of customers in Cyberspace All that’s 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
Reintermediation Paradigm Addition of Middlemen in Distribution Channel Specialized intermediaries are needed to efficiently link buyers and sellers together in Cyberspace
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
BE Point BE Point 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)
Marketing Channel Flows Paradigm Five Flows in Marketing Channels • 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.
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
Get on the Internet First Paradigm It’s 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”
Valuation by Press Release Paradigm 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. • 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.
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”
Market Cap is All That Matters Paradigm Who cares about sales, earnings, real assets and people. The only thing that matters is the size of your market capitalization
“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
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!
Perfect Market Segmentation Paradigm Perfect Market Aggregation Perfect Market Segmentation 100 million customers in market Segmented marketing Niche marketing Micro-marketing One -to-one marketing Relationship building (100 million different products) (1 product) “If we have 4.5 million customers we shouldn’t have one store. We should have 4.5 million stores .” Jeff Bezos, CEO Amazon.com
It’s 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.
Optimum Customer Service Paradigm Customer tracking and profiling capabilities via the Internet provide near perfect information about customer purchasing and usage patterns. • Therefore • Heavy buyers get heavy service and • Light buyers get light service. • Heavy service demand customers who • don’t spend much get cut off.
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
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)
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.
Variable Cost Pricing Paradigm We lose $50 on each room but we’ll make it up in volume.Silly or possible?Answer: possible
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
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
Internet is a Whole New Culture Paradigm Unless you are: • 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.
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).