If you want to understand the Internet, you need to understand the basic ideas of a channel. Why? Because in many ways the Internet is simply a different way of distributing what channels have traditionally distributed.
Typically we think of a channel of distribution as a manufacturer selling to some retailers or distributors, and then on to consumers. We might also think of a salesperson or a manufacturers' rep in that channel as well, or any number of other businesses that can move a product from a manufacturer to a buyer.
But if you want to understand channels of distribution, the first thing to note is that distributors, retailers and the other channel members are physical institutions that can make up a channel of distribution. But there is another way to look at the channel that is far more powerful.
CHANNELS AS FUNCTIONS
Long ago academics stopped looking at channels of distribution as physical institutions, and instead began seeing them as a set of channel "functions". Below we list these basic functions:
- Who collects and distributes information? (information)
- Who develops and disseminates promotional communications? (promotion)
- Who agrees on terms for transfer of ownership or possession of the product? (negotiation)
- How handles the ordering? (ordering)
- Who provides financing for the purchase? (financing)
- Who assumes the risks, such as product failure? (risk taking)
- Who moves the product? (physical distribution)
- Who stores the product? (storage)
- Who shapes the offer to a buyer's needs? (matching)
- How handles the payment of funds? (payment)
These may look a bit dull to be sure. But to understand why these are important, consider this. In any channel of distribution, each of these channel functions must be performed by some party (or parties). Typically, a business was created (e.g., an intermediary) because they could perform one or more of these functions more efficiently than some else.
A distributor (the classic middleman) is a prime example of this. In comparision to manufacturers, distributors have traditionally been better able to match a manufacturer's products with customers. Thus, distributors performed a more efficient matching function.
EXAMPLE
Let's take another simple example to show you how these functions work.
You go to the bookstore to get information about a book, and while you're there you buy it. From a physical standpoint, the channel went between the publisher to the bookstore and then to you – not very interesting.
From the standpoint of the functions, however, this is what happened. Let's just focus on the channel section between you and the bookstore. Who handled the physical distribution of the book? You did. You drove to the store, bought it and transported it home. Who handled the payment? The bookstore did when you gave them the money for the book.
THE INTERNET DOESN'T MAKE THE FUNCTIONS GO AWAY
Let's say instead that bookstore decided to mail you the book. Now the bookstore is handling the physical distribution, not you. The bookstore could have another party handle the payment (say, on the web). And this is the important point.
These functions are inherent in every transaction and someone has to do it. Internet or not, these functions still exist. The Internet may make it easier for a company to have other companies handle a channel function, so the function may shift from the manufacturer or distributor, or even the customer to someone else, but the function will not go away.
PRICELINE SHIFTS INFORMATION AND NEGOTIATION
Think about Priceline and what it does. Prior to Priceline customers would deal with travel agents who would negotiate with the airlines for seats. You can get rid of the travel agents, but someone is going to have to take over the function of negotiation. Who is it? Priceline is going to take part of the responsibility for negotiations, but so are you when you go into their bidding process.
Now, think about information. Information (say, about travel fares and destinations) is a function that was typically carried out by the agents. Take the travel agents away, and where does the information function go? Well, web sites now give out information and consumers have to take on more responsibility to find that information. Again, the information function doesn't go away, it just gets performed by other people.
When you think about it, the Internet just makes it easier for a lot of these functions to be done by different parties. E-tailers often provide nothing but information, with virtually every other function (payment, storage, physical distribution, and even financing in some cases) is handled by some other company.
Even Napster and Gnutella can be thought of as simple technologies that allow the function of storage to shift from retailers to consumers.
Of course, these ideas seem awfully new to a lot of people who focus on the Internet and indeed the popular press has even been prone to use the term "visionary" to some who apply these ideas to the internet to explain these and similar concepts such as e-webs. But we at MarketingProfs.com take a different view - the idea of channel functions and how they can be used to explain any channel were first outlined by an academic named Wroe Alderson back in 1953!
So, what does it mean for you? First think about which functions in the channel that you are responsible for. Then, think about which functions you might have others (including customers) perform. Before long you will see a whole new world opening up in the ways you could conduct business.
