Considering Internet Channel Entry? Assess Channel Structure and Market Environment

This content relates to : MARKETING INNOVATION

HIGHLIGHTS

The impact of Internet channel introduction varies considerably across channel structures and underlying market environments.

Depending upon the balance of five underlying effects (e.g., market coverage), introducing an Internet channel can have the surprising effect of increased prices and decreased channel power.

Assessing these five underlying effects can help companies select the optimal mixed channel structure.

Eunkyu Lee

Syracuse University

The emergence of the Internet distribution channel is one of the most significant innovations in marketing practice during the recent decades. In the early years of this development, which includes the dot com boom period, there was a widely shared expectation that the growth of the Internet channel would lead to a significant degree of disintermediation (i.e., manufacturers cutting out the middlemen in distribution channels by switching to manufacturers’ own direct Internet channels) and, consequently, noticeably lower prices in online channels than the offline prices for the same products. However, the subsequent evolution of Internet channels has produced very different outcomes, highlighted by online retailers, not manufacturer’s direct online channels, dominating the Internet market, largely insignificant price differences between online and offline channels, and growing utilization of various mixed channel structures that combine “bricks and clicks” as complements in multichannel marketing strategy instead of online channels simply substituting traditional offline channels.

The resulting landscape of online marketing exhibits much greater complexity and variability in channel structure than initially expected. Consequently, it is critical for marketing strategists to be able to select the optimal channel structure with clear understanding of how the opening of an Internet channel in a particular structure will affect the performance of each channel member and the entire channel system. With no previous research providing satisfactory guidelines for this critical issue, this research study is the first aiming to address this strategic concern directly, by analyzing alternative channel structures arising from the addition of an internet channel to a conventional brick-and-mortar channel. In order to generate clear conclusions and insights for a field that was still in the developing stage, the research employed a game theory approach by developing and investigating a mathematical model of mixed Internet channel to perform a series of “what if” analyses of alternative channel structures under various market conditions.

A broad message from the findings of this study is that the impact of Internet channel introduction varies considerably across alternative channel structures and underlying market conditions. Thus, one should not propose any one specific outcome as the impact of Internet channel entry. For instance, Internet channel introduction may lead to lower or higher prices and cause the firm adding an Internet channel to experience increased or decreased channel power. More importantly, this research identifies five key underlying effects of Internet channel introduction, the balance among which determines the overall outcome of Internet channel introduction. In this way, the study provides a useful framework for understand the nature of strategic interactions among channel members that shape the effectiveness of a specific online-offline mixed channel structure.

Author: 

Eunkyu Lee 

Professor of Marketing, Whitman School of Management, Syracuse University

https://whitman.syr.edu/directory/showInfo.aspx?nid=elee06

To learn more, read: 

Yoo, W.S. and E. Lee (2011) “Internet Channel Entry: A Strategic Analysis of Mixed Channel Structures,” Marketing Science, 30 (1), 29-41.