PART 1: Defining Marketing and the Marketing Process (Chapters 1–2) PART 2: Understanding the Marketplace and Consumer Value (Chapters 3–6) PART 3: Designing a Customer Value–Driven Strategy and Mix (Chapters 7–17) PART 4: Extending Marketing (Chapters 18–20) Marketing Channels 12 Delivering Customer Value We now look at the third marketing mix tool—distribution. distribution—or logistics—an area that has grown dramatically Companies rarely work alone in engaging custom- in importance and sophistication. In the next chapter, we’ll look ers, creating customer value, and building profitable more closely at two major channel intermediaries: retailers and customer relationships. Instead, most are only a single wholesalers. REVIEW CHAPTER P link in a larger supply chain and marketing channel. As We start by looking at Uber, the fast-growing, app-based such, a firm’s success depends not only on how well it performs car-hailing service that has recently sprouted up in cities around but also on how well its entire marketing channel competes with the world. Uber has radically reinvented urban transportation competitors’ channels. The first part of this chapter explores channels, posing a serious threat to conventional taxicab and car the nature of marketing channels and the marketer’s channel service companies. As Uber grows, traditional competitors must design and management decisions. We then examine physical innovate or risk being pushed aside. UBER: Radically Reshaping Urban Transportation Channels t’s rare. But every now and then a company comes along eliminating guesswork and uncertainty. After the ride, pas- that completely disrupts the traditional ways of distribut- sengers simply exit and walk away. Uber automatically pays ing a product or service. FedEx revolutionized small pack- the driver (including tip) from the passenger’s prepaid Uber age delivery channels, Amazon.com radically transformed account, eliminating the often-inconvenient and awkward Ionline selling, and Apple’s iTunes and iPod turned music moment of payment. And it’s the same process anywhere in distribution on its ear. Now comes Uber, the app-based ride the world, from San Francisco, London, Paris, or Abu Dhabi to service that is revolutionizing urban transportation. Fast- Ashville, North Carolina, or Athens, Georgia. growing Uber is giving conventional taxicab and car services Compare the Uber experience to the uncertain and often- a real ride for their money. In just seven short years, Uber unsettling experience of using a standard taxicab. One business has revved up operations in hundreds of major cities in 67 reporter describes waiting in line at a taxi stand while a driver countries, already booking more tried to convince another would- than $10 billion in rides annually be passenger—a total stranger—to through its massive network of Uber—the fast-growing app-based share the cab, thereby increasing more than a million drivers. ride service—is revolutionizing urban his fare. The cab itself was ancient Why are so many customers and filthy, with ripped and worn transportation channels in cities around the around the world bypassing good seats. During the entire ride, the globe. As Uber grows, traditional taxicab old taxicabs in favor of newcomer cabbie carried on a phone conver- Uber? It’s all about convenience services must innovate or risk extinction. sation in a foreign language via his and peace of mind. No more step- headset, causing safety concerns ping out into busy city streets to while distractedly navigating busy wave down a passing cab. Instead, Uber’s smartphone app city streets. The driver spoke only poor, hard-to-understand lets passengers hail the nearest cab or limo from any location, English. “That turned out to be a good thing,” says the reporter, then track the vehicle on a map as it approaches. The Uber app “because I couldn’t understand what he was trying to say when gives riders an accurate estimate in advance of the fare to their he insulted me for not tipping him enough.” The reporter’s destinations (usually less than that charged by a regular cab), conclusion: “I stepped out of the taxi in front of my house and CHAPTER 12 | Marketing Channels: Delivering Customer Value 357 realized I just don’t have to put up with this garbage anymore. Uber has changed my life, and as God is my witness, [wherever Uber is available] I will never take a taxi again.” Uber drivers range from professional drivers who’ve switched over from conventional cab and transportation companies to regular people looking for a little adventure and some extra income in their spare time. All Uber drivers go through an orienta- tion that requires proficiency in a market area’s dominant language, ensuring that they can com- municate effectively with customers. Uber vehicles must be at least 2010-year models or newer, and cus- tomers can often choose the type of car they want, from an entry-level Prius to a stretch Mercedes Uber lets passengers hail the nearest cab from any location using its smartphone app, then track the vehicle on a map as it approaches. S-Class. A two-way rating system—by which riders PAUL J. RICHARDS/AFP/Getty Images rate drivers and drivers rate riders in return—helps keep both sides on their best behavior. Poorly rated drivers risk being rejected by future passengers; poorly rated major Uber investor) is reported to be readying the launch of its passengers risk rejection by drivers, who can choose which own ride-hailing service, one that would eventually utilize the fares they accept. driverless vehicles Google is developing. But Uber has a huge Uber’s disruptive innovation has brought a breath of fresh first-to-market advantage. Its bookings are 10 times those of air to an industry begging for change. Urban transportation nearest competitor Lyft, and Uber is adding new customers at channels have long been characterized by cartel-like relation- a faster rate. ships between cab companies and local governments, high Moreover, even as competition stiffens, Uber has little fixed fares, poor service, and little accountability. As one eco- to fear from like-minded competitors. In fact, the more com- nomics professor points out, the taxicab industry “was ripe for petitors adopt the new model, the more the revolutionary entry [by start-ups] because everybody hates it.” channel will grow and thrive versus traditional channels, creat- Like any innovator, upstart Uber faces some significant ing opportunities for all new car-hailing entrants. Instead, the challenges. For example, Uber has been criticized for exer- new distribution model poses the biggest threat to traditional cising too little control over driver quality and security. So taxicab and car-for-hire companies, which are now losing both far, the company has ridden beneath the radar of industry customers and drivers to Uber and its competitors. regulators by not directly employing drivers (all Uber drivers Based on its U.S. success, Uber is now expanding rapidly are independent contractors) and not owning any vehicles abroad. Huge markets such as China and India are especially (all vehicles are driver-owned). However, although some attractive, with their massive populations of people who don’t municipalities have passed ordinances favorable to Uber’s own cars. Uber is already operating in 37 Chinese cities and operations, others are imposing new regulatory restrictions plans to be shuttling riders around 100 large metro areas in the and licensing requirements or even banning ride-hailing ser- country within 12 months. In China, however, Uber is playing vices altogether. catch-up to market leader Didi Kuaidi, which already operates Uber has also been criticized for its “surge pricing” in 360 Chinese cities and towns. Similarly, in India, Uber is tak- practices—a dynamic pricing mechanism that kicks in to raise ing on established market leader Ola. prices when demand exceeds supply, sometimes resulting in Despite its explosive growth, Uber—like every other shockingly high fares and accusations of price gouging. Uber ride-hailing company—has yet to turn a profit. Like justifies surge pricing by pointing that it provides an incentive Facebook, Amazon, and so many other revolutionary com- for more drivers to be available during periods when passen- panies in today’s internet-driven economy, Uber’s start-up gers need them most. According to Uber, if a passenger faces model is to build a big user base first, then worry about mak- a higher-than-normal fare because of surge pricing, the alter- ing money later. Uber keeps 20 to 30 percent of each fare—the native without Uber would more than likely be no taxi at all. rest goes to the driver. But Uber plows back most of its take Moreover, Uber informs passengers in advance what the fares into expansion and promotional expenses. Investors seem will be. If they don’t like the fare, they can find another cab, confident. Uber has raised more than $10 billion in venture take public transportation, or walk. capital and currently has a valuation of more than $62 billion, Uber’s huge success has attracted a garage full of competi- making it the world’s most valuable privately held technol- tors, such as Lyft, Gett, Carma, and Curb. Even Google (itself a ogy firm. 358 PART 3 | Designing a Customer Value–Driven Strategy and Mix OBJECTIVES OUTLINE OBJECTIVE 12-1 Explain why companies use marketing channels and discuss the functions these channels perform. Supply Chains and the Value Delivery Network (pp 358–361) OBJECTIVE 12-2 Discuss how channel members interact and how they organize to perform the work of the channel. Channel Behavior and Organization (pp 362–368) OBJECTIVE 12-3 Identify the major channel alternatives open to a company. Channel Design Decisions (pp 368–372) OBJECTIVE 12-4 Explain how companies select, motivate, and evaluate channel members.