The Rise of Online B2B Marketplaces

One of the trends that is growing in the year 2000 is industry-specific, or "vertical," online marketplaces. While these have similarities to other forms of B2B e-commerce, they have characteristics all their own.

Market Day

Marketplaces began thousands of years ago at the dawn of civilization. On a particular day of the week farmers would gather in the town square and set up a place to show off their wares. Vegetables, fruits, grain, chickens, cattle, sheep, wool. All these would be available on a particular day in the same square. Since they met on the same day, one farmer was keenly aware of his neighbor selling the same products a few stalls down. So "market prices" were established, competitive, but with enough margin that each of the farmers could make a little money by selling their goods at market. The modern farmer's market in many areas doesn't seem a lot different, except that they display their produce on tables and pick-up truck beds, rather than on the ground.

Essentially, a marketplace is a deliberate gathering of both sellers and buyers at the same time in the same place to conduct commerce. The shops in the downtown area of cities and towns forms a marketplace of sorts, though the merchants have become middlemen between the producers and the buyers. Retail malls also form a kind of marketplace, with a mall owner aggregating key businesses in order to attract enough shoppers for everyone to make money. Though the average mall will have many apparel stores, the synergy of them all being together in one place is greater than the negative effect of their competition on each other. The mall owner has created a buying and selling environment that all benefit from.

Business to Business Marketplaces

Wholesale markets, too, exist at certain times and places. If you go to 745 Wall Street in Los Angeles: between 2 am and noon, Monday, Wednesday, and Friday, you'll be in the midst of the Los Angeles Flower Market where florists obtain flowers to stock their shops. This is a B2B market where only credentialed buyers with resellers' licenses can do business.

Industry-wide, there haven't been interconnected markets for most products. In the US, the multi-volume Thomas Register would help buyers to find sellers, and then they would send out by mail or fax requests for bids (RFPs) to various vendors. The cost of processing an RFP and purchase order might be $120 to $150, making purchasing a real bottleneck.

Stock markets don't allow the manufacturers or producers on the floor. There trading is aggregated into blocks of shares and handled by brokers and industry specialists. Gone are the days of one broker attracting attention to what he had for sale by shouting. For a while the ticker tape conveyed what was happening to the outside world. Now it is done on high speed computers. While the New York Stock Exchange has real humans interacting on the floor, the NASDAQ is really just a distributed network of computers. Enter the digital age.

Vertical, or Industry-Specific Exchanges or Marketplaces

What we are now seeing are industry-specific online marketplaces springing up that facilitate trading and dealing between buyers and sellers. Manufacturers may put their entire catalog up in a marketplace setting by uploading a Microsoft Excel spreadsheet of products and prices. There is a "trading floor" where procurement officers can place RFPs where suppliers can see them and bid on them. The costs of the marketplace are typically covered by a small commission on each sale pad by the supplier.

This is different from the distributor model pioneered on the Web by Grainger.com. http://www.grainger.com There suppliers' catalogs are included in the giant Grainger catalog. Buyers must register their businesses in order to be qualified to make purchases from Grainger on an open account. The transactions are made between the buyers and Grainger, and there are no RFPs or bids. The biggest difference between the distributor model and vertical marketplaces is that the deal is made between the supplier and buyer directly, using the infrastructure created by the marketplace.

These marketplaces are typically set up by trusted third parties, and created using software from vendors such as Vertical.net http://www.vertical.net and CommerceOne.com http://www.commerceone.com/ Open Market http://www.openmarket.com/ also supplies marketplace software.

Examples of Vertical Exchanges

Here are some examples of the wave of vertical exchanges springing up.

ChipCenter.com http://www.chipcenter.com/ seeks to provide all the information necessary to help buyers compare one supplier's microchip to another's. They also provide sample quantities. While parts are ordered through ChipCenter.com, they are distributed by the suppliers who are part of the exchange.

Chemdex.com http://www.chemdex.com/ is seeking to be the center for life science enterprises, researchers, and suppliers. They see it as "streamlining the entire supply chain, enhancing the buyer-supplier relationship, automating the purchasing process from requisition to payment, and delivering a robust, easy-to-use online marketplace."

Simplexis.com http://www.simplexis.com/ seeks to become the marketplace for school districts. For school districts, summers are an intensive time of getting three bids in many areas so they can select vendors for supplies with a fixed, negotiated price. Whereas this has typically been done with faxed RFPs and requisitions, Simplexis hopes to lower costs by moving the RFP and requisition process online, cutting costs from $125 to $150 to perhaps $10, as well as speeding this process. Powered by Commerce One software, San Francisco-based Simplexix.com is working hard to attract both school districts and suppliers. School districts will never be charged for use of Simplexis.com. After an introductory period, vendors will pay less than a 5% commission on deals made through Simplexis, covered hopefully by the cost savings made possible by the online process. Each participating district will then have its own webpage displaying negotiated prices with the selected vendors, allowing authorized persons to make requisitions through the Simplexis.com interface.

FedCenter.com http://www.fedcenter.com is seeking to make life easier for buyers for the 1,100 different agencies of the Federal Government. Vendors are aggregated and put their catalogs up at FedCenter, visible to authorized agency buyers. Whether or not the vendor has GSA contracts in place is also shown, as well as prices, shipping details, etc. FedCenter charges vendors a minimum of $4,000 and an average of $8,500 to set up their catalog at FedCenter.com. There is an additional monthly maintenance fee of 10% of the set-up fee, as well as a transaction fee of 1% to 5%, depending upon the margin, with an average of 2%.

Pros and Cons

Buyers can realize several advantages in these marketplaces. The process lowers transaction costs, automates many online forms by filling out fields in advance, tracks ordering, provides a budget review, and may enable volume discounts on aggregated purchases between companies, agencies, or districts based on volume buying.

Vendors, too, have a number of advantages. Rather than spending valuable sales time to get reorders, the sales force can be refocused on getting new orders and building relationships. Smaller vendors stand to gain a lot, since they can have national and international visibility without high advertising costs. "Because of the Web, a lot of our customers who were limited to 4 or 5 state territories are able to go nationwide while keeping their costs quite minimal," says Jean Anne Verbik of FedCenter.com. As well as reducing transaction costs, some businesses may be able to bypass setting up their own standalone e-commerce sites and rely completely on the marketplace for e-commerce. (See the sidebar: Sidebar: "Will Online Marketplaces Displace Online Stores?" http://www.wilsonweb.com/wct3/b2b-displace-stores.cfm )

But it's not entirely win-win. Vertical marketplaces also pose a threat to vendors. Larger vendors will lose some dominance since the marketplace gives smaller competitors equal visibility. Instead of the vendor "owning" the customer, now the customer is "owned" by the marketplace. In addition, putting all the vendors in the same space will heighten competition, bringing down prices to razor-thin margins, making business less profitable. Marketplaces also make vendors more dependent upon the marketplaces to aggressively advertise the marketplace to bring in new buyers; otherwise vendors will face increased competition without any new business to compensate for it. Moreover, the average transaction fee of 3% to 5% is causing some vendors to balk, especially vendors who are already realizing cost savings through EDI transactions.

Marketplaces Owned by the Largest Players

The latest twist is a move toward B2B exchanges being operated not by trusted third parties, but by the largest companies in the industry who would then save on transaction fees. In April Hewlett-Packard and Compaq with 10 other companies announced the formation of a new exchange. This was immediately followed by a similar announcement by IBM and 9 other rival companies. Marriott and Hyatt are partnering in an hospitality industry exchange. MetalSpectrum is being formed by 8 large metal companies. Software companies that sell Enterprise Resource Planning (ERP) software are also interested in building marketplaces for customers who use their software. Marketplaces dominated or owned by the largest vendors in an industry, too, will make it difficult for small businesses to realize the advantages of exposure that more neutral marketplaces offer. The future seems competitive, though it is pretty certain than only one major marketplace can ultimately survive in any single industry, with perhaps a couple of much smaller secondary marketplaces.

Advice to small business B2B companies: investigate how you can benefit from vertical marketplaces or exchanges in your industry. There may be a growth opportunity here for early adopters.