Are You Ready for the Online Marketplace?

Selling into online marketplaces Internet auctions, exchanges, and eventually Net markets will be inevitable for more than 2 million businesses worldwide within four years, as the number and importance of these trading communities explode.

Online marketplaces offer participants the opportunity to reach more buyers, increase transaction volume, and lower customer acquisition costs. These benefits are offset by the risks loss of margin control, erosion of customer switching costs, channel conflict, and exclusion from new markets. IMT Strategies has devised four steps to evaluate readiness for participation (as a seller, market facilitator, or both) in online marketplaces.

Step One: Know the Golden Rule

Sales and marketing executives would be wise to remember the golden rule: Those with the gold make the rules. Selling organizations must recognize that online marketplaces are being driven chiefly by buyers. Thus, before deciding how to participate, selling organizations must first understand how, and how fast, customer buying behavior is changing in their particular market or set of markets.

Despite the rapid proliferation of “announced” marketplaces, the vast majority of the more than 750 online marketplaces announced to date have no transactions or suppliers in place. In the B2B space, less than 15 percent of corporate purchasers planned to use online marketplaces, and only 10 percent anticipated buying through Internet auctions, according to a Purchasing Magazine survey from November 1999.

What Type Of E-Commerce Models Do You Use/Plan To Use
(% Total Respondents)
Individual supplier catalogs
69%
Electronic Data Interchange (EDI)
38%
Aggregated multi-supplier catalogs
29%
Commerce-enabled extranet with select suppliers
15%
Online trading communities (portals)
15%
Online collaborative negotiations with suppliers
15%
Buy-side systems for non-production goods
14%
Commerce enabled ERP
11%
Internet auctions
10%
Source: Purchasing Magazine, November 1999

In consumer markets, adoption rates are higher, but transaction volumes are lower. More than 14 million customers will participate in online auctions by 2003, by eMarketer estimates. Though popular now, consumer purchases made via buying services that aggregate demand (such as Priceline.com, Mobster.com, and Mercata) are not expected to make up a significant portion of online retail sales over the long term.

The bottom line: Sellers will need to take the cue from buyers with respect to online marketplace relevance and adoption to avoid being left out. Anticipate shifts in customer buying behavior to gain first-mover advantage in certain online marketplaces.

Step Two: Find Online Marketplaces That Align with Your Business Strategy

Executives should be comfortable with these trade-offs before committing to an online marketplace approach.

  • Margins versus volume: Firms must decide whether they are willing to trade off (potentially) lower margins for greater volume arising from the extended reach and customer access of the online marketplace.

  • Ease of doing business versus efficiency: Contrary to popular belief, not every product warrants real-time trading. Products may be too inexpensive and commodified to justify the effort, part of “preconfigured” purchases via electronic data exchange (EDI), or too highly engineered or customized, in which case ease of doing business will tend to outweigh pure price competitiveness in the eyes of buyers, diminishing the value of an auction.

  • Exclusion versus inclusion: Businesses must wrestle with the question of whether the rise of online marketplaces will consolidate industry buying power to the extent that nonparticipants/exchange owners will be left out or whether new markets and opportunities will result from “playing the field.”

  • Market coverage versus control: Firms must determine to what extent the opportunity to cover more of the market outweighs lessening their control over channels and the creation of potential conflict with existing traditional channels.

  • Cost of arbitrage versus pricing gaps: Selling organizations will need to evaluate the possibility that online marketplaces will create “gray market” opportunities for resale and arbitrage price differences across supply chains and global markets or, alternately, that price transparency will prevail, eliminating exploitable price differences.

Step Three: Assemble the Nine Critical Ingredients for Success

Success as an exchange facilitator is not a function of technological prowess as much as it is the result of marshalling and deploying the requisite organizational assets. Organizations considering participating in, building, or sponsoring an online marketplace must first understand the nine critical ingredients and ensure they have many if not all of these ingredients to contribute:

  1. Value-added content: Do I have access to value-added information relevant to my market and industry (e.g., demand forecasting, product assessment)?

  2. Expertise: Do I have market-leading expertise in either specific markets (e.g., timber machinery) or functional processes (e.g., energy management, logistics)?

  3. Trust relationships: Am I a trusted intermediary with credibility and strong industry relationships who can help reduce risk and monitor product and participant quality through regulation, appraisals, inspections, or certification?

  4. Liquidity: Do I have the ability to deliver or attract a critical mass of volume, buying power, buyers, usage, and transactions?

  5. Financing: Can I deliver material financing and/or manage credit risk in the marketplace?

  6. Sourcing: Do I have the ability to attract and connect many buyers and sellers (e.g., possess either a strong customer/supplier base or marketing expertise to acquire the same)?

  7. Sell-side leverage: Do I operate in seller-managed markets (i.e., with a high concentration of sellers), or do I have the dominant share of a unique niche market?

  8. First-mover advantage: Am I the first to the market in my specific niche, or can I successfully redefine the market?

  9. Resources: Do I have the financial and technological infrastructure, resources, or partnerships to scale the marketplace to reach critical mass?

Step Four: Exploit Short-Term Tactics to Protect Margins and Boost Share

Organizations selling into online marketplaces will face myriad risks, especially during the short-term experimentation and learning phase. Over the next year, businesses must manage these risks with a variety of survival tactics designed to preserve margins and market share.

  1. Redefine value boundaries: Differentiating by or changing how value is created and captured to “de-commodify” products and services. Tactics include bundling solutions, resegmentating markets, establishing pricing tiers, and increasing minimum transaction sizes.

  2. Discriminatory pricing practices: Develop proprietary products, redraw market segments, utilize exclusive volume purchase agreements (VPAs), deploy elastic pricing tools, and develop complex pricing schemes that discourage comparison shopping. For instance, airlines create pricing schedules that “discriminate” against business travelers by scaling prices against specific rates, short cycle times, and length of stay.

  3. Elevate service as a value add: Retail and distributors can offer/extract service premiums on commodity products since most online marketplaces today offer little beyond matching buyers and sellers, and product and price information. For example, because few online marketplaces today offer customer support or service, there is a potential advantage for distributors in bundling service into pricing and creating a local service company presence.

  4. Speed: Sellers can differentiate and maximize margins through speed by enabling real-time costing to actively manage margins, dynamic pricing to react more quickly to changes in demand, faster and more accurate bidding processes and short cycle time delivery for premium prices and differentiation. For instance, superior pricing models and capabilities will allow sellers to quickly decide where to participate (or rationally decide not to) and better understand and optimize margins in fast-paced bidding.

  5. Loss leader approaches: Strategically participating in markets with loss leader (e.g., extremely low-priced) products as a way of acquiring customers and leads at low cost, with the expectation of upselling them offline. For instance, the low bidder on a good Mercata reverse auction can pick up 1,000 customers in a single transaction. Depending on customer lifetime value, this low cost of acquisition may offset low or even negative product margins.

  6. Arbitrage/”gray market” leverage: Using online marketplaces to exploit inefficiencies by arbitraging price differences between/across exchanges, supply chains, or global markets. Anonymous exchanges and global auctions provide an excellent opportunity to exploit disorganized or aberrant market pricing, or different global price structures/policies in certain industries.

  7. Positioning: Exploiting ways to gain favorable positioning, e.g., via predatory pricing, loss leader strategies, or public relations. For instance, American Airlines garnered 35% of transactions on its captive Sabre exchange, where, coincidentally, all airlines were listed alphabetically.

Online marketplaces are fast becoming an important selling channel for organizations in a broad range of B2B and B2C markets. In the short term, selling organizations must learn how to integrate online marketplaces into their selling channel mix and develop tactics for mitigating considerable risks and exploiting niches and opportunities. They must also decide whether to enter into online marketplaces as a participant (seller), market facilitator, or both.

Participate in IMT Strategies’ Online Marketplace Survey

IMT Strategies is conducting a survey on the use of online marketplaces beginning July 17. Participants will receive a free benchmark summary of the survey results and a free three-month trial subscription to Executive Insights, IMT Strategies’ monthly strategic research report series. To participate, go to www.imtstrategies.com.

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