The Six Primary Flavors of Online Marketplaces

As online marketplaces proliferate, a bewildering array of subvarieties and hybrid exchange models will emerge. IMT Strategies has distilled these variants into six primary flavors of online marketplaces, serving both the B2B and B2C markets:

  1. Online Buying Services
  2. Auctions
  3. Functional Exchanges
  4. Vertical Exchanges
  5. Industry-Sponsored Exchanges
  6. Net Markets

The salient characteristic shared by all six is that they increase the ease with which buyers perform one or many steps of the purchasing process, from product consideration to demand generation through to the transaction itself. Specifically, online marketplaces deliver:

  • Price and product transparency (i.e., the ability to easily locate and compare products and prices).

  • Supplier and seller discovery, or the ability to aggregate demand and supply.
  • Convenient and reliable transactions, by matching buyer and seller orders, and enabling a wide variety of pricing and market-making mechanisms.
  • Ultimately, value-added services to enhance the selling process, including logistics, inventory management, financing, forecasting, advertising, catalog management, and more.

Each type of online marketplace differs fundamentally along four axes:

  1. Level of information provided (e.g., price, availability, and range of substitutes).

  2. Breadth of services offered (e.g., quality assurance, financing credit risk, and customer support).
  3. Type of market-making mechanism (i.e., the way transactions occur, such as Dutch auctions, reverse auctions, real-time transactions, and collaborative negotiations).
  4. Enabling technology (e.g., web shopping agents, content management, levels of database, and transaction infrastructure).

The six flavors of online marketplaces are described in detail below:

Online Buying Services

These services offer support during the awareness and demand generation phases of the selling process. Specifically, they provide price and product transparency (e.g., via shopping agents and comparison sites), buyer and seller discovery (e.g., shopping agents, price aggregators and industry catalogs), and quality recommendation and selection aides (e.g., analyst and review sites).

Online buying services are targeted primarily to B2C markets, such as big-ticket consumer retail (e.g., electronics) and one-of-a-kind novelty purchases, as well as small business/SOHO markets.

The individual services that make up online buying services will be absorbed into more mature exchanges and net markets over time.

Examples include mySimon, CarPrices.com, and CNET.

Auctions

Auctions are online markets that aggregate demand and match buyers and sellers for a wide range of B2B and B2C products. They employ a variety of market-making mechanisms (e.g., reverse, Dutch, English, and sealed-bid auctions) to meet specific business objectives such as demand aggregation and price maximization.

Auctions serve B2B, B2C, and C2C markets, including retail, novelty, maintenance, repair and operations (MRO) purchases, distressed inventory/perishables, spot purchases of commodities and raw materials, and secondhand capital equipment. In the B2B space, auctions are generally targeted to small business/SOHO customers that lack both purchase power and sophisticated purchasing operations.

Examples include Amazon.com (auction) and Mercata (demand aggregator).

Vertical Exchanges

Vertical exchanges are trusted intermediaries that facilitate B2B e-commerce with vertical market and product-specific expertise. They offer real-time pricing and complete product information. Eventually, they are to offer a range of value-added services across an array of vertical markets (e.g., MRO, spot purchases of commodities and raw materials, capital equipment, secondary markets, distressed inventory and perishables, and some direct materials such as semifinished and engineered products).

Examples of vertical exchanges include PaperExchange.com and FreeMarkets.

Functional Exchanges

Functional exchanges are trusted intermediaries that facilitate mostly B2B e-commerce involving process, functional, or channel-specific expertise. These exchanges market an array of primary services or solutions that automate or support specific business functions or processes (such as HR benefits or energy management). Functional exchanges offer real-time pricing, complete product information, and value-added services.

Examples include tradehub and Celarix.com.

Industry-Sponsored Exchanges

Limited to B2B commerce, these exchanges have equity participation or sponsorship from major industry buyers and (frequently) technology partners as well. They act as intermediaries to facilitate B2B e-commerce in industries with high concentrations of buying power. Industry-sponsored exchanges offer the same range of services as other exchanges, including real-time pricing, complete product information, and value-added services and information. Over time, these exchanges will accommodate more highly engineered products and direct materials.

Examples include COVISINT and Globalnet Exchange.

Net Markets

The holy grail of online marketplaces will be Net markets, or federated Net markets. These markets are sophisticated networks and combinations of online marketplaces that will emerge over the next three years. Net markets will develop from the quilting of functional and vertical exchange capabilities and expertise, and the assembly of value-added services across the supply chain (e.g., logistics, inventory, demand forecasting). This type of market will deliver more value-added services and will require high levels of buyer collaboration to conduct complex transactions. Because Net markets will demand the integration of many industry supply chains and the coordination of multiple large and small markets, they will not mature for several years.

In the short term, each of these online marketplaces creates value by facilitating the sharing of information about products and pricing, matching many buyers and sellers and improving the ease and speed of transactions. Longer term, value will arise from greater levels of purchase-process integration and through the delivery of value-added information and services.

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