August 16, 1999

IT Impact:
E-Market Models Matter

E-marketplace business models determine the kinds of customers the sites can attract and the kinds of services they can offer

By Jeetu Patel

lectronic marketplaces are among the most significant business channels the era of E-commerce has produced. They bring together multiple buyers and sellers in a single application, where they can interact, negotiate prices and quantities, and allow free-market economics to rule. They also simplify trading relationships, reduce the friction of traditional commerce, and let suppliers reach new customers.

The impact of E-marketplaces is not lost on the investment community: Venture capital firms are funding them with some big investments. The most successful marketplaces will be those that focus on specific niches, vertical markets, or industries. For example, business-to-business sites such as MetalSite and ChemConnect appeal to very well-defined buyers and sellers of metals and chemicals.

Suppliers interested in working with an E-marketplace must understand the business model the site follows, for that will determine the customers it attracts and the way it makes money. Options include a seller-controlled model, a buyer-controlled model, or a dynamic supply-and-demand model.

In seller-controlled sites such as MetalSite, success depends on offering the right products or services. Buyers look for products in general categories and will browse through numerous catalogs before choosing.

Buyer-controlled marketplaces attract buyers who know what they want, how much they want to pay, or both. These sites may eventually let customers specify a product that doesn't yet exist.

In the dynamic supply-and-demand model, prices for goods and services are determined by supply and demand. This is the model used by ChemConnect, whose strategy to become the Web's largest global chemical exchange has attracted $30 million in a second round of funding.

Changing the business model of an E-marketplace will change the kinds of customers it will attract. For example, a buyer-controlled travel site that shifts to a seller-controlled model would look more like a traditional travel agency--perhaps serving business travelers with less flexibility and less price sensitivity.

Expect to see E-marketplaces embrace multiple models. For example, Expedia.com's primary market today is seller-focused, offering travel services from multiple vendors. It could easily implement a buyer-focused model by creating a secondary market for travel suppliers, in which customers make specific requests and allow the providers to determine whether to meet the pricing and conditions.

Plenty of industries could make good use of E-marketplaces. The obvious candidates are hardware manufacturing and commodities--industries with inventory and limited shelf life for products. But there are other candidates, too. Insurance brokers could set up E-marketplaces for multiple insurers. The auto industry could set up a marketplace for loans and leases from competing financial-services firms.

Clearly, E-marketplace hosts and suppliers need to understand what the marketplace's business model means in terms of business opportunities. As a supplier, do you want to go through a buyer-controlled marketplace in which customers make demands that you'll have to meet? Does a seller-controlled marketplace make more sense for helping your business move excess inventory? Do you want to play in a supply-and-demand-driven site in which the market determines pricing?

Once you determine the right business model, you need to consider the technologies needed to support it. A seller-focused site might be able to run its transactions in batch mode, whereas a buyer-focused site must conduct transactions and calculations in real time. A supply-and-demand site must ensure pricing information is current.

Some sites will need to support auctions or contract-based pricing. And for any marketplace, downtime will mean lost business and customers who don't come back.

Jeetu Patel is VP of research at Doculabs, a Chicago advisory firm that focuses on the Internet, intranets, E-commerce, document management, and knowledge management. He can be reached at info@doculabs.com.

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