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September 27, 1999

New Ways To Reach Customers

By Dave Taylor and Alyse Terhune

ne highly publicized online market promises anonymity; another assures prospective sellers that their participation will be kept strictly confidential. These cautionary inducements are not aimed at contributors to the lucrative online pornography market or down-and-out aristocrats hoping to surreptitiously sell off family heirlooms. Rather, they are aimed squarely at the business-to-business E-commerce market, targeted at manufacturers who urgently want to get in on the margin-enhancing direct-sales model immortalized by Cisco, Amazon, and E-Trade, but who are loath to risk the ire of their established distribution channels.

Five types of these so-called E-markets exist: channel masters, operated by a dominate company; industry cooperatives, sponsored by multiple business in the same sector; distributors, run by traditional channel middlemen; third-party, Internet-era distributors funded by venture capital; and suppliers, sponsored by a single company that also distributes competitors' products.

Let's put aside the fact that such popular terms as "market of one" or "mass customization" are oxymorons. The ability to sell directly over the Web has been a boon to the concept of niche marketing, and the wealth of Web-usage data has revitalized the concept of the customer-driven enterprise. Indeed, in an era of global competition and ever-faster product commoditization, manufacturers are looking for ways to re-engineer their supply chains and move closer to the assemble-to-order model canonized by Internet-innovators such as PC maker Dell Computer.

But few manufacturers have designed their business processes around a direct-sales model. Most rely almost exclusively on established channels of resellers, retailers, and distributors. Selling around them not only creates channel conflict but may also violate contractual obligations to their partners. This channel conflict raises the specter of a boycott such as the one retailers launched against Amana Appliances, when it said it wanted to sell products directly to consumers over the Internet, or a warning such as the letter Home Depot sent to its vendors saying they may not do business with companies that sell directly to consumers on the Internet.

For many firms, fear of channel retribution has caused an anxious pause in the march toward direct sales, even though the incentives seem almost irresistible. It's certainly easier to be customer-driven if you can gather and analyze data from direct Web sales. Plus, direct selling cuts the unit cost of sales by reducing distributor costs and promotional incentives. However, a larger marketing budget is needed for a company to build and maintain brands for distributors as well as corporate buyers and consumers. Direct sellers also have better control over product pricing and the opportunity to cross-sell other products to existing buyers as well as sell products to more senior managers. But the major value to a customer-driven enterprise of a direct-sales model is that detailed buyer information bypasses the middleman and goes directly to the manufacturer.

How can companies sell directly without upsetting their apple cart? Enter the anonymous marketplace, in which neutral intermediaries create markets, usually funded by venture capital, where multiple complementary or competitive manufacturers can offer their goods in what is hoped to be relative obscurity. But anonymity works both ways. Corporate buyers typically want to know that privacy is maintained relative to their purchases. And they will likely be more concerned about privacy when buying from relatively unknown marketers as opposed to buying from well-known and trusted manufacturers or distributors. So, if the primary reason to implement direct customer interaction is to gain insight into buyer demand and use that information to construct a more customer-centric enterprise, then a direct Internet sales channel is preferable to the multisupplier neutral marketplace model.

While the E-market Web outlet promises the faint of heart part of the sell-direct mystique--namely, a relatively cheap sales channel, probably for commodities or excess material--it does not offer manufacturers much cloth from which to refashion the enterprise and customer relationships. Aren't the producers of goods and services simply replacing one intermediary with another? After all, most of the functionality provided by multisupplier marketplaces has not moved beyond that provided by traditional intermediaries. And if an E-market controls the customer interaction, who really benefits from customer knowledge gained during the buying process? Even with these caveats, however, multisupplier E-markets offer manufacturers a less-threatening alternative to selling directly online.

Unfortunately, manufacturers may fail to define the rules of the game and give away valuable customer data. If you want to be a customer-driven seller in an anonymous E-market, you need to answer a couple of tough questions before signing your business away.

First, who owns the customer data? E-markets interact with buyers during the product search and order process. Therefore, the market, not the seller, gathers buying behavior and product-preference data. In fact, E-markets view this data as extremely valuable, and many E-market business plans call for selling individual or aggregate buyer information back to the supplier. Make sure your contract provides for the E-market to provide you with aggregate and trend information about who is buying your products compared with similar products from competing suppliers. This information lets suppliers implement customer-driven marketing, pricing, inventory, and competitive strategies.

Second, who will you compete with in the E-market? In order for neutral, anonymous E-markets to be successful, they must offer a critical mass of products available within a class of commodity. Otherwise, their ability to attract a critical mass of buyers is limited. Therefore, E-markets must offer products from a variety of manufacturers or offer product information from other sources to attract customers. The fastest source for aggregated manufacturer product data is, in many cases, distributors. For example, Chemdex Corp., an E-commerce solutions provider in the life-science sector, acts as an electronic front end for VWR Scientific Products Corp., a leading distributor of laboratory supply equipment. Selling directly through neutral E-markets means your products will compete with similar products. And these E-markets will ultimately compete with your other distribution channels. Knowing this will help you evaluate the value of the particular E-market and may help you negotiate better terms, such as exclusivity or preferential treatment.

It is possible to be customer-driven in anonymous E-markets. The key is understanding what customer data you really need to drive your business processes and only signing up with E-markets that will give you access to this information. The most important lesson is that your business processes and applications have to be capable of incorporating and acting upon the data you get from these E-markets, as fast as you can get it. Don't ask for, or worse, pay for customer data that your processes can't handle or your planners won't use.

Dave Taylor and Alyse Terhune are co-founders of eMarket Holdings, a firm that helps enterprises develop electronic marketplaces. They can be reached at dtaylor@emarketholdings.com and ater hune@emarketholdings.com.

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