Buying and Selling Through B2B Marketplaces

BUYING AND SELLING THROUGH B2B MARKETPLACES

A PurchasePro Inc. White Paper

Imagine for a moment that you are the top executive at your company. Someone offers you a solution that will give you instant access to a wide audience of interested prospects, increase the efficiency of your purchasing function, automate and streamline your buying and selling processes, and reduce your sales and purchasing overhead. Even more, you can get this solution for little up-front investment of time and money, virtually no hardware or software outlays, and without having to rely on your IT resources or outside consultants. Wouldn't you jump at this opportunity? Of course!

Sound too good to be true? It isn't. Today, in our highly networked world, businesses have more viable options and channels for conducting commerce, both as buyers and sellers, than ever before. A number of platforms, from simple Web storefronts to sophisticated B2B marketplaces, have emerged to level the playing field for businesses of all sizes and circumstances, giving them equal opportunity to pitch and source products and services to a worldwide audience for a negligible cost of entry. Who wouldn't tap into a channel that offers so many possibilities for such a reasonable investment?

If you think you can ignore these new platforms for conducting commerce, think again. As a seller, consider these statistics. Forrester Research predicts that in a very short time -- by 2002 -- roughly 70% of buyers and sellers will use B2B marketplaces to engage in commerce. Even more mind-boggling, AMR Research expects that by 2004, $3 trillion in B2B sales will flow through marketplaces. This $3 trillion figure does not represent additional sales but a redirection of existing sales to B2B marketplaces. Sellers, take heed. That's $3 trillion moving to marketplaces and out of traditional sales channels. If you join a marketplace, you not only get to protect your market share, you have the chance to capture sales from the laggards.

As a buyer, note these numbers. AMR Research estimates that the average company spends more than 80% of its revenues buying direct and indirect goods. Any efficiencies introduced into the buying process obviously go straight to the bottom line. Analyst firms Giga and IDC project that B2B marketplaces will allow companies to shave from $180 to $480 billion off transaction costs by 2003. Buyers that fail to use marketplaces won't share in this bounty. Businesses that do will see their margins rise.

This paper introduces perhaps the most compelling B2B commerce option available today -- B2B marketplaces. B2B marketplaces are intuitively appealing because they can give companies exactly those benefits described above -- wider audiences, higher revenues and margins, increased efficiency and reduced costs. The remainder of this paper shows why B2B marketplaces are fundamentally transforming commercial activities today.

Choices for Conducting Commerce Online

If you want to conduct commerce online, where do you start? There are several options. Before the advent of electronic commerce, companies had to make trade-offs when selecting channels for buying and selling goods. There was no single, efficient, cost-effective way to market products to, or source products from, a global community of interested buyers and sellers. Today, there is.

Thanks to an explosion of online platforms and pervasive connectivity offered by the Internet, companies can now engage in virtually every type of commercial transaction imaginable. By exploiting these platforms, companies can generate leads, convert online interactions into revenue-producing relationships, reduce sales and purchasing overhead, compete more aggressively and grow their market share. And all of these activities can be done 24 hours a day, 7 days a week, around the world, for minimal up-front investment.

There are basically four online platforms that companies can use to engage in commerce.

Web presence

Simple web sites promote product and brand awareness, but present mainly static information -- marketing literature or catalogs. These sites lack built-in commerce capabilities and therefore can produce only indirect financial benefits. They often have a hard time attracting enough visitors or generating qualified sales leads. Buyers have to perform their own research to find these sites.

Web storefronts

Many second or third-generation web sites have order-taking capabilities. These storefronts have the potential to generate direct financial benefits, but without a high flow of visitors, the benefits won't materialize. The burden is on prospective purchasers to find these sites, and most are consumer-oriented rather than business-oriented.

Supply chain applications

From extranets to virtual private networks, companies adopt supply chain applications to strengthen their ties with buyers and suppliers. These point solutions permit one-to-one commercial transactions with existing partners, but are not designed to market products, widen an audience or generate new sources of revenue.

B2B marketplaces

B2B marketplaces are business-oriented platforms where buyers and sellers can meet to transact business. They are geared specifically to create and support wide communities of interested purchasers and suppliers. For example, Hilton’s procurement marketplace unites buyers at more than 1,700 properties with hundreds of suppliers. Likewise, Honeywell’s myfacilities.com marketplace is building a large-scale community of facility managers, contractors and suppliers. Requiring little implementation effort or investment, B2B marketplaces allow buyers and sellers to reduce their purchasing and sales overhead and increase their efficiency. Sellers can also capture more sales and increase their revenues.

B2B Marketplaces -- The Ultimate e-Commerce Platform

For most companies, the fastest way to get real benefits from the Internet is to participate in a B2B marketplace and tap into an instant community of interested buyers and sellers. Marketplaces offer the most complete set of benefits to buyers and sellers, come in several different types and incorporate rich features designed to accomplish simple to complex transactions. This section of the paper explains the concept of a B2B marketplace, examines its benefits, reviews the basic types available today and summarizes the key must-have features.

B2B Marketplace Model

B2B marketplaces are online destinations where multiple buyers and multiple sellers can engage in commercial transactions. A member of a marketplace can participate as a buyer, a seller or both. Members research selling and buying opportunities, offer and purchase products and services, and take advantage of related, value-added services. For example, buyers at Hilton Hotel properties use Hilton’s custom-branded procurement marketplace to purchase a wide range of supplies. Suppliers connected to Honeywell’s facilities marketplace can advertise and sell products to participating facility managers and contractors.

There are three primary players in a B2B marketplace: buyer, seller and market maker. A single company can participate as a buyer and a seller. For example, an electronic parts company can use the marketplace to sell electronic components and buy office supplies from another member. The market maker is the sponsor of the marketplace and performs the necessary administrative functions from operating the marketplace to supplying the infrastructure, registering members and servicing and supporting them.

How does a B2B marketplace work? Buyers and sellers register as members and connect to the marketplace via the Internet. Buyers must decide who will be allowed to transact business through the marketplace-- the purchasing department or end users. Using marketplace tools, buyers set up authorizations, approvals, spending limits, access rights and other purchasing policies for each user. They also identify preferred or contract suppliers that are connected to the marketplace.

A seller's initial task is to create an electronic description of its products and/or services, typically in the form of a catalog. Marketplaces generally provide tools to create, maintain and even import catalogs. Like buyers, sellers will identify preferred or contract buyers and their associated terms (discounts, volume purchases, etc.).

After these basic set-up steps, buyers and sellers are ready to use the marketplace. Buyers can research items, view promotions and browse catalogs. They can request quotes and ask suppliers to bid competitively for their business. Purchase orders can be issued through the marketplace and matched with receipted goods. Sellers can advertise product sales, update catalogs, auction inventory, engage in price negotiations with buyers, make offers and accept purchase orders. Both buyers and sellers can use marketplace reporting and tracking capabilities to generate audit trails, analyze the performance of counter-parties, and evaluate buying and selling patterns.

Benefits of B2B Marketplaces

B2B marketplaces offer significant benefits to all participants. The actual benefits received depend on how heavily a company takes advantage of the marketplace, and whether a company participates as a buyer and a seller. For example, a company that funnels all of its purchases through a marketplace will realize greater cost savings than a company that makes only sporadic purchases. Looked at from each player's perspective, B2B marketplaces offer these benefits.

Seller Benefits

B2B marketplaces present sellers with several attractive financial benefits from improved liquidity to better forecasting.

Liquidity Improvements. Marketplaces offer sellers a wide potential customer base, including customers located in different geographic areas, industries and sizes than traditionally served. Sellers can present their entire product catalog to interested viewers, respond dynamically to all requests for bids and quotes where they have matching products or services, and auction inventory.

Cost Savings. The liquidity improvements that a seller gains through a marketplace come at a low cost. The extensive reach offered by a marketplace is achieved at a fraction of the cost associated with traditional sales channels -- mass mailings, telemarketing, face-to-face sales calls, etc.

Stronger Inventory Management. Marketplaces can help suppliers better manage their inventory. Dynamic selling capabilities like forward auctions allow sellers to solicit bids on excess, damaged or obsolete inventory.

Better Forecasting. Sellers can use B2B marketplaces to gauge the demand for their goods and services, and the price the market is willing to bear. By analyzing marketplace transaction data, sellers can better match their products and services, and time their production schedules, to fit customer needs.

Buyer Benefits

Buyers benefit from B2B marketplaces by increasing their efficiency and saving costs.

Efficiency Increases. Marketplaces allow buyers to increase their efficiency in many ways. Using a marketplace, buyers can automate their purchasing tasks, reducing their reliance on paperwork and manual processes. Companies can offload purchasing activities to end users, effectively shortening the cycle time between order and fulfillment. Buyers can solicit quotes and bids from a broad base of suppliers by issuing a single request rather than contacting suppliers individually. Buyers can also issue line item POs -- a single PO with multiple items sourced from different suppliers -- rather than separate POs for each supplier.

Cost Savings. Buyers can enjoy substantial administrative cost savings by directing purchases through a B2B marketplace. Automating procurement functions drastically lowers the cost to process a transaction. An Aberdeen Group survey found that transaction processing costs were reduced about 70%, from an average of $107 to $30, by using B2B procurement platforms. By requiring all purchases to go through a marketplace, companies can reduce maverick buying, thereby lowering their total spending. They can also track and aggregate their spending to receive more favorable terms from suppliers. Companies can use marketplace data to identify suppliers that consistently outperform their peers and direct future purchasers to these higher performers.

Types of B2B Marketplaces

Marketplaces are grouped along two axes, as illustrated below. They can be private or public, horizontally focused or vertically focused. Large market makers will typically sponsor marketplaces in all four categories, and can offer participants of one marketplace the best of all worlds -- seamless access to other types of hosted marketplaces through marketplace-to-marketplace interactions. In this way, a member of a private veterinary supplies marketplace can, for example, access the global marketplace hosted by its market maker to source commodity goods like paper and light bulbs. A primary example of this type of marketplace-to-marketplace interaction is Netbusiness.com. With 130,000 buyers and sellers, this marketplace is perhaps the largest and most liquid of its kind. Pioneered by PurchasePro through a cooperative effort with America Online, Netbusiness.com has the added advantage of allowing its participants to link to other PurchasePro powered marketplaces without any additional effort.

When selecting a marketplace, buyers and suppliers should consider the breadth of marketplaces offered by the market maker, and its ability and willingness to foster marketplace-to-marketplace interaction.

Types of B2B Marketplaces

Public versus private

Marketplaces are either open to the public or private. In a private marketplace, the market maker decides who gets to join. Private marketplaces restrict membership to preserve some affinity around a particular product or service or an industry. Public marketplaces include AOL's NetBusiness, Honeywell's myFacilities.com for facility managers and contractors, iTravel's travel marketplace and PurchasePro's Global Marketplace. Private marketplaces include Hilton’s procurement marketplace (open only to select suppliers for Hilton’s network of 1,700 properties), Honeywell’s Enterprise Service Solutions marketplace (open only to suppliers of the Honeywell division), Page Co-op’s marketplace (open only to newspapers and printing facilities that are members of the cooperative), and MGM Mirage’s procurement marketplace (open only to MGM Mirage properties and their suppliers).

Market focus

Marketplaces can have a horizontal or vertical focus. Horizontal marketplaces sell a diverse collection of goods or services. For example, America Online's NetBusiness powered by PurchasePro allows sellers to market an unlimited range of products and services. Vertically focused marketplaces are formed around a particular product or service, a given industry, the needs of a large supplier or buyer, or some other interest group. For example, LawCommerce is a marketplace focused on the legal community and Vetbuyersnet.com is a marketplace focused on the buying and selling of veterinary supplies. Funeral Exchange is a B2B marketplace catering to funeral products and services. CommercExec is a procurement marketplace for non-profit organizations such as colleges, universities, health care facilities and religious establishments.

Features of B2B Marketplaces

B2B marketplaces have a full range of features. Some features are necessary -- every marketplace must have sufficient security to ensure the integrity and privacy of data exchanged over it. Other features, like dynamic pricing and catalog management, will vary among marketplaces. A good marketplace will have the following capabilities.

Buy-side capabilities

Research -- the ability to browse catalogs, perform keyword searches for products and services, and apply filters for supplier location, diversity status, etc.

Manage suppliers -- the ability to access real-time supplier product information, select suppliers from pre-approved or public lists, and analyze transaction data for supplier performance.

Create authorizations/approval routing -- the ability to specify user authorizations, spending limits, and access rights according to business rules, and route requests and orders to managers for approval.

Request quotes and bids -- the ability to locate new and current suppliers, request quotes, solicit bids (sealed or unsealed) from one or several suppliers simultaneously, send bid attachments, view multiple responses based on characteristics such as quantity or price, and negotiate pricing.

Make purchases-- the ability to generate POs, send POs to suppliers electronically and request order confirmation.

Handle receivables -- the ability to match received merchandise to the corresponding PO for reporting of partial orders, refusals and damaged goods.

Sell-side capabilities

Manage buyers-- the ability to monitor buyer performance and purchases, measure spending programs and contract purchases, create audit trails, analyze buying patterns, and document PO history from initial request to final payment.

Manage catalogs -- the ability to create and/or import product catalogs, and to maintain them on an ongoing basis, using marketplace tools. Separate catalogs can be created for contract versus general pricing.

Promote products and services -- the ability to advertise or promote special offers, sales, discounts, etc. to the marketplace.

Respond to quotes and bids -- the ability to capture new and current buyers, respond to quotes and bids, and negotiate pricing.

Make offers (forward and reverse auctions) -- the ability to solicit interest in products and services through auctions and similar forums. Buyers are empowered to make offers to suppliers in the marketplace (forward auctions) and sellers can bid in real time in auctions hosted by buyers (reverse auctions).

Accept orders -- the ability to accept POs and track them through payment.

Value-added services

Marketplaces also offer a host of value-added services ranging from reporting and audit capabilities, providing specialized content and information management, wireless support, financial services, settlement, chat rooms and news feeds.

B2B Commerce: How to Start

It's easy to get involved in B2B commerce -- just join a marketplace. By taking some simple preparations and devoting a little energy to choosing the right marketplace and the right market maker, you can be up and running in no time.

While some companies may choose to build their own marketplace from scratch, most will find it unnecessary. Building a marketplace takes energy, commitment and an active outreach program to enlist buyers and/or sellers. Most companies find that an existing marketplace with an established and growing community can best serve their needs.

Buyer and Seller Preparations

Joining a marketplace is a straightforward task. Sellers and buyers must prepare, but preparations are minimal. The market maker is responsible for the bulk of the more time-consuming administrative and operational tasks.

From a seller's perspective, preparations include:

Register - supply a profile for user searches and filters

Put products and services online - create an electronic catalog

Determine sales terms - pricing, discounts, preferred buyers

Determine financial settlement and logistics - invoicing, payment terms, shipping

Determine promotion plans - advertising, sales, classifieds

Determine integration needs between marketplace and back-office systems

From a buyer's perspective, preparations include:

Determine procurement needs - the types of goods to be sourced

Determine purchasing policies - authorizations, approvals, access rights, preferred suppliers

Determine financial settlement and logistics needs - payment, shipping, receiving

Determine integration needs between marketplace and back-end systems

Choosing the Right Marketplace

With so many marketplaces, companies must take a little time to choose the right one. Sometimes the choice will be obvious -- the marketplace where most of your buyers and suppliers are found is a good match. In general, however, companies should consider the following attributes when selecting a marketplace.

The type of marketplace

Decide whether a public or private marketplace is the better forum, and whether a broad or narrow focus is more appropriate. Public marketplaces are good choices for sellers and buyers interested in ordinary, non-production goods and services. Private marketplaces may offer sellers access to more targeted buyers, and buyers access to sellers with specialized goods. Vertically focused marketplaces may be best for specialty products or services, raw materials or industry-specific goods. Horizontal marketplaces may offer the largest community of sellers and buyers and the greatest cross-section of goods. A veterinary supplier, for example, would prefer a vertical marketplace targeted at the veterinary industry over a horizontal marketplace aimed at indirect goods. But a manufacturer of office cubicles might lean towards a horizontal marketplace with an office furniture and equipment category. Finally, marketplaces that can interact with other marketplaces are ideal because they combine the advantages of several different types of marketplaces.

The characteristics of the marketplace

The marketplace must have attributes that encourage usage and permit transactions to complete successfully. Key characteristics for success include:

Easy to use so that members can become proficient quickly

Intuitive interfaces, reports and tools to reduce the learning curve

Critical mass of participants so buyers can find the products and services they need, and sellers can locate interested buyers

Marketplace-to-marketplace interaction to give participants access to a larger or smaller "virtual" marketplace and audience as desired

Functionality rich enough to perform the range of commerce tasks from searching, sourcing, bidding, dynamic pricing, tracking, auditing and authorization management to catalog management.

The cost to join the marketplace

Joining an existing marketplace is usually not an expensive proposition. Today, most marketplaces charge reasonable membership fees that may even be waived in some cases. Most marketplaces also charge suppliers nominal transaction fees or commissions on sales facilitated by the marketplace as well as advertising fees. Nevertheless, members must be able to justify any initial and recurring costs, including internal labor costs, to join a marketplace. Tools or services, like authorization management and catalog management tools, offered by the market maker can help defray set-up costs. Once a company is actively using the marketplace, it may decide to make additional investments in integrating its back-office systems with the marketplace.

Choosing the Right Market Maker

The party sponsoring the marketplace can make or break it. It is important to consider the qualities of the market maker to evaluate the chances of success for your marketplace. As more B2B marketplace providers emerge, it is critical that companies perform their own diligence to assess the long-term viability of their selected marketplace. Essential characteristics for a market maker include:

B2B knowledge

A strong grasp of B2B commerce from a business and technical perspective translates into cutting edge solutions for your marketplace.

Proven track record

A market maker with a history of prosperous engagements and satisfied customers is likely to repeat its successes and perform well in the future.

Successful business model

A market maker with a winning business model will be financially successful and able to weather market fluctuations.

Critical mass

The marketplaces sponsored by the market maker should have, or be on a path to attain, a critical mass of participants in order to provide liquidity in the marketplace. Low participation is one of the foremost obstacles to marketplace success.

Plan for growth and support of marketplace

Since marketplaces must grow to succeed, the market maker should have a scalable operational model able to support the needs of its marketplaces.

Willingness to make marketplaces successful

Reaching critical mass is a criterion for marketplace success. A market maker should have plans to grow its membership base and actively support its members in their efforts to enlist additional participants by providing a comprehensive set of marketing services and programs.

Marketplace-to-marketplace interaction

The larger the marketplace, the more each party gains. A market maker that has access to and can connect diverse marketplaces gives participants the opportunity to reach a wide audience without sacrificing their membership in more specialized marketplaces.

Superior customer service

Market makers that provide responsive and proactive customer service resolve issues quickly, disperse needed information in a timely manner and ensure the success of each member in using the marketplace.

Broad value-added services

To extract the full benefits of a marketplace, members should look for a market maker that offers value-added services such as industry news, chat rooms, wireless capabilities, financial services and more.

Strong partnerships

A market maker with ties to multiple marketplaces, other market makers and technology companies can use those relationships to offer additional services to its members.

From all accounts, B2B commerce is starting to explode. It's easy to understand why. B2B marketplaces offer instance access to a wide and interested audience, increased efficiency in purchasing and sales, streamlined buying and selling processes, reduced overhead and enhanced revenues. The benefits are high and the initial investment is low. And, if you pick the right marketplace and market maker, it's simple to get started.

As you look around, you'll find increasing numbers of your customers, suppliers, partners and competitors trading through B2B marketplaces. They will receive their share of the $ 3 trillion in projected sales. They will benefit from the up to $480 billion in projected efficiency savings. Shouldn't your company be among them? It can be. All you have to do is be in the right place -- as a member of a B2B marketplace!