Start Your Own Net Market

Everyone is getting into the e-commerce act. Former purchasing and supply management professionals are even establishing their own markets. So how do you do it? Some core steps will help you.


[From iSource Business, March 2001] Mother, please, I'd rather do it myself. Ever get that feeling when reading about Net markets? You understand your industry. You know what both sides of the transaction equation need. You're even somewhat conversant in the in's and out's of the various technologies. "Hey," you may think, "I could start one of these markets on my own."

There's just one catch: Since Net markets first burst onto the scene two years ago, many of the rules of the game have changed. Here's what you need to know now to build a successful private electronic market.

1. Hot Spots and Services

The first step hasn't changed much since the early days. It's pretty straight forward. "Figure out where the weak points are in your industry and then how an electronic marketplace can improve the life of buyers and sellers," says David Yockelson, a director of the META Group, a market research firm in Stamford, Conn. First make sure your industry is actually ripe for a marketplace. That's usually true in cases where the purchasing process is highly inefficient or the industry is highly fragmented; but not too fragmented, of course. Otherwise, you'll have a hard time signing on the few influential buyers and sellers that are likely to bring the rest of the pack on board with them.

What's different these days is the matter of quantity. Most big industries, and even many niches, are already teeming with competitors. The result: Your market needs to be appreciably different from what's out there already.

How do you stand out from the crowd? The answer lies in three little words: value-added services. Indeed "it's not enough anymore just to give someone the ability to locate and pay for goods or find something at a better price," says Ken Crafford, CTO of FutureNext Consulting, a McLean, Va.-based firm that advises Net markets. Instead, you have to offer lots of other features, anything from arranging credit to assisting with shipping. (That's also because companies are finding it harder to make money the old way through transaction fees. By offering services you provide another, more effective approach). USBuild is a case in point. Aimed at buyers and sellers of materials for home construction, it focuses on a key aspect of the process: scheduling the shipping of products to make sure all the goods that are procured show up when a contractor really needs them, not a day earlier or later. Or consider Online Asset Exchange, an exchange for buyers and sellers of used equipment. It does everything from inspecting the machinery and conducting appraisals for banks to arranging to get quotes from shippers and offering escrow services. "We're a one-stop shop," says Executive Vice President Norm Bastin.

In fact lots of existing companies are repositioning themselves, changing their focus away from being a vehicle for electronic procurement. Some don't even want to be called a Net market; the term of the moment is "enabler." Consider Chicago-based fob.com, which started out two years ago as a market for the chemical industry. What happened? The founders discovered that buyers weren't all that interested in an Internet-based way to buy materials, since 90 percent of chemicals are bought on contract. Instead what they needed was a method for managing such parts of the process as order entry and fulfillment. So, recently, they changed their business model to emphasize those features.

In addition, say the experts, there's another wrinkle: not just providing services, but making sure those services grab the customer "as early in the food chain as possible," says FutureNext's Crafford. That means you need to offer features that get buyers involved in the initial stages of the buying cycle. First you'll reduce the likelihood that that they'll go to a competitor. Second you'll reduce your expenses. "The cost of acquiring new customers goes up the further along they are in the purchasing cycle," says Crafford.

2. The Right Stuff

Your business will probably still be about hooking up buyers and sellers in some way. And, that's your next challenge pinpointing just what structure, or market mechanism, you will implement. Should you, for example, build a catalog-like system through which buyers get easy access to an aggregation of catalogs from different suppliers? Or should you consider an exchange where buyers and sellers trade commodities, negotiating prices through a bid-and-ask system? Or an auction which lets buyers bid against each other for goods?

The answer, in part, hasn't changed. Catalogs are generally better suited to buyers who are looking for specific products that are hard to find in one fell swoop. Auctions tend to work with surplus goods, like industrial equipment for manufacturing, and exchanges for commodities where the decision about to whether to buy a product, like wheat, depends on just a few, straightforward factors.

It sounds simple enough, but what many Net market operators didn't realize at first was how important it would be to make the structure fit the actual behavior of the industry in question. In other words you can't shoehorn buyers and sellers into accepting a system that runs counter to their usual modes operendi. "A lot of early marketplaces didn't understand how difficult it would be for an industry to adopt a different type of platform from the one they were using in the real world," says Dan Nissanoff, CEO of Free Trade Zone, a marketplace for electronic components. A company buying complex machinery, for example, won't take easily to an exchange system. Another unanticipated complication: suppliers' reactions. Sellers haven't responded favorably to certain market mechanisms, particularly reverse auctions, where, says META Group's Yockelson, "They've realized it doesn't behoove them in every case to allow prices to go down to their lowest level." The moral: Think twice before plunging into a structure that might meet with a lot of supplier hesitation.

Perhaps the biggest lessons from which you can benefit have been those related to catalogs, where operators faced unexpected, technical challenges. With hundreds of sellers and constantly changing prices, offerings and availability, "There are a lot balls in the air to juggle a lot more than anyone realized," says Tim Clark, senior analyst with Jupiter Research, a market research firm based in Los Altos, Calif. You'll not only have to devote a bigger chunk of your budget to coming up with the right technology, but you will also have to be prepared to make searching through the site easy. That means doing a lot of work upfront enhancing suppliers' catalogs expanding product descriptions, organizing the structure of the information, and the like. "If it's cumbersome no one will use it," says Trey Simonton executive vice-president of business development at ec-Content, a site aimed at construction, automotive after-market parts, and other manufacturing sectors, which also provides advice to other Net markets seeking help managing their content. Another challenge: convincing suppliers to come on board, and then to offer competitive pricing once they do. Simonton cites a fledgling company that hired ec-Content for advice after hitting a brick wall with important suppliers. Expecting to sign up hundreds of sellers in the first six months, they had only attracted about a dozen. Simonton's advice: Start slow cultivating a few, key relationships. "We advise that you start with three to five relationships, then build to 20, then to 100 in the first six months to a year," he says. He also helped them pinpoint the most important decision-makers in key suppliers' companies and the particular benefits to emphasize in their pitch. (For example the site would give them access to new customers, and the fact that the company, with $50 million in venture capital funding, was flush with cash.) The result: They were able to win a previously impenetrable key supplier.

3. The Backbone

Of course, your enterprise rests on a technological infrastructure. The big decision you'll face is whether or not to grow your own. Do you hire an expensive in-house IT staff to do the design, or do you outsource the job, possibly losing the critical element of control? It's a complex issue. These days it's possible to reduce internal development costs by using a wide assortment of off-the-shelf software that can be integrated and turned into a usable system. But by using the same stuff anyone else can buy, says the META Group's Yockelson, "You won't create a barrier to entry for competitors."

On the other hand, hiring outside developers and integrators can pose a lot of problems if you don't do it right. Consider SingleSource IT which helps companies manage their IT assets. When the company first started a year ago, it hired outside consultants to do the development. In a hurry to get the system up and running, however, they didn't spend as much time planning out just what it was they wanted. As a result, their instructions to the developers weren't fully fleshed out and the end result wasn't what Randy Wilcox, SingleSource IT's CEO, had in mind. You have to spend time on the specs," says Wilcox. "If we'd done that, we might not have gotten up and running quicker, but the technology would have been better thought through.''

4. Money Matters

Today paying for all this may be the biggest challenge. Before last April venture capitalists were bending over backward to fund B2B companies so much so that many Net markets were able to win $20 million infusions from just one firm. Since the stock market crash in Internet stocks, however, venture capital money for Net markets has slowed to a trickle. Still some venture capital is going to new Net markets. The big difference is that, if you can get any, you can expect them to go through a longer and more thorough due diligence and to offer smaller chunks of money. Online Asset Exchange, for example, recently raised a second round of funding totaling $25 million, which was $60 million less than what they were expecting. What's more, although old-fashioned Net markets might be having a tough time, new-fangled "enablers" are in demand, and that is just one more reason why companies have recently started to rejigger their business models.

If you can't find venture funding, the likeliest alternative is to find a strategic partner a supplier or buyer willing to make an equity stake. But tread carefully. Give away too much and you stand the chance of alienating your partner's competitors and, possibly, attracting the attention of the Federal Trade Commission. For that reason when Bo Holland, CEO of Works.com, recently signed a deal with W.W. Grainger to make an equity investment in his company he included in the contract steps that would keep it a minority stake. For example their new investor can't buy shares in the company if it goes public. The bottom line: Keep the total stake from suppliers to no more than 15 percent.

5. The Chicken and the Egg

Finally you'll have to face the basic conundrum of Net markets: Do you start by bringing in buyers hoping that they will lure sellers, or the other way around? The key is relatively simple: Figure out where the power lies in your industry. Holland, for example, figured that for the small and midsize companies he wanted to serve, the influence lay with the sellers. So he made an effort to enlist big players like Dell Computer and W.W. Granger. "They pulled in the customers," he says. At the same time, however, the answer also depends upon the particular relationships you have. Wilcox, for example, had started as a computer reseller and knew lots of suppliers. So he decided to concentrate on bringing in buyers. "I figured that if I had the customers, the suppliers would come," he says.

In an ever-evolving, nascent arena, you can expect the unexpected, but also the need to quickly change your focus. Customers so frequently told Wilcox what they really needed was help managing their computers and other IT assets he realized that as the real opportunity. So he changed his focus. "The more you learn, the more you evolve your business model and end up doing something different," he says. And hopefully, you'll wind up making some money in the process.

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