Revenue models how Internet marketplaces earn their money have evolved over the few years that companies have been doing business on the Web. As the B2B e-commerce market has developed, advertising has given way to markups and transaction fees, which have recently been supplemented by a variety of subscription and licensing fees. In the near future, analysts believe the marketplaces will generate income from ancillary services. Using the plastics market as the major example, the following is a primer on the various revenue models at work on the Web, where they have been, and where they are going.
The Age-Old Revenue Generator: Advertising
Advertising provided the initial revenue stream for vertical industry portals, or vortals, which specialized in providing information to companies operating in a particular vertical market. Commerx PlasticsNet, for example, started in 1995 providing information, forums and chat rooms for purchasers and other executives in the plastics industry. The site sold banner advertising space targeted at its Internet viewership in the same way that a magazine or trade publication runs ads targeting its readers.
While B2B marketplaces generally have moved on to other sources of revenue, some sites continue to supplement their income through advertising or marketing-type services. The online plastics market, fobplastics, which launched June 19, generates some ancillary revenue through advertising. In addition, although general access to the site is free for sellers, the market also offers suppliers the option of fee-based access to its marketplace for plastic resins, sheets and films. Paying for access gives increased visibility in the channel and information regarding the customers in the channel, according to Patrick J. Blake, CEO of fobplastics' parent company, fob.com.
However, overall, advertising has not proved effective at generating significant revenues for marketplaces, primarily because it is not cost-effective for the advertisers. You have to charge way too much, and your CPM [cost-per-thousand] rate has to be way higher than what people are willing to pay, says e-commerce analyst Vernon Keenan, CEO of San Francisco consulting firm Keenan Vision Inc.
It's Old-Fashioned, But it Works: Markups
While advertising has lost its attraction, some Net marketplaces are using the old-fashioned markup model. Markets that charge a markup are acting either as virtual distributors, buying goods from suppliers and then selling them at a profit; or as aggregators, bundling demand from smaller buyers in order to gain volume discounts from suppliers and then retaining part of the discount for themselves.
An example of the former, getPlastic.com, which began conducting transactions online June 13, sells plastic resins and also allows buyers to configure custom resin solutions. The site charges a markup on the plastic materials purchased through its site. The markup, which the company does not currently disclose, varies by product and volume, but the site's prices are competitive with those of other distributors according to purchasers who have used the site (see sidebar Revenue Models: The Purchaser's Perspective).
Fobplastics, however, acts as an aggregator. The site gets volume commitments from its buying customers, bundles the demand and leverages the volume to buy at a discount from suppliers. The company passes on part of the savings to its customers while retaining a percentage of the discount for itself. Blake says that the percentage varies, but fobplastics does not disclose the share of the volume discount it keeps.
Hanging on: Transaction Fees
Transaction fees came to predominate the marketplaces' revenue models during the explosive growth of B2B e-commerce that began in 1999. Marketplaces rushed to capture market share by pursuing visibility and liquidity, which meant drawing as many buyers and sellers to the marketplace and generating as many transactions and as much volume as possible. Transaction fees could be easily and rapidly implemented, allowing a Net marketplace to open for business quickly in a period when the first sites into a particular market were viewed as having enormous advantages over latecomers.