Go With the Current: How Net Markets Make Money

New economy or not, some of the old business rules still apply, even to Internet-based marketplaces. Rule Number 1, is that companies must generate revenues and, eventually, profits. But with B2B Net markets still in their infancy, a variety of revenue...


Whether the buyer or supplier (or both) paid the fee generally depended on each marketplace's calculation of who would derive the most value from the Web site. For example, Impresse.com, an Internet service for buyers and their printers to negotiate and manage commercial print projects, believed that a supplier-paid fee was the best way to bring the maximum number of buyers and suppliers to the table. According to company President and CEO Nimish Mehta: We had to find the path of least resistance to liquidity. The easiest way to do this was to charge the printers because they needed the buyers' business. The idea was to sell the buyer on the value of the system and then go to the printers and charge them one percent.

FreeMarkets.com, among the oldest online markets for industrial parts, raw materials, commodities and services on the Web, began with a supplier-paid fee in 1995 but moved to a buyer-paid model in 1997.

SupplierMarket.com, the reverse auction site for manufactured direct materials, that was acquired by Ariba in June, has maintained a supplier-paid model, charging sellers two percent of the value of a transaction.

During this liquidity-building phase, venture capital and high stock valuations kept marketplaces afloat while they strove to build sufficient transaction volume to produce a profit. But rising doubts on Wall Street about the long-term profitability of many Web marketplaces led to the rout on the stock exchanges early in 2000. Although concerns primarily focused on business-to-consumer ventures, investors also began taking a closer look at the B2B markets' prospects for profitability in the near term. Says Mehta: It used to be that in general the financial markets would accept eight to 12 quarters to profitability. Now the financial markets will not accept more than six quarters to profitability.

With the new focus on nearer-term profitability, executives at the Net markets took another look at their revenue models. For its part, impresse.com began shifting in the second quarter of this year to a model under which buyers will pay a transaction fee and commit to purchasing a certain volume of commercial printing through the marketplace. The fee will vary from 1.5 to three percent, depending on the size of a buyer's commitment.

Beyond Transactions: Subscriptions and Licensing FeesWhile many sites continue to charge transaction fees, many marketplaces have also sought to diversify their revenue streams. Numerous sites have begun charging subscriptions or licensing fees for the use of their supply chain or procurement solutions. These types of fees are attractive for the markets because they can provide steady income, which makes investors happy and helps a marketplace move away from dependency on transaction volume. Three examples from the plastics industry show the variety of approaches the marketplaces are taking.

Commerx, which operates Commerx PlasticsNet still lets buyers source products through its public marketplace, including through reverse auctions. But Commerx now offers Web-based, supply chain management applications that link buyers directly to their suppliers through a private trading network. Buying companies pay a set-up fee and an ongoing subscription for the trading network, which can include realt-time logistics and inventory management.

Commerx also offers a connectivity solution as part of the trading network. This lets buyers and suppliers in industrial processing markets communicate with each other electronically regardless of which technical or computer language they each use, be it EDI, XML, e-mail or fax. Commerx converts a message into the format necessary for transmission to the recipient and charges a translation fee. For their part, suppliers have the option of paying Commerx to set up and host a demand fulfillment center through which the suppliers can accept orders online.

Fobplastics charges buyers a licensing fee for the use of what Blake calls the fob toolkit, which includes an auction exchange, a substitution engine to identify material equivalents and buying groups, through which fobplastics.com aggregates buyers' demand to leverage lower prices from suppliers. The licensing fee ranges from $1,000 to $15,000 per month, depending on the size of the customer and the volume that the customer commits to buying through the exchange. Volume commitments range from $1 million to $20 million per year, according to Blake.

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