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...


20TONS.com, an auction/reverse auction marketplace for secondary plastics that went online in May, currently charges both buyer and supplier a fee equal to 1.5 percent of the value of a transaction consummated on the site. The company is moving toward a service that it calls multiple attribute parametric matching, that is, matching buyers with sellers that can meet specific product requirements and contractual terms. But in the long term 20TONS plans to leverage the knowledge that it is gaining from operating its marketplace to become a subscription-based information service for the secondary plastics market. For example, subscribers to the service would be able to get real-time information on how much a particular secondary plastic resin is worth in the current market.

Looking DownstreamPeering into the future, analysts agree that the transaction fee is unlikely to disappear entirely. I would be surprised if it disappeared, says Keenan. However, I do see pressure on transaction fees to move the average from five percent to one percent.

Keenan believes that success for the Net markets will depend on their ability to make themselves an integral part of the way their customers do business. Exchanges need to embed themselves into the business processes of the exchange members in order to provide the service level that people expect, he says. They have to extend their service to encompass many additional facets of the trading process, for example, settlements and clearing, fulfillment, shipping and logistics.

In fact, Keenan's consulting firm issued a report in April forecasting the rise of a business-to-exchange (B2X) service sector. In the report, Keenan writes: By purchasing financial, shipping, marketing and transaction services from online services, and integrating the services into their sites, Internet exchanges will be able to grow rapidly and service more satisfied members.

CheMatch.com, a marketplace for commodity chemicals, plastics and fuel products, is looking at adding logistics and credit services to its site. The market would earn a referral fee from the providers of those services. The site getPlastic.com currently handles logistics and other aspects of order fulfillment in-house but may outsource those services in the future as other sites become able to handle the work, according to Chris Poirier, the company's president and CEO.

Leah Knight, of Stamford, Conn., consulting firm GartnerGroup, agrees that adding ancillary services will be key to building revenue streams for the Net markets: It's a fairly thin-margin business, but the more value-added services they can build out, the better they can build up those margins.

And the higher the margins, the sooner the Net marketplaces can start generating profits rather than red ink.

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