Which Digital Model's Right for You?

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Digital marketplaces are tearing down walls within and between companies, offering companies and consumers new buying power. These marketplaces - e-commerce sites that bring together buyers and sellers in one community - increase trading partners and give buyers simplified sourcing and better pricing. They also provide significant transaction efficiencies at every point in the supply chain.

Digital marketplaces rewrite the linear supply chain with networked hub-and-spoke models, introducing profound changes in the way businesses operate, new pricing models and new market channels. Where five buyers would have connected with five sellers through 25 different connections in a linear model, the hub-and-spoke model brings them together through one marketplace in one connection.

This approach to business on the Internet consists of multivendor catalogs, auctions, exchanges or a combination of the three. These solutions - when integrated with buying guides, credit verification, fulfillment/logistics and other services - create new marketplaces and intensify supply and demand. With all three solutions, buyers and sellers benefit from reduced transaction costs, market value for transactions and better matches between buyers and sellers.

So how do you know if creating a digital marketplace is right for your company? There are several situations in which digital marketplaces offer the most value. These are:

• A large market size - $10 billion in transactions yearly or $2 billion for niche markets - along with a fragmented value chain and volatile supply costs and consumer demand.

• Vendors without much differentiation, especially business-to-business where there is less brand identity.

• High information search costs associated with finding the right products and services, and high work-flow costs. Compatible product types are ideal for auction and business exchange models.

If your company fits any of these characteristics, you are a candidate to go digital. How do you know which model will work best? Each tackles inefficiencies at different points in the supply chain and is suited to specific products.

Multivendor catalogs. This model collects catalogs from multiple suppliers in a single location. This model is best suited for well-defined, complex or nonstandardized products with little or no price fluctuation. Revenue is typically from transactions or referral fees. A multivendor site makes it easy for buyers to locate products and to compare products and prices. In addition, buyers can use a single purchase order for multiple vendors. Sellers have access to a larger number of buyers and lower marketing costs.

Auctions. Whether a traditional auction where buyers bid on goods or a reverse auction where buyers ask for price bids from vendors, auctions provide an environment for competitive bidding on products and services.

The forward auction model works best to quickly sell perishable goods, excess inventory, discontinued goods and one-of-a-kind or collectible items. Pricing is dynamic and revenues are typically transaction-based. Buyers gain access to hard-to-find items and reduce search costs.

The competitive bidding of a reverse auction gives buyers the best price. In some specialized implementations of the reverse auction model, buyers pool their buying power to get volume discounts.

Auction sites are perhaps the most prevalent digital marketplace model today and there are many different versions in use. eBay uses forward and reverse auctions for consumer-to-consumer and business-to-consumer. Priceline.com provides an auction BTC site for everything from travel and groceries to home mortgages. TradeOut.com is an online BTB marketplace for liquidating excess inventory and idle assets.

Exchanges. Exchange sites find a match between buyers and sellers. Products best suited for this model are well-defined goods that require little interaction between buyer and seller to explain product characteristics and have a volatile price. Revenue for exchange sites comes from transaction fees, membership fees and advertising fees.

Exchange sites offer buyers faster access to goods and services in volatile markets, provide real-time pricing information and the most competitive price. Similarly, sellers speed the process of finding buyers and broaden their customer base. An exchange also creates an environment where the seller can effectively use yield management to control inventory and pricing in a dynamic fashion.

Hybrid. Often, a model, auction or exchange does not meet your business needs and it is necessary to develop a hybrid approach. The more participants an e-commerce site gains at every point on the supply chain, the more attractive it becomes to potential participants. As the size of the network increases, so does the value of the network. With the enhanced convenience of one-stop shopping, participants may be more likely to move back and forth from one marketplace to another. Furthermore, once a participant joins a site, buyers and suppliers that have relationships with that participant are likely to enter the site to retain their relationships.

Digital marketplaces bring together buyers, sellers and value-added service providers more efficiently and effectively than traditional business models. In addition, online marketplaces have opened the doors for small businesses and individuals to participate in forums that were previously exclusive to major industry players.

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