B2Basics

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B2Basics

“There is no one right way for an e-marketplace to charge for its services, but there are many wrong ways.”

The McKinsey Quarterly, 2001 Number 1

Policy relevance:

E-marketplaces are relatively new. A full consideration of the possibilities should help companies – and policy makers – avoid making expensive errors.

Main conclusions:

  • Business-to-business (B2B) electronic marketplaces reduce transaction costs and remove inefficiencies from the supply chain, but unless these marketplaces give more consideration to how they value and charge for their services, the profit from the benefits they provide will flow to everyone but themselves;
  • There are four roads to value: expand everyone’s market reach, generate lower prices for buyers (by providing access to reach more suppliers as well as from increased price competition), cut the cost of buyers’ operations, identify industry best practices;
  • In many cases, a marketplace should deploy two or more approaches simultaneously;
  • A desire to build scale quickly is understandable, but rock-bottom prices often don’t make sense, because low prices establish themselves in customers’ minds as ‘reference prices’ which are extremely difficult to change as value increases. Low prices can also be taken to imply that the B2B company itself isn’t confident of its offering;
  • B2B pricing most often takes the form of transaction fees (“cost-plus pricing structure”), but this structure presents a number of problems:
    • if these fees are applied in a simple, undifferentiated way, customers are likely to think of the B2B company as a mere transaction facilatator and not as an ‘industry portal’ or the ‘infomediary’ that B2Bs wish to become;
    • sometimes the wrong party is charged: the party which is most motivated should be charged;
    • transaction fees may well begin to disappear when basic buy-sell coordination becomes a commodity;
  • A B2B company whose business model lends itself only to simple transaction fee structures therefore probably needs a new business model: some companies do this by licensing software intensive solutions to third parties that typically pay an up-front, lump-sum charge or licensing fee; others by keeping for themselves a part of the savings that buyers derive from improved supply chain efficiencies or from prices lower than some agreed upon benchmark;
  • No B2B exchanges have yet introduced gain sharing as a standard pricing model and few companies have implemented multitiered structures that tie pricing to value.

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