HBR.org

The narrow path to victory for B2B exchanges

Bain & Company vice presidents Michael Collins and Phil Schefter suggest ways in which B2B exchange operators can still turn a profit.

By Michael Collins and Phil Schefter

Published on September 01, 2000
min read


The full version of this article is available on Harvard Business Online (subscription required). The Idea in Brief Accel partners’ July shut-down of Fleetscape.com, an electronic marketplace for the trucking industry, signals trouble for B2B exchanges. Estimates of commerce to be captured in B2B exchanges by 2004 range from $1 to $2 trillion, and Fleetscape was just one of about 700 electronic exchanges that had sprung up in North America by last March. Then, in April, the market caught on to a dirty little secret: although built on assumptions of thick margins, high volumes, and low capital requirements, most exchanges had yet to host a transaction—and for those that had, the margins were razor thin. Stock prices of B2B marketplace darlings like Ariba and VerticalNet plummeted 60%–80%. Start-up Fleetscape skidded right off the street. It’s not the end of the road for such ventures, but even the best of them are in for some rough riding—and the path to riches is narrow. In theory, a B2B exchange makes perfect sense. Buyers are exposed to new sellers, and sellers are exposed to new buyers. Product, search, and transaction costs are reduced; information exchange is enhanced. And as information is shared and leveraged across industry participants, supply chain relationships are improved and costs dramatically reduced. We’ve seen this scenario played out on the B2C side in the success of eBay and Priceline. But most B2B exchanges rely on a few sweet spots in the market: areas in which supply and demand are fragmented, transaction costs are high, or the pricing mechanism is inefficient. Ventro’s Chemdex, which aggregates bioreagents for academic researchers and private laboratories, has hit several of these sweet spots. As a result, it leads the pack in the fragmented life-sciences market, which has historically had high search costs. Having grown to $54 million in revenue for the 12 months ended March 30, 2000, Chemdex seems to be on a path to profitability. But take away the sweet spots—that is, try to operate in suboptimal conditions characterized by highly evolved distributors, low margins, and consolidated supply—and you’ve got a losing proposition. How can exchange operators successfully navigate this narrow path to profitability? Here are a few options: 1. Learn from the survivors of the shakeout in the B2C business. Ally with scale players who are looking for expertise. The large consumer-products manufacturers, for example, have something to sell, but they lack speed, technology, and management teams dedicated to operating an online marketplace. Even the automakers, which have put hundreds of millions of dollars of business through their exchanges, are not yet operating a true digital marketplace, where value-added services exist for buyers and sellers. Instead, most are simply using the Internet to automate an auction RFP process. But online exchange CarsDirect.com’s recently announced alliance with bricks-and-mortar megadealers UnitedAuto Group and Penske Automotive Group represents a step forward. Read the full article on Harvard Business Online.

The full version of this article is available on Harvard Business Online (subscription required).

The Idea in Brief

Accel partners’ July shut-down of Fleetscape.com, an electronic marketplace for the trucking industry, signals trouble for B2B exchanges. Estimates of commerce to be captured in B2B exchanges by 2004 range from $1 to $2 trillion, and Fleetscape was just one of about 700 electronic exchanges that had sprung up in North America by last March. Then, in April, the market caught on to a dirty little secret: although built on assumptions of thick margins, high volumes, and low capital requirements, most exchanges had yet to host a transaction—and for those that had, the margins were razor thin. Stock prices of B2B marketplace darlings like Ariba and VerticalNet plummeted 60%–80%. Start-up Fleetscape skidded right off the street.

It’s not the end of the road for such ventures, but even the best of them are in for some rough riding—and the path to riches is narrow. In theory, a B2B exchange makes perfect sense. Buyers are exposed to new sellers, and sellers are exposed to new buyers. Product, search, and transaction costs are reduced; information exchange is enhanced. And as information is shared and leveraged across industry participants, supply chain relationships are improved and costs dramatically reduced. We’ve seen this scenario played out on the B2C side in the success of eBay and Priceline.

But most B2B exchanges rely on a few sweet spots in the market: areas in which supply and demand are fragmented, transaction costs are high, or the pricing mechanism is inefficient. Ventro’s Chemdex, which aggregates bioreagents for academic researchers and private laboratories, has hit several of these sweet spots. As a result, it leads the pack in the fragmented life-sciences market, which has historically had high search costs. Having grown to $54 million in revenue for the 12 months ended March 30, 2000, Chemdex seems to be on a path to profitability. But take away the sweet spots—that is, try to operate in suboptimal conditions characterized by highly evolved distributors, low margins, and consolidated supply—and you’ve got a losing proposition.

How can exchange operators successfully navigate this narrow path to profitability? Here are a few options:

1. Learn from the survivors of the shakeout in the B2C business. Ally with scale players who are looking for expertise. The large consumer-products manufacturers, for example, have something to sell, but they lack speed, technology, and management teams dedicated to operating an online marketplace. Even the automakers, which have put hundreds of millions of dollars of business through their exchanges, are not yet operating a true digital marketplace, where value-added services exist for buyers and sellers. Instead, most are simply using the Internet to automate an auction RFP process. But online exchange CarsDirect.com’s recently announced alliance with bricks-and-mortar megadealers UnitedAuto Group and Penske Automotive Group represents a step forward.

Read the full article on Harvard Business Online.