ComputerLink articles by Brian Pitre

B2B Exchanges

To the surprise of many, the largest opportunity on the Internet is in the "Business to Business" or B2B market. Most people perceive that the best opportunity on the Internet surrounds the dot.com's, such as Amazon.com or CDNow.com. Generally, these companies are referred to as the "Business to Consumer", shortened simply to B2C market. In fact, the Gartner Group predicts that the B2B marketplace is expected to grow to over 88% of the dollar volume of transactions made over the Internet. This would make the B2B marketplace about 10 times the size of the B2C marketplace.

In the B2B marketplace there is a new form of community developing, generally referred to as the B2B exchange. These exchanges are designed to facilitate the "many to many" type of environment, so that sellers and buyers can easily and efficiently find one another. Think of how much easier it is to search over the Internet than it is to thumb through scores of catalogs for different suppliers. Not to mention, the need for travelling to meet perspective buyers and sellers is eliminated.

There are generally two types of B2B exchanges. First, there are the general exchanges with many vertical subgroups. Two great examples of these types of exchanges that are rapidly growing include Verticalnet.net and Freemarkets.com. The second type is the industry specific exchanges, such as Plasticnet.com, chemdex.com and E-steel.com. All of these new "Infomediaries" are beginning to define a new landscape of B2B business transactions that are vastly streamlined over the Internet.

The attraction for businesses to engage exchanges over the Internet includes small buyers gaining access to large sellers that would not previously give them the time of day and small sellers gaining access to large buyers. Large sellers are the ones most reluctant because they already have access to large buyers and they believe erosion of their prices would be the result.

One key to a successful exchange is having a large number of both buyers and sellers. When critical mass is reached at an exchange, say a million buyers and a million sellers; both sides of the process win. With that type of critical mass both buyers and sellers can be assured in that market they can always buy and sell products.

The exchange model begins to deteriorate the former volume agreement and long-term contracts for raw materials or sub-assembly components needed in the production of a product. In this new exchange model of business the economies of scale are created and supported by the marketplace, similar to the retail buying groups that were created to group together purchases of many small groups that could compete with large retailers. This aggregation of business is a primary function of exchanges for both buyer and sellers.

In an exchange, transactions become aggregated for both parties of the transaction and provide economies of scale along with pricing that becomes very market driven. In this new market there are similar effects to those of an auction, which allows the market to determine price as opposed to the provider of a product setting a price.

Although finding the best and most competitive price is one of the primary factors in using exchanges, it is not the only reason. Exchange trading partners are also better able to find other purchasing factors beyond price including transit time, mode of transportation, quality, preferred vendors, service-level requirements, and value-added services.

The Infomediaries that build and manage these exchanges make their primary revenue in the form of relatively small transaction fees from buyers and sellers. However, there are supplemental forms of revenue, such as advertising, that also supports their business model. These middlemen are moving quickly to add both buyers and sellers to their environment and are learning that they are only one mouse click away from another competitive exchange.

Over time B2B will conduct the lion's share of transactions over the Internet. Begin to research the Web for the exchange in your specific industry and learn how exchanges can help your company in both the purchase and sale of products. If there is not an exchange that meets your needs, then you may have found one of the most exciting opportunities on the Internet.