After reading my earlier post on B2B e-Marketplaces, someone asked me – Why write about the B2B e-Marketplaces? It was a long time ago and most of them failed. So who cares? I think George Santayana’s famous quotation is applicable here “Those who cannot learn from history are doomed to repeat it.” This concept is more than appropriate in the B2B e-Commerce sector today when you consider all of the investments in electronic invoicing vendors and supply chain finance marketplaces made during recent years. There is nothing short of an irrational exuberance afoot as everyone from financial institutions to venture capitalists to independent software vendors has been pouring millions in to these technologies. Much like the e-marketplaces, these emerging concepts have strong value propositions, but are over-capitalized with 10X more vendors than the market will support. So I would maintain that there is a great deal to be learned from why the B2B e-marketplaces of the dot com era failed, which is the subject of this post.
Why did the marketplaces fail?
Below I outline the top 10 reasons that the e-marketplaces ultimately failed.
B2B e-Marketplaces – Find Your Partner Online
- More than Price – One of the key services the original e-marketplaces offered was to anonymously match buyers and sellers of goods. Reverse auctions could be utilized to effectively commoditize all items minimizing the price paid by buyers. The on-line matching model worked well for certain scenarios such as the liquidation of excess apparel, indirect procurement of MRO goods and the purchasing of hard-to-find electrical components. However, for most production materials used in the retail, automotive, aerospace, high tech and industrial manufacturing sectors, purchasing decisions were based upon a broader range of criteria beyond price such as quality, service, capacity, and performance.
- Insufficient Liquidity – Many of the independent marketplaces were focused on auctions, which depend upon broad participation to achieve their goals of lowering or raising the price for an item. Suppliers viewed reverse auctions as a mechanism for buyers to squeeze price concessions of them. They preferred to sell through traditional channels in order to emphasize differentiating aspects of their proposition such as quality, service and performance. Consequently, many suppliers avoided the auction process wherever possible. The result was a lack of liquidity that reduced the value proposition of auctions and the limited associated fees. Private and consortia marketplaces did not have this problem as they gained a critical mass of liquidity from their equity owners.
- Lack of Neutrality – Consortia marketplaces struggled with a perceived lack of neutrality. While many buyers and sellers took equity stakes in marketplaces others stood on the sidelines. For the consortia marketplaces to grow they needed to gain the participation of additional non-equity organizations. However, these non-equity traders were not comfortable sharing sensitive pricing and product information on an exchange owned by their competitors. Nor were they interested in paying transaction fees which ultimately flowed back to these same competitors.
- Lack of Integration – Independent and consortia exchanges had the advantage of being freed from the limitations of legacy applications. The freedom enabled the marketplaces to quickly develop new functionality. However, the lack of integration to fulfillment, clearing and settlement systems proved to be a significant disadvantage as well. Without integration to ERP applications for key functions such as product catalogs, order-fulfillment, transportation management and invoice processing, the ROI from marketplaces was significantly reduced.
- Governance Models – One of the major challenges consortia marketplaces faced was the governance model with their customers/owners. Not only were there many different owners of these exchanges, but most were cutthroat competitors, which complicated decision making and strategy. For example, the consumer goods marketplace Transora had 49 different equity investors! Private marketplaces, having a single owner, could make decisions and execute much faster.
- Discounted Relationships – Marketplaces underestimated the importance of long-standing personal and corporate relationships existing in the value chain. Buyer relationships with suppliers extended decades or in some cases an entire century. These dynamics were unlikely to be disrupted for a 10% price gain through an online auction.
- Cultural Resistance – Another factor marketplaces underestimated was cultural resistance. Middle-aged buyers and suppliers accustomed to negotiating purchases over the phone were reluctant to quickly transition to e-marketplaces. These new systems were unproven will relatively low transaction volumes. Furthermore they threatened to potentially eliminate the need for the very end-users (buyers and sellers) they aimed to support.
- Disintermediation – Middlemen such as distributors, wholesalers and brokers were at risk of disintermediation from e-marketplaces. The value proposition of these middlemen was to connect large suppliers to the millions of small businesses that were uneconomical to serve directly. However, new marketplace technology threatened to potentially change the dynamics, dramatically reducing the cost of direct sales to the small business sector.
- Inadequate Revenues – Most of the independent and consortia marketplaces, which depended upon revenue generation to remain active, failed to develop a pricing model that appealed to customers. Some exchanges assessed transaction fees, representing a percentage (0.5% to 8.0%) of the dollar value of goods bought or sold. Others charged annual subscription fees for unlimited usage of the marketplace services. A few creative exchanges experimented with advertising models and referral fees. In the end, customers were reluctant to pay. Marketplaces failed to generate sufficient revenues to become self-sustaining.
- Irrational Exuberance – Much like the B2C e-retailers of the Dot Com era, B2B e-marketplaces suffered from irrational exuberance about the market opportunities in the supply chain sector. There was a strong value proposition to be gained from features such as auctions, e-procurement, e-catalogs, supplier portals and collaborative demand planning, as evidenced by the widespread use of these technologies in 2009. However, the year 2000 market opportunity and subsequent growth rates were much smaller than investors anticipated, resulting in a sector 100X over-capitalized relative to actual demand.
Why Study History?
These are just a few of the key factors that I think influenced the demise of the marketplaces, but there are certainly others. What is your opinion? Comment below to let me know what you think.