Digital Marketplaces - Types and Functions - Publications

themanager.org

Home

Publications

German Portal

Digital Marketplaces – Types and Functions

The recent years have seen the rise of a new business model on the Internet: Digital marketplaces. They bring together large numbers of buyers and sellers in a way that has not been possible in the physical world.

Kaplan and Mohanbir (2000) state the following functions and characteristics of digital marketplaces, which they call electronic hubs or e-hubs:

· They bring together huge numbers of buyers and sellers.

· They automate transactions.

· They expand the choices available to buyers.

· They give sellers access to new customers.

· They reduce transaction costs for all players.

· They are software based, so can scale with minimal additional investment.

But most of the digital markets existent so far do more than just facilitating electronic commerce. Many of them have taken the form of portals, focused on certain industries (vertical portals, vortals) or on certain functions for a variety of industries (horizontal portals). There they provide a large source of information, news, etc. and facilitate contacts amongst member companies. Hence these marketplaces are a good place for companies to extend their networks, a process that will gain even more importance in future.

It is widely known that digital marketplaces can help to achieve significant cost savings. For instance, GE was able to save with its procurement marketplace Trading Process Network (TPN) as much as 30 % of labour involved in procurement, 5 % - 20 % of material costs and 9 – 12 days in the process of identifying suppliers, preparing a request for a bid, negotiate price and award a contract to a supplier. However, it would be a mistake to believe that companies make their savings just by increasing their market power and hence squeezing the margins of their partners. Often cost savings can be reached for both partners in a deal. An important issue are time savings, for instance for research, negotiation, fulfillment etc. Digital marketplaces take over these and more functions so that companies are able to concentrate on their core activities. Enhanced budgetary control, elimination of administrative errors, shorter purchasing cycle times and better information management may be other benefits for the parties involved.

Kaplan and Mohanbir have developed a classification scheme for digital marketplaces. Their criteria are what and how companies purchase. On the What-side they distinguish manufacturing inputs (raw materials and components that go directly into a product or service) and operating inputs (not parts of the finished products, maintenance, repair, operating – MRO). On the How-side they identify systematic sourcing (negotiated contracts with qualified suppliers) and spot sourcing (fulfilment of an immediate need at the lowest possible price). From these criteria they develop the following B2B matrix:

Exchanges are vertical markets that enable spot sourcing of manufacturing inputs, hence they allow smoothing out peaks and valleys in supply and demand.

Yield managers are horizontal markets that enable spot sourcing of common operating inputs. They enable companies to extend or contract their operations at short notice.

Catalog hubs are vertical markets that enable systematic sourcing of manufacturing inputs. They automate the sourcing of non-commodity manufacturing inputs.

MRO hubs are horizontal markets that enable systematic sourcing of operating inputs. These tend to be low-value goods with relatively high transaction costs so that the digital marketplace creates value by increasing efficiencies in the procurement process.

It is important to keep in mind that digital marketplaces are not only about physical goods. There are also marketplaces that bring together supply and demand for services. Examples are the evolving marketplaces for freelancers and companies that look for short-term contractors. The benefits are obvious. The companies can realise one-off projects or smooth out activity levels without employing additional people. For the freelancers it is easier to find new assignments and they can realise savings as well. Ants.com takes a 5 % provision from the value of the contract the freelancer closes. However, Rick Davis from Ants.com points out that freelancers normally invest up to 25 % of their time in marketing themselves. Marketplaces like Ants.com reduce this effort significantly.

Kaplan and Mohanbir state further that digital marketplaces create value by two fundamentally different mechanisms: aggregation and matching. The aggregation brings together a large number of buyers and sellers under one virtual roof. Their positions are fixed since prices are pre-negotiated. On the contrary, matching brings together buyers and sellers to negotiate prices on a dynamic and real-time basis. Therefore matching mechanisms are well suitable for spot situations where prices are determined at the moment of purchase. They can take the form of auctions.

According to Kaplan and Mohanbir another criteria for classification of digital marketplaces is bias. Neutral markets are operated by independent third parties and don’t favor buyers over sellers or vice versa. If the marketplace favors sellers (forward aggregators) or buyers (reverse aggregators or reverse auctioneers) it is biased. Berryman et al (1998) classify biased and unbiased digital marketplaces as follows:

Classification by		Characteristics
Kaplan and Mohanbir	Berryman et al	Characteristics
Neutral	Neutral	Auction spaces Business malls
Biased	Seller controlled	Information only sites Vendors sites with ordering
Biased	Buyer controlled	Web site procurement Purchasing agents

Especially in auctions intermediaries play an important role. They provide all necessary infrastructure, trust mechanisms, activity report generation and billing and collection.

Reference:
S. Kaplan and S. Mohanbir, "E-hubs: the new B2B marketplaces", Harvard Business Review, Boston, May/Jun 2000 pp 97