Editorial:
ragingbull.com
"Business-to-business e-commerce markets are cropping up for all
types of products, but it's the pricing structure within an existing
market that helps determine whether the B2B model can
succeed.
Typically, depending on the nature of a good, it is either traded
on a spot basis (at the market price) or through contractual,
fixed-price mechanisms. B2B markets are emerging for both, but
one of the main advantages of the Internet is the capacity for
real-time data transmission. That makes Internet models ideally
suited for variably priced goods and for products where it's
advantageous for pricing to immediately reflect changes in
underlying inputs.
This “dynamic pricing” model is suitable for many sectors, and
like the plethora of consumer auction sites, it will do much to
alter the face of business commerce. Pay attention to firms that
skillfully apply active or multiple-pricing schemes to old
industries, especially those in which dynamic pricing provides a
competitive advantage not duplicable in the offline world. Keep
in mind, however, that contractual pricing is far from the
endangered species list. In fact, it can even be preferred in
situations where the costs of order processing exceed the
underlying product.
Workflow costs
A common theme found throughout most research reports on
these markets is that the main e-commerce drivers are the cost
savings associated with moving business activity to the Net. This
is especially relevant in industries with high workflow costs.
Workflow costs include internal procurement, approval, credit
verification, billing, receivables management and logistics
tracking.
These costs are high in many industries – often as a result of
legacy methods such as fax-and-phone – and are particularly
appropriate for B2B Net market automation. Indeed, the bulk of
B2B companies that have gone public have attacked broad
areas of this market, yet opportunities exist for companies that
target specialized, vertically focused workflow areas.
B2B Internet companies are particularly well suited for industries
in which the underlying good or service has a low value and
process expenses comprise a significant percentage of the
overall cost of the good. That is the case for ordering office
supplies and other activities related to maintenance, repair and
operations. Such industries are likely to remain on fixed-contract
pricing structures.
Management is the key
It's hard to overemphasize the impact that a seasoned
management team can make. The Web is moving away from its
Wild West days, when companies could be started by almost
anyone with a good idea and some programming skills.
Especially in B2B, start-ups are competing against companies
with long-established histories of delivering mission-critical
business lines. Having management with industry experience will
do much to facilitate this and level the playing field.
By dangling stock options in front of purchasing managers,
technology officers and chief executives working at old guard
companies within the industry, B2B start-ups can gain insight into
the inner workings of the industry as well as the many small
nuances that make up business processes. In addition, industry
veterans bring a stamp of credibility, as well as their Rolodexes
to the B2B Internet firm, which helps get the ball rolling in the
pre-launch start-up phase.
Investors should scan hard for emerging B2B companies that wed
innovative Internet technology with a seasoned industry
management team.
First-mover advantage
Much has been written about first-mover advantage as it relates
to B2B, and the term is at risk of becoming one of those
annoying cliches like “paradigm shift” or “new economy” that is
over-applied and has lost its meaning. Nonetheless, although the
B2B arm of Internet commerce moves somewhat slower than
many business-to-commerce segments, we're still on “Internet
time” here, and establishing an early market lead, along with
significant visibility and market presence, will be key as the
industry takes off like so many analysts predict.
The reasoning is simple: Within any industry segment,
competition will stem from a host of new entrants as well as
concerted efforts by offline parties that have deep financial
resources and are fearful of losing market share. In many markets,
the window of opportunity will be short, so there will be limited
time to grow the business to a defensible position. Essentially,
the companies that are first to market with the compelling value
propositions are going to gain market share. The beauty of the
Internet is that, although not unlimited, the models afforded by
the medium are highly scalable. Early movers hold the potential
to grow nearly exponentially, thereby erecting a barrier to entry.
Companies that implement subscription fees, or that require the
purchase of proprietary software, may be at a disadvantage.
Such fees can be a dramatic discouraging factor when trying to
get buyers and vendors to participate, and the B2B upstart may
experience difficulty in reaching critical mass quickly.
Finally, a corollary to this concept is what I term, “revenue
scalability.” How scalable is the revenue source? For example, a
business model based on transaction fees is imminently more
scalable than a subscription-based service (especially if the
overall number of participants in the industry is small). Similarly,
advertising, referral programs and ancillary service schemes (sell
the product cheap and make money on the credit, shipping, etc.)
all have varying levels of revenue scalability, which ultimately
determines how fast revenue growth can occur.
Repeatedly astounded
And that, as they say, is that. The conclusion of this relatively
long-winded exploration of B2B. There have been and will be a
lot of super-hyped sectors surrounding the Internet, and at times
parts of the B2B world appear to be overheated as well. But
since I began taking an earnest look at this space several months
ago, I have been repeatedly astounded. I've been astounded by
the amount of venture money flowing into it; astounded at the
reshuffling at investment banks, shifting the top research guns to
cover B2B; and most of all, astounded at the level of
entrepreneurial energy being expended within industries across
the board.
This could, as many predict, be equal in importance to the
Industrial Revolution, or it could pass into history much as New
Year's Eve did, with much hype and ballyhoo, but little real
effect. Regardless, it will be exciting to watch this segment
unfold over the next few years. Happy hunting!"
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