New economy businesses are facing tough times and Business-to-Business (B2B) marketplaces are no exception. Yet these online markets continue play an important role in B2B worldwide, with B2B sites transaction volumes reaching nearly a trillion U.S. dollars.
These marketplaces are far from identical, as they are sometimes dominated by a few large players (often also customers) or may be independent, serving small buyers and sellers. Some target a specific industry segment, offering a highly customized transaction format, while others offer a broad catalog resembling a community bazaar.
According to the press, there are a variety of possibilities for the future. The Harvard Business Review suggests that the future lay in multiple independent organizations focused on highly specialized activities, and the Wall Street Journal observes that marketplaces established by buyers and/or sellers seem to be capturing an increased share of transactions.
In this industry note, Miklos Sarvary, INSEAD Associate Professor of Marketing, examines how to make sense of these seemingly conflicting trends and how to judge which marketplace format fits which industry context, analyzing issues of fragmented markets, product complexity, and buyer/seller size.
Professor Sarvary suggests that B2B marketplaces function best in fragmented markets where they facilitate transactions by allowing buyers and sellers to overcome prohibitive search costs. However, such costs can only be reduced if the products can be easily categorized. If product complexity is too high, he notes, buyers will not be able to evaluate and compare offers.
He develops a matrix to explore these claims and then turns to the question of buyer and seller levels. Markets, he acknowledges, are often asymmetrical, with more buyers than sellers or visa versa, and he presents a second matrix to analyze the impact of buyer/seller size on the optimal marketplace structure.
His findings indicate that independent B2B marketplaces are likely to exist in markets with intermediate levels of product complexity and market fragmentation on both the buyer and seller sides, and that while markets controlled by a few large players do better starting off, the potential value created by independent matching markets for their participants may be higher.
B2B participants, he concludes, need to analyze carefully their industry along these lines in order to most effectively evaluate the potential of existing and emerging marketplaces.