Reviewed literature shows that despite the undoubted value created by B2B e-marketplaces, and the efficient transacting mechanisms they provide for buyers, suppliers, and intermediaries, the creation of e-marketplaces presents substantial challenges (Dai & Kauffman, 2002a; Rayport & Jaworski, 2002). According to Rayport and Jaworski (2002), these challenges generally are business related rather than technical. As presented in the previous section, a number of new business models that are different and more complex than traditional off-line business models have emerged within the area of B2B e-marketplaces. Some authors (e.g., Bruun et al., 2000; Rayport & Jaworski, 2002) also claim that finding a business model that provides enough value for trading partners to justify the effort and cost of participation might be the greatest challenge to the e-marketplace. But finding an appropriate way of creating value is only one piece of the puzzle; e-marketplaces also have to deal with the challenge of capturing some of the value created through them; that is, they have to formulate appropriate revenue models (Bruun et al., 2002). Without the ability to capture a share of the value that the e-marketplace creates for its participants, the e-marketplace will be unable to achieve profitability (ibid.).
B2B e-marketplaces most often charge transaction fees, either to the buyer or the seller, or to both (Bruun et al., 2002; Sculley & Woods, 2001; Turban & King, 2003). Most transaction fees are based on a percentage of the transaction price, usually amounting to between 1 and 5 percent, but these numbers are expected to decrease as technology evolves (Bloch & Catfolis, 2001). Another source of revenue is subscription (or membership) fees, which are usually fixed annual or monthly fees (ibid.). Finally, e-marketplaces can charge license fees, advertising fees, and fees for value-added services (Sculley & Woods, 2001; Bruun et al., 2002).
According to Bruun et al. (2002), e-marketplaces have to make a thorough evaluation of the advantages and limitations of each type of fee so that they can capture as much value as possible. Table 2.21 presents the advantages and limitations of various revenue sources. In addition, Bruun et al. (2002), suggest that the revenue model should rest on a combination of fees rather than on a single fee type. This would allow the e-marketplace to tie its revenue model more accurately to the value it creates, and make it less vulnerable to competition. But, since the perception of value often differs significantly among different types of customers, it is important for the e-marketplace to know its customers when deciding upon an appropriate revenue model (ibid.).
Table 2.21 The Advantages and Limitations of Various Revenue Sources Fee type When/Who Advantages Limitation
- If process savings are not completely visible, use of the system is discouraged (incentive to move transactions off-line) - Important revenue source
when high level of liquidity (transaction volume) is reached
- The firm might be perceived as a mere transaction facilitator instead of an industry portal or
infomediary
- Transaction fees likely to decrease with time
- In the long term, transaction-based fees need to be linked to changing value proposition
- High up-front revenue - Up-front fee is a barrier to entry for participants
- Creates incentives for many
transactions - Price differentiation is complicated - Customization and back-end
integration leads to lock-in of participants
- Creates inability to scale with growth of the marketplace
- Create incentives to transact - Fixed fee is a barrier to entry for participants
- Price can be differentiated - Possibility to build
additional revenue from new user groups
- Avoid the difficulty of calculating myriad transaction fees for a given complex solution
Fees for value-added services
- Service offering can be differentiated
- Cumbersome process for customers to continually evaluate new services
- Price can be differentiated - Possibility to build
additional revenue from established, as well as new, user groups (third parties)
- Inability to scale with volume - Limited revenue potential - Overdone or badly targeted
advertisements can be a disturbing element on the Web site
- Easy to implement
Source: Compiled from Skinner (2000); Bruun et al. (2002)
Concerning who the e-marketplace should charge, Chung et al. (2001) suggest that the value created through an e-marketplace should be fairly distributed among those parties who contribute to the value of the exchange. In line with this, Bruun et al. (2002) state, for example, that the party benefiting from the increased efficiency achieved through the use of an e-marketplace should be charged.
Several authors (e.g., Bruun et al., 2002; Dou & Chou, 2002; Kaplan & Sawhney, 2000; Laudon & Traver, 2002; Lucking-Reiley & Spulber, 2001; Raisch, 2001;
Ramsdell, 2000; Rayport & Jaworski, 2002; Turban & King, 2003; Wise &
Morrison, 2000) agree that the creation of liquidity represents a major challenge for e-marketplace operators. Liquidity is the result of having a sufficient number of participants in the e-marketplace to achieve a critical mass of buyers and suppliers, as well as a sufficient transaction volume (Raisch, 2001; Turban &
King, 2003). Achieving a critical mass of buyers and sellers is important, because having the greatest liquidity translates into market domination (Sculley & Woods, 2000), and supports economies of scale and scope, which are important drivers of the e-marketplace business model (Bruun et al., 2002). In addition, Turban and King (2003) state that the earlier an e-marketplace achieves the necessary liquidity level, the better its chances will be for survival. However, our overview of e-marketplace literature indicates that achieving critical mass, and thereby liquidity, takes time. According to Rayport and Jaworski (2002), the process of convincing organizations to join the e-marketplace is both long and expensive, despite the fact that the e-marketplace offers its participants appropriate economic incentives. Prospective buyers and suppliers will not join the e-marketplace only on “visionary predictions of the glorious future of B2B e-trade; they must see the benefits in it right now,” according to Lennstrand et al. (2001, p. 18). Bearing in mind the dilemma that a critical mass of buyers and suppliers must be attracted simultaneously (Lennstrand et al., 2001), the greatest challenge for new e-marketplace operators is to bring the first group of strategic buyers and suppliers into the marketplace and complete the first transactions (Rayport & Jaworski, 2002). A good strategy for building liquidity should, according to Rayport and Jaworski (2002), not only cover attracting a critical mass of buyers and sellers simultaneously, but also include exploiting network externalities14 and extending liquidity continuously.
14 A technology or product exhibits network externalities when it becomes more valuable to users as more people take advantage of it. For example, the more people who are connected to a network within the Internet, the more valuable that network is (Afuah & Tucci, 2001). In an e-marketplace setting, this means that the e-marketplace with the largest base of participants within an industry has a great advantage as the positive network externalities make that e-marketplace even more attractive to join (Bruun et al., 2002).
Both of the key challenges of creating liquidity and capturing value are complex and must be met for an e-marketplace to become successful (Bruun et al., 2002).
In addition, these two challenges are related, as there is no value to capture unless there is a sufficient and sustainable flow of transactions from a critical mass of buyers and suppliers (Chung et al., 2001). But, according to Bruun et al. (2002), the tricky part is to handle the trade-off that exists between the two tasks. On the one hand, in an attempt to rapidly attract many participants, the e-marketplace might keep the price of its services low, which naturally affects its ability to generate profit. On the other hand, by focusing on capturing value, the e-marketplace runs the risk that prospective buyers and suppliers may hesitate to join, and turn instead to the marketplace’s competitors. Currently, most e-marketplaces prioritize liquidity building, due to the competition they experience (ibid.).
Aside from challenges associated with business models, building liquidity, and capturing value, the literature review indicates that there are additional challenges concerning catalogue content management, internationalization, and adoption that e-marketplaces have to meet to become successful (Rayport & Jaworski, 2002). For the e-marketplace operator, catalogue content management involves challenges associated with location of the content (i.e., internal storage versus external access), external content (i.e., quality, search, and normalization), taxonomy definition and maintenance, mapping to taxonomy, and supplier updates (ibid.). Concerning internationalization, the challenge for e-marketplace operators, according to Rayport and Jaworski (2002), is to enable the use of multiple languages and currencies to facilitate transactions across geographical boundaries.
Finally, Andrew et al. (2000) claim that developing and creating high-value-added services is challenging for e-marketplaces as technology is not in place to enable more sophisticated forms of real-time collaboration among multiple participants.
Besides establishing an appropriate technological infrastructure and allocating a considerable amount of time and resources, improving collaboration requires huge changes in internal processes and behaviors (ibid.).
Table 2.22 presents a summary of major challenges, as pointed out in B2B e-marketplace literature.
Table 2.22 Major Challenges for B2B e-Marketplaces
Source Challenges
Bruun et al. (2002); Rayport & Jaworski (2002)
Finding an appropriate business model
Bruun et al. (2002) Capturing value
Bruun et al. (2002); Dou & Chou (2002);
Kaplan & Sawhney (2000); Laudon & Traver (2002); Lucking-Reiley & Spulber (2001);
Raisch, (2001); Ramsdell (2000); Rayport &
Jaworski (2002); Turban & King (2003); Wise
& Morrison (2000)
Creating liquidity
Rayport & Jaworski (2002) Adoption
Rayport & Jaworski (2002) Catalogue content management
Rayport & Jaworski (2002) Internationalization Developing and creating high-value-added services
Andrew et al. (2000)
Not all e-marketplaces, however, manage to successfully meet these challenges.
Although e-marketplaces are a quite recent phenomenon, there are already many examples of successes and failures among them (Bruun et al., 2002).