Business-to-Business (B2B) Auctions

Business-to-Business (B2B) exchanges are new types of ventures that were developed with the explosion of the Internet in the late 1990’s. A B2B exchange is a type of business that is conducted between multiple companies, rather than between a company and an individual consumer. They are also known as market places or e-market places that allow buyers and sellers to collaborate online to exchange goods and services.[1] This new way of doing business via the Internet improved the buying and selling industries. For example, an advantage to the buyer is the large amount of money that could be saved by doing business through a B2B exchange and the advantage for the seller is the opportunity to reach out to new customers.[2]

B2B marketplaces can be divided into two different types of markets, horizontal or vertical. Horizontal markets cross industry boundaries by linking companies that perform a multitude of services. Vertical markets are industry specific and allow companies to focus on one service. There are many different types of business models within each of these markets or hubs. A few of the different types of models that exist are English auctions, reverse auctions, dutch auctions, exchanges and barters. Each of these models cater to a specific group of companies and individuals.

Some major players in the industry range from companies that provide a variety of items to companies that are narrowed to a specific industry. Terrecom is a leading B2B exchange that brings organizational buyers seeking a wide variety of goods and services together with organizational sellers seeking to find these particular products.[3] Another B2B exchange is QcomX, which brings buyers and sellers of IT services together for negotiation of goods.[4] FreeMarkets is another leading B2B eMarketPlace that saves millions of dollars for businesses that want to collaborate in the acquisition of a variety of merchandise and services. They are able to provide a wide venue of choice for these businesses including: injection molded plastic parts, coal, and tax preparation services.[5]

Economic Trends

In the late 1990’s, B2B began to shape how industries of all types traded goods. This new supply chain model enabled companies to lower cost by matching buyers and sellers faster, lowering inventory levels and allowed companies to expand globally. Industry wide it is estimated to have created a cost savings of 2 to 16 percent from the “cost of goods sold” (COGS), which is expected to create double digit gains in net income for companies.[6] According to the Gartner Group, B2B revenues reached US $433 billion in 2000 and are expected to reach around US $2 to $6 trillion by 2004. Forrester Research also estimates that the revenue from e-commerce will reach around US $6.8 trillion in 2004. This substantial increase will have a major impact on economies around the world. In fact, Brookes and Wahhaj argue that the impact to the United States economy from B2B revenues will have a greater impact than normal on innovation and productivity. Therefore, due to the B2B revenues, the GDP will increase by 0.25 percent a year.[7] The main factors that have fueled the economic growth in B2B transactions are: increased focus on efficiency, improved security, new technologies, lower transactions cost, and increased user satisfaction. Of all the different business models in the B2B market space, reverse auctions currently has the largest positive impact on revenues. Although the e-commerce business is changing rapidly, any of the other business models can influence revenue growth in other areas. A great deal of economic potential can come from B2B models and other various auction types, but there are consequences as well. Many of the firms that exist today to connect suppliers and buyers will either be out of business or consolidated within the next few years. As companies look for stability in their order procurement and transaction management process, they will be hesitant to deal with companies that might not be around in the future. Another probable economic impact that would hinder the B2B market is global trade. As governments and politicians try to deal with regulatory matters and trade issues, the B2B markets will become distorted with political matters instead of the improved efficiency. According to Paul Strassmann of ComputerWorld, politics will shape the B2B landscape and not technology.[8] There are positive and negative impacts as well as roadblocks in the B2B markets, but one thing is for certain and that is B2B is here to stay. Even though many research groups predict huge revenue gains from B2B, the true economic impact it will have on companies and countries is uncertain.

Marketing Mix

The marketing mix refers to the combination of elements that a company uses to market its product. It takes work and dedicated resources to create the best marketing mix for an item. Each respected company must gauge both the market (prospects and customers) and the competitors properly. The five P’s of marketing refers to the following, Product, Price, Packaging, Place, and Promotion. This defines the categories of the marketing mix. Since the B2B industry is primarily a service related industry, packaging will not be discussed in the marketing mix for this industry.

The product in B2B companies is the service provided to both the buying organizations and selling organizations to auction particular items for a reduced cost to the buyer. The buyer usually requires a set standard design presented to the B2B company that is to be used to screen potential sellers and resolve all issues before bidding begins. This type of auction creates new client opportunities for sellers who would normally be limited to their established client base. This requires that the B2B company, among other things, build into each respected site a feature that monitors a buyer’s spending limits, alerts them when they exceed their limit, and sends some form of notification to executives for further spending approvals.[9] In a recent survey, it was determined that in the near future services will include linking purchases with a companies distribution schedule, integrating transactions with financial ledgers, and settling buyer and seller disputes.[10]

The price is usually the key element in the marketing mix and generates strong responses in customers and competitors. Pricing strategies might include setting the price at ten percent below the nearest competitor or setting a price that is twenty percent above the company costs, which could put a number of different scenarios on pricing decisions. Many B2B sites employ a transaction fee based on the buyer and seller transactions. Some also incorporate a flat fee over a length of time or contract between the buyer and the B2B company.[11] Due to the amount of savings that each industry has received from B2B transactions, the percentage points added to each sell from the B2B service has seen sufficient value and the repeat business is catering more to the outstanding service and the potential clients each side brings to the site of a B2B company rather than the cost differences between sites.[12]

B2B distribution in the marketing mix refers to sales channels on the websites or interactive mediums presented to both the buyers and the suppliers. Navigation through the site should be designed in a simple, clear, and consistent manner. The customers want something that is functional and informative.[13] Most B2B companies employ software design teams and gather extensive customer analysis from feedback to develop an ever-changing software medium that offers fast informative exchanges between both buyers and sellers, such as Freemarket’s Bidwareâ and Bidserverâ software designs.[14] While the services that B2B companies provide appear to be the premier asset to insure repeat customers, the interface site, or sales distribution channel in the marketing mix, is the one concrete visual interaction that both the buyer and seller use to communicate transactions. This interactive medium bares the whole being of the B2B company and therefore demands a great deal of attention and resources to constantly keep at the cutting edge of software development.[15]

The promotion of B2B services is how various companies choose to highlight respective B2B companies to industry leaders. Chemdex is an Internet company that created a forum for buyers and sellers of laboratory products in 1997. It initially waved all fees to persuade companies such as SmithKline, Beecham, Harvard University, and Genetech to use its site.[16] Chemdex also suggested that each company bring their supplier companies, and when each did the site had something to offer to other prospective buyers and sellers.[17] Considering that each B2B company has received some initial traffic through promotion strategies, the objective is to gain repeat visits and further referrals. One way B2B companies have promoted repeat traffic is by providing industry related articles that are up to date and informative on new technologies or product related information that is useful to both suppliers and buyers in each respected field.[18] Another helpful tool that B2B companies have implemented on the website is a discussion format that facilitates the discussion of any of the companies services, other buyer or seller related incidents, and provides feedback that can be beneficial to all parties if monitored correctly.[19]

Gains and Risk in the B2B Industry

Participation in B2B exchanges is a way for buyers to save money and for sellers to meet new clients. B2B exchanges, like any type of exchange, may not suite all companies, since gains and risks are always involved. This affects both the buyers and the sellers. However, all persons involved or that want to be involved in a particular exchange can avoid detrimental risks if they research for information before participating in B2B exchanges.[20]

Buyers will experience gains that include one stop comparison-shopping saving them a great deal of time, eliminating the need to contact multiple suppliers, and comparing the best prices. Buyers can shop at any time of the day gaining access to new vendors, which were not available in the past. Buyers can also encounter risks. For example, a buyer replacing a trusted vendor with an unknown source can be a huge risk where liability is concerned. If the company chooses to go with the new vendor then the risk on whether the vendor is reliable or not will be answered over time and must be taken in order to find out if the new vendor is competent and dependable. Buyers when using online tools no longer experience the customer service that comes with brick and mortar shops. For instance, most brick and mortar shops rely on customer service where as online stores rely on low prices to attract their customer base.[21]

Suppliers as well as buyers experience gains and risks. Suppliers have the ability to join an online exchange without creating their own online store. They are able to reach out to new customers in order to increase the client base. Storing extra inventory can be used to ensure inventory is in stock when exchange buyers make a purchase. On the other hand, a risk that the supplier will encounter is the loss of direct customer interaction and relationships because they will no longer provide customer service. A supplier will also have to face direct price wars where the buyers compare prices of goods and services for the best deal. A supplier must also take into consideration that they must begin to pay a transaction fee, and promote business to the fullest in order to survive.[22]

Issues and Problems in the B2B Industry

Collusion and deceit have caused many problems within the auction industry because all auction types can be manipulated. According to the website, www.fraud.org, online auctions were the number one source (68%) of complaints in 1998, up from 26% in 1997. In 1999, things worsened as online auctions accounted for 87% of complaints. This caused serious trust issues amongst businesses causing the need for escrow, credit, and evaluation and performance data on auction participants.

Another problem in current B2B auction industries is that there are significantly higher accountability requirements to those potential B2B auction participants like purchasing managers, inventory managers and channel marketing directors. These managers must understand auctions thoroughly and be able to explain and justify their use of auctions to management. Not only must they know about the universe of auction sites, auction methods and their variations, but they must also know when and why to use (or not use) a particular site and method. However, current auction sites, particularly B2B auction sites, provide very limited explanation of the various auction methods that can be used on their site. Consider a typical purchasing manager’s accountability; every purchase through every channel must be justifiable. In addition, the use of non-traditional channels must be explained with regard to the already approved, traditional channels including catalogues and approved vendors. These managers face far greater risks than typical consumers face in B2C (Business to Consumer) and C2C (Consumer to Consumer) auctions. The potential financial consequences of bad decisions are greater and the personal career consequences can be greater as well. These obviously prevent managers from actively participating in B2B auctions.[23]

Future Projections for B2B Auctions

According to market research, cost savings will drive the initial adoption of B2B e-commerce. B2B e-commerce will increase worldwide in revenues going from US $300 billion in the year 2000 to approximately US $4 to $8 trillion by the year 2005. See the comparative estimates table below.

	2000	2001	2002	2003	2004	2005
eMarketer	$278	$474	$823	$1409	$2637	--
AMR Research	$371	$704	$1375	$2261	$3350	$4739
Computer Economics	$3068	$5232	$6815	$9907	--	--
Forrester Research	$604	$1138	$2061	$3694	$6335	--
IDC	$282	$516	$917	$1573	$2655	$4329
Garter Group	$433	$919	$1929	$3632	$5950	$8530
Morgan Stanley Dean Witter	$200	$721	$1378	--	--	--
Goldman Sachs &Co.	$357	$740	$1304	$2088	$3201	--
Ovum	$218	$345	$543	$858	$1400	--

Table 1: Comparative Estimates: B2B E-Commerce Worldwide, 2000 – 2005 (In billions)[24]

Among B2B e-Commerce, four industry sectors are (1) Aerospace and defense, (2) chemicals, (3) electronics, and (4) motor vehicle and parts are expected to top US $500 billion in B2B revenues within the next five years. The only industry studied that will not exceed US $100 billion in online trading by 2005 is agriculture. The rise of the B2B commerce in revenues will mainly stem from the growth of online B2B auction sites. Over 71% of businesses will at least try and experiment with online auctions.

As we know, most of the problems in the purchasing process are due to poor information flow between buyers and the total pool of potential suppliers. In a reverse auction, a company states its need for services or products and sellers bid to fulfill that need. So for buyers, the B2B reverse auction system ensures lower prices in a quicker time than any other procurement method. This type of B2B auction might also have more potential increase for space. For instance, FreeMarkets.com, which hosts reverse auctions of industrial goods and services, revenues plus fees for the year ended on December 31, 2001 and were at approximately US $158.8 million, compared to US $91.3 million in 2000, an increase of 74%. The number of customers served increased 25% from 100 customers in 2000 to 125 customers in 2001.[25] It is expected that this increase shall continue in the next few years for FreeMarkets. As for the other three types of B2B auctions, they should also have great potential increase in the next few years. It is said that more than 85% of companies will be involved in B2B auctions either as buyers or sellers.

Business-to-Business (B2B) Auctions

GROUP 4

Britany Cage

Business-to-Business (B2B) Auctions

Economic Trends

Marketing Mix

Gains and Risk in the B2B Industry

Issues and Problems in the B2B Industry

Future Projections for B2B Auctions