Online marketplaces for small and medium sized businesses

Online marketplaces for small and medium sized businesses
When do they make sense?

Based on the fragmented market structure in which small and medium-sized businesses operate, a question that I get asked very often relates to the value of participating in online marketplaces. This question has become even more relevant recently since several e-marketplaces are now available for specific industries or product categories (Hint: you can find one for your specific need by doing a quick Google search). In the highly competitive business environment of today, it is also a cost effective way to get new leads and generate new sales.

In my opinion, the reasons for the slower emergence of e-marketplaces for small and medium-sized businesses are threefold. One, the fragmented nature of the businesses did not appear to be as suited for online marketplaces which initially made more sense for high-volume, commoditized products. Secondly, many small and medium sized businesses are still not savvy enough about e-commerce and do not have dedicated IT staff to provide the necessary technical support. Finally, the sponsors of electronic marketplaces went after the big fish first.

Does an electronic marketplace make sense?

The small business sector is not as homogeneous as some of the e-marketplaces would like it to be. For instance, let us discuss the value chain for making grocery bags. While polymers can be manufactured by only large companies (e.g. BASF, Dow, etc.) , small and medium sized companies can easily convert it into films, and even smaller companies can convert it into more usable forms like bags. This is true for metals, glass, paper, wood, and all other materials that are used in similar fashion. Thus, while e-marketplaces made sense for commodities in the beginning (which means that for large companies), they did not make sense for grocery bag manufacturers at that time. (Related link: e-Procurement strategies for small businesses)

As I see it, the manner in which business will be conducted in the very near future will be largely dictated by the number of buyers and sellers or the degree of concentration. Of course, this will also determine the power buyers and sellers will have.

Small number of buyers and sellers: If this is a small group, there is no value added by moving to an e-marketplace since the most effective method of doing business would still be through direct sales. In fact, the Internet only provides a better means of communication within the group.

Small number of sellers and large number of buyers: In this scenario, buyers should seriously consider pooling their resources to develop a consortium. This will not only enable lower cost of selling, but the buyers are also likely to benefit through transparent competition.

Large number of sellers and small number of buyers: In this case, the aggregation model is more likely to serve the interests of both buyers and sellers. A large number of sellers pursuing a small number of buyers is inherently an inefficient selling process and aggregation can eliminate some of these inefficiencies.

Large number of buyers and sellers: This seems to be one of the most common scenarios in the small and medium-sized businesses sector. Such a high degree of fragmentation creates new opportunities for both buyers and sellers when they can meet each other in an e-marketplace. This also enables both buyers and sellers to find each other easily and cost-effectively.

iProceed.com's framework for evaluating when online marketplaces make sense for small and medium sized businesses If and when should you join an online marketplace?

At this time, it is becoming extremely hard to predict which business model is going to win in the long run. That is clear not only from the speed at which business models are being changed but also from the nervousness in the stock market.

Online marketplaces do provide a relatively cost-effective means of bringing buyers and sellers together, but they have to generate a large volume of trade to become profitable themselves. So far the only companies that have benefited from participating in an e-marketplace are buyers and sellers. This phenomenon partly explains why buyers and sellers are increasingly coming together to sponsor such marketplaces.

Since the initial results have shown positive results for both buyers and sellers, it is a good idea to seriously consider participating in even more than one e-marketplace. But do not fire your sales staff or purchasing teams yet. You should continue to be proactive in embracing new business models but also have the flexibility to change gears if the market dynamics changes.

Future of internet and e-business The end of B2B marketplaces

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