Vertical Net

B2B E-Commerce Concepts
When does one use the catalog and auction models in b2b e-
commerce?
The Catalog model is best when:
• Transactions Are Frequent or ‘Small Ticket’
• Buyers and Suppliers Can Be Pre-Qualified
• ‘Rules of Exchange’ Are Well-Defined
• Demand Is Predictable
• Price Doesn’t Vary Too Much
What is a b2b exchange?
• A true B2B Exchange brings multiple buyers and sellers together in a
central market space, enabling buyers and sellers to transact with
each other at dynamic prices which are determined in accordance
with the rules of the exchange.
What should an exchange offer?
• Critical mass of volume buyers and sellers
• Logistics, payment clearing and settlement services
• Certification of users
• Self-regulation
• Confidential and anonymous transactions
• Transparent price discovery
What should an exchange offer?
• Multiple price-setting mechanisms
• Dissemination of pricing information and history
• Standardization of business rules and structured content
• An Exchange community
• Low cost connection of buyers and sellers
• Maintenance of market integrity
commerce?
The Catalog model is best when:
• Transactions Are Frequent or ‘Small Ticket’
• Buyers and Suppliers Can Be Pre-Qualified
• ‘Rules of Exchange’ Are Well-Defined
• Demand Is Predictable
• Price Doesn’t Vary Too Much
commerce?
Auctions are best when:
• Items Are Unique or Perishable
• Buyers Have Different Perceptions of Value
• Buyer Values Are “Affiliated”
• Auction Timing Is Convenient
VerticalNet
(www.verticalnet.com)
Synopsis:
• VerticalNet is a leading operator of online vertical trade communities
focusing specifically on the business-to-business segment of the Internet, it
has a stable of more than 50 Web sites spanning industries such as
communications, health care, and sciences.
• Among its offerings are Water Online (municipal water supply and
wastewater treatment) and Chemical Online (chemical processing).
VerticalNet’s industry-specific Web sites offer features such as online
shopping, buyer’s guides, and news.
• As leading creator of targeted business-to-business vertical trade
communities on the Internet, VerticalNet is now trying to expand its model
to facilitate e-commerce as well.
• Mark Walsh, the CEO of VerticalNet, has to decide how far he can extend
the firm’s business model without affecting his current franchise negatively.
Lead Questions
What do you think of the specific criteria that
VerticalNet uses to select vertical markets to enter?
• Criteria that the firm uses to choose which vertical markets to enter.
They include:
• The markets need to be large in size, at least $8 billion in annual sales with over $10
million in advertising—the question that needs to be asked here is whether these are
large markets or not?
• For a global perspective the markets are truly not very large. They do realize that the
firm is not willing to enter niche markets as such.
• The $10 million advertising budget—this is a very small number and doesn’t represent
sufficient potential for the firm especially if it is going to remain in the content and
community space.
• The markets need to be fragmented [with] many buyers and many sellers.
• The firm doesn’t want a few buyers or sellers to dominate the market
• ”What are the types of markets that the firm is likely to serve given its
business model?”
• A large buyer or seller is likely to want create the marketplace itself along with other
large buyers/sellers.
• A trend that has revealed itself in the year 2000.
• Major buyers like Ford, GM, Daimler-Chrysler have opted to set up their own
marketplace called Covisint. Most of the major oil, chemical companies have done
the same thing.
• The PC manufacturers have created their own marketplace for MRO product
purchases. VeticalNet has anticipated the fact that, as a new entrant it is going to
face hurdles trying to sustain independent marketplaces in the face of incumbent
firms setting up their own markets and exchanges.
• There also needs to be a history of new product/service introductions in the industry.
New product introductions would mean that sellers would seek avenues to communicate
the details of their new offerings and this is a source of advertising revenues for
VerticalNet.
• The market should be global in nature with buyers and sellers coming from all parts of
the world, North America, Europe, Japan, and other regions.
• VerticalNet is looking at the globalization of markets as an opportunity.
• It believes that markets that were local due to cost constraints in the past might be ripe
for globalization in the Internet world that is able to reduce search, verification,
transaction, and service costs in buyer-seller relationships.
• Most of the buyers and sellers should already have on-line access to the Web. The firm is
clearly not interested in trying to educate markets and bring them online. They believe
that this is too expensive an exercise. By being very selective in its market entry
decision, VerticalNet would like to avoid the burden of having to educate the market,
build critical mass, and then conduct business. The firm is particular that it doesn’t
spend its precious resources creating markets; they prefer transforming ones that are
ready for change.
• Purchases should account for a significant percentage of the seller’s revenues. This is a
clear indication of which side the firm is planning to be. Unlike most other players that
are buyer-centric, VerticalNet is a sell-side player. It is positioning itself as a partner for
sellers that would like to create a digital sales channel to serve their existing customers
more efficiently and, in addition, locate and profitably serve new customers all over the
globe.
Who do you think will use VerticalNet’s
services?
The main objective here is to identify the types of buyer/seller interactions or
relationships that would be best served by the VerticalNet model.
Large Buyers/Large Sellers
• In general, these relationships tend to be close, as each firm is often one of the
other’s best customers or suppliers, respectively. Typically, the purchase volumes
are large enough to permit these pairs to deal directly with one another. Large
sellers often offer special value added services to their largest customers as well
as offering their most competitive prices and preferential order processing. Large
buyers, in return, often pledge to purchase a substantial portion of their sales
from these suppliers.
• For a repurchase of a commodity product, the large buyer/large seller interaction
is often streamlined to make procurement more efficient. Whether it be a Dell
Computer or a GE, large sellers and large buyers have been in the process of
implementing automatic purchasing systems that increase the efficiency of the
procurement process. Such systems can involve standardized pricing and
occasionally inventory audits and the like. Taken together at the moment, such
systems can benefit both sides through increased efficiency.
• Ariba, I2 Technologies, and Commerce One as players that are
focused on this segment.
• Large customers are unlikely to let any intermediary come in between
them and their largest customers.
• Ariba and Commerce One were initially focused on the relationship
between large buyers and mid to small size suppliers.
• Freemarkets, on the other hand, is focused on serving the large
buyers dealing with large and mid-sized buyers.
Initial focus of Ariba,

Oracle, and
Commerce One
Freemarket’s
focus
• For a new capital equipment purchase, this interaction is somewhat similar. The
seller is most likely to have a dedicated salesforce that has been calling on the
customer for a long time. In all likelihood, this account team has closely worked
with all the members of the customer’s DMU right from the need identification
stage
• For major capital equipment purchases and for consumables and supplies that
are purchased in large quantities, VerticalNet does not provide anything that is
superior to the large seller’s capabilities.
• The only role that VerticalNet could play is serving as an advertising medium for
the seller.
• The purchasing staff of large firms is already aware of the sellers and that
advertising on VerticalNet’s website will be of marginal value to the sellers.
Large Buyers/Small Seller
• For MRO purchases, large buyers are more likely to set up their own sites on the
Internet. Any supplier that wants to work with these buyers will have the
opportunity to do so. The only place where VerticalNet can add value is by trying
to develop the dedicated sites for large buyers who do not have the skills to do it
themselves and are not willing to invest in this area—an area that is currently
dominated by Ariba, CommerceOne, and Oracle.
• Procurement is considered to be a strategic activity that firms will not be willing
to out-source to middlemen like VerticalNet or any other b2b player.
• For capital equipment goods, the only support for VerticalNet playing a role
would be to provide the seller with an opportunity to advertise and inform the
large buyers.
• By advertising on the VerticalNet, small suppliers will be able to get the attention
of large buyers who might otherwise have not agreed to meet with them in
person.
Small Buyer/Large Seller
• The Dell example shows how large sellers will tend to set up their own presence
on the Internet. A sophisticated small seller who plans to buy a PC on the
Internet is likely to know about Dell and will visit the Dell site directly to check out
the system specifications and price. From Dell’s viewpoint, it does not make
sense for Dell to be posting information on VerticalNet’s site along with lesser
known brands that are likely to be cheaper than Dell anyway. Further, Dell might
not be interested in being compared to other well known PC makers like IBM on
the VerticalNet site since they will not be able to do anything to influence the
customer on any dimension other than price.
• Dell would possibly consider VerticalNet to advertise but would prefer to have
their own site to sell directly to customers. In summary, large sellers can be
connected with well known brands that are already part of a buyer’s
consideration set and therefore do not derive any benefit from bringing
VerticalNet into the picture.
• The one area that there are opportunities for VerticalNet is in the small buyers/small
sellers segment.
• VerticalNet can provide enormous value to these dyads by
• Helping these buyers and sellers locate one another on VerticalNet’s marketplaces and
significantly reducing the search costs incurred by both sides. Content being the reason why the
buyers and sellers visit the vertical marketplace,
• Facilitating transactions—a push for VerticalNet to move towards commerce.
• Once the buyer has identified a need and knows what they are looking for, VerticalNet
adds value to the buyer by providing them with detailed product and other information
on several vendors that can provide them with solutions.
• To the seller, it is likely that they would never have sold any product to this small
customer anyway.
• By getting on VerticalNet’s site, they are able get into the consideration set of these
buyers.
• For these small sellers, any sale achieved through VerticalNet’s site is gravy.
VerticalNet’s
focus
Does it make sense for VerticalNet to move from content
and community to commerce? Do you think it can be an
Ebay-Yahoo-AOL-Amazon all rolled into one?
• The firm can stick with only - VerticalNet will never be able to direct
transactions through its sites—they feel that the firm can only facilitate the
meeting of buyers and sellers—transactions will happen outside the
VerticalNet environment. Further, given that big buyers are not likely to use
the VerticalNet site—we are talking of small orders any way. Also, powerful
suppliers, distributors and resellers in an industry can lock these markets
up and make it impossible for an intermediary to gain any traction.
• Some other reasons for not going into commerce are that the firm lacks
expertise in commerce—they are a late entrant. They also don’t have
expertise in handling direct transactions through their sites. VerticalNet’s
expertise is in facilitating the match between buyers and sellers.
• Finally, the issue of transaction fees being reduced to zero as competition
increases and margins get eroded.
• The firm needs to move to commerce will focus on the fact that the
advertising model is very weak.
• Once the mainstream trade publications get on-line, VerticalNet is
going to be a sitting duck. They can neither hire the best editorial
talent (away from the trade journals) nor will they have the credibility
of the editors of traditional trade journals. They will insist that the
only hope for VerticalNet is to migrate its model from content to
commerce.
• Auctions will be suggested as the best way to get into the e-
commerce business.
• The company has to stay ahead of competition and the only way to
do it is through commerce.
• Competition is heating up with the mainstream publications getting
on-line (e.g., manufacturing.net established by Cahner Publications in
April 2000). The number of e-marketplaces has jumped from 30 in
1998 to 300 in 1999 to several 1000s in 2000.
• Bundled Services are a huge opportunity for any new entrant, i.e., the
potential to generate revenues by providing a periphery of services
around the flow of commerce (e.g., bundled services like credit risk
management) is very high and very attractive to a firm like
VerticalNet.
What are the advantages/disadvantages of VerticalNet’s
portfolio model?
Arguments for the portfolio model
• VerticalNet’s systems are easily transported across verticals. This significantly reduces
costs of managing websites.
• There are several products that get sold to multiple segments. For example, pumps are
bought by buyers in multiple vertical segments. Also, there are economies of scale to
posting same articles, editorial comments, and information across industry websites.
• The portfolio approach allows the firm to test out different strategies at low cost and
figure out the best way to do things—more rapid new product development.
VerticalNet’s portfolio approach isa low cost trial and error approach to finding the right
business model.
No one really understands b2b e- commerce and that by trying many more models that
any other firm, VerticalNet is likely to find the right answers first.
Eventually the firm is likely to have a few successful verticals.
What are the advantages/disadvantages of VerticalNet’s
portfolio model?
Arguments against the portfolio model:
• The segments that visit each industry website and mutually exclusive.
There is little to gain or transfer from the experience in one industry.
• The vanilla approach to serving the 50+ communities is not going to
work given the diversity of needs in b2b markets. Each vertical market
is unique and will reject a cookie cutter approach that does not
appear customized to their needs.
• The company needs to be focused, conserve its resources, and
achieve success in a few of its current communities at this point.
List a set of criteria that you would use to choose
amongst the current verticals to migrate to commerce
(versus staying with content).
• Simple versus complex products or simple versus complex decision
making units: simple—move to commerce, complex—stay with
content and community building
• Shorts versus long sales cycles—short—move to commerce, long—
stay with content and community.
• Standardized products versus customized products: standardized—
consider the move to commerce, customized—integrate on-line with
off-line go to market strategies.
• Other criteria could include U.S. centric versus global, high-tech
versus low-tech industries, and the level of buyer sophistication with
Internet usage
Do you agree with Mark Walsh when he says that to
succeed in b2b markets you need to be “inside out”
rather than “outside in”?
Internet entrepreneurs lack in maturity and an understanding of industrial
marketplaces?
• Life was about wiping out inefficient systems from the past. They have felt
that it is not a handshake that was going to work—”Disintermediation is
the name of the game today.”
• However, the trends since the early part of 2000 have tempered such an
approach. With the market conditions as they stand in the last quarter of
2000, there is a very high negative sentiment about the company that
needs to be carefully managed.
• As easy as it was for people to be exuberant about the Internet- based
models a year ago, they are as likely to fall prey to being unanimously
cynical about anything to do with the Internet at present.
What Happened?
• In September 2000, after hiring Joe Galli (of Black & Decker Dewalt Power Tools
fame. He was also the COO of Amazon.com), VerticalNet decided to create three
divisions: marketplaces—the traditional business of building vertical
market/communities; exchanges—they bought NECX a broker of electronic
components and plan to buy several more trading exchanges that could be used
by buyers and sellers to sell surplus/obsolescent/off-spec products; solutions—
which is the equivalent of VerticalNet in a box—the firm has cobbled together a
bundle of software and solutions that can provide complete b2b e-commerce
solutions to any of its customers.
• The firm also received over $200 million in investments from Microsoft that it is
currently using to subsidize the building of storefronts and commerce centers for
customers in its various vertical communities.
• As of December 2000, there is a great of skepticism on the long-term viability of
the firm as is the case with many other b2b e-commerce players.
Points to Ponder
• What is the difference between b2c and b2b—what do these two segments
seek when they visit a website?
• Which of the “Market Making Mechanisms” ex: Exchanges, Auctions,
Reverse Auctions, etc. can VerticalNet apply with its current approach?
• Why would a seller want to participate in an online marketplace where
buyers can easily inspect offers by other competitors?
• Mark Walsh wonders whether it would be better at this stage to expand
VerticalNet’s reach (more countries, more industries), its depth (“doing
more of what we currently do”), or both? Is VerticalNet losing focus by
trying to be too many things to too many industries? Do they really need a
portfolio of so many industries (many very different)? Why not just create a
transaction platform in a (limited) number of industries that they know
very well?
Points to Ponder
• In the industries in which VerticalNet is active, is VerticalNet a disintermediating force? A
hypermediary? What kind of channels is VerticalNet currently using in addition to the
Internet? Does VerticalNet’s current channel strategy incorporate BAM-channels (Bricks-
And-Mortar)? Should it?
• Does VerticalNet use its online communities to support offline communities? How about
using its offline activities to support its online communities?
• What is VerticalNet’s current source of revenues? What alternate models would you
consider for the firm?
• Will marketplaces like the ones created by VerticalNet lead to downward price
pressures? How does this relate to the viability in the long run of electronic
marketplaces?
• What do you think about the need to be SIMPLE—does this matter in b2b markets?
• As a leader, what is the difference between running a company in the Old World versus
the New World?
Links
E-Commerce: Business Models
• https://www.youtube.com/watch?v=DW6Bg_BjeWQ
B2B Ecommerce Trends and Opportunity: David Wise of Magento
• https://www.youtube.com/watch?v=fbeT6vrvE9g
Best Practice in B2B Ecommerce: The Grainger Story
• https://www.youtube.com/watch?v=UjRqSNnmXOE
B2B E-Commerce and B2C E-Commerce: What is the Difference?
• https://www.youtube.com/watch?v=leI_E9VCXDU
Links
b2b e commerce simplified
https://www.youtube.com/watch?v=Tsa1KgYSDKE
B2B eCommerce 101 with ORO
https://www.youtube.com/watch?v=8B2GmOs3Fmk

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