Click to Print

From: Business To: Business

Subject: Long-heralded as the next big set of Internet opportunities, business-to-business e-commerce is here--and the crystal balls were right; it's big.
June 1, 2000
URL: http://www.entrepreneur.com/article/28488

It was in late 1998 that Walt Geer, a partner in an Atlanta promotional-products company, faced up to reality. His little business--which sold logo merchandise such as pens and coffee mugs (a.k.a. "trash and trinkets") to companies for handouts to employees and customers-was chugging along OK, but it was just one of about 19,000 promotional-products companies in the country. Plainly put, the 32-year-old's company was lost in that mob. So he decided to take the plunge: He cut the cord on his traditional company, dumped his existing customers and--whoosh!--put his business on the Web as eCompanystore.com.

How did it work out? Well, there were a couple months when things looked grim: "We had no revenues coming in," recalls Geer, "but we had to focus our energies on the Internet, because we didn't have the resources to do it and run our traditional business. Of course, there were scary moments." But business eventually turned around for Geer. "In just a few months, the Internet let us move from being a small company to a national player," he says. "Before, we serviced lots of little accounts. Now we have AutoNation, the country's biggest car dealership, and we're going after more big accounts. The Internet is what let us do that."

Geer's eCompanyStore isn't alone. Dotcom companies winning the most press buzz may be those consumer-oriented, high-advertising businesses like Amazon.com and eToys, but the real buzz in big money circles solidly centers on business-to-business (b2b) players like eCompanyStore. Forrester Research predicts the b2b sector will explode from an estimated $43 billion on the Internet in '98 to a jaw-dropping $1.8 trillion in 2003. Meantime, Forrester predicts that online retail (the business-to-consumer market) will also grow, but those numbers are piddly in comparison. In '99, reports Forrester, business-to-consumer e-commerce reached $20.2 billion, and, by 2004, it should hit an estimated $184 billion. Do the math, and you'll see b2b is expected to involve 10 times more cash--and that's a multiple that demands attention.

Just why the rush of businesses wanting to purchase on the Internet? Simple, says Ben Smith, a consultant in the Santa Clara, California, office of A. T. Kearney, a global management consulting firm. "This represents a fundamental change in how companies purchase, and they're using the Internet to drive out costs."

"B2b e-commerce is about streamlining processes in order to do business more efficiently," adds Tarun Sharma, chief e-business architect at EC Cubed, a Westborough, Massachusetts, provider of b2b e-commerce solutions, and coauthor of Enterprise E-Commerce (Meghan Kiffer Press).

How much value? "Shift purchasing to the Web, and a business can eliminate 90 percent of transaction costs," says Dean Whitlock, vice president and general manager of consulting firm ICL's eBusiness Services group in Dallas.

Another estimate comes from Chris Cogan, 40, CEO of GoCo-op, a Maitland, Florida-based Internet purchasing solution for hotels, restaurants and health-care businesses. "We estimate the average cost of executing a paper purchase order is $115," he says. "We get that cost down to $10. When companies buy through our system, they'll see immediate savings."

But cost savings aren't the only reason Internet b2b trade has been mushrooming, says eCompanyStore's Geer. Although he claims he provides customers with savings--"our prices are 5 to 15 percent lower than traditional solutions"--the real drivers are speed and efficiency. "And besides," he explains, "our Web store is always open. These advantages are as attractive to our customers as are the savings. The Internet is a better and faster way for businesses to shop."

The Many Faces of B2B

Just who is making it in b2b e-commerce? The gold rush has just begun, and sure winners have yet to emerge, but there are players illustrating the breadth of this marketplace. That's because b2b e-commerce offers diverse opportunities. Some Netpreneurs seek to establish their businesses as exchanges where buyers and sellers meet to do deals while others position their start-ups to provide services and products to business customers in a new, Web-based way. The bottom line: B2b e-commerce entrepreneurs are limited only by their own imaginations, because there are plentiful possibilities in this exploding space.

Check out this sampling of the strategies that b2b businesses are pursuing online:

BizBuyer.com. When now 35-year-old Bernard Louvat was hired to set up Disney's The Disney Store in his native France, it seemed like a relatively simple job. In reality, it took innumerable hours to identify sellers of the products and services he needed, from computers to telecommunications, and then get bids, compare them and make deals. There had to be a better way, thought Louvat, and that's why a few years later he founded Santa Monica, California, BizBuyer.com, a Web-based marketplace established with a mission to streamline buying--and selling--on the part of small and midsized businesses in particular. "The Web will allow everyone, buyers and sellers alike, to achieve more efficient pricing. We help vendors reach new buyers, and buyers hear from new suppliers, and we estimate that our system will save buyers 25 percent," says Louvat.

The model is simple: A buyer logs on to the site and says he or she wants to make a purchase--say, a wireless telephone plan and a new company car. BizBuyer.com then submits that request to suppliers, and those who want to bid pay "a nominal amount," says Louvat. The buyer gets the bids, and if one seems good, he makes a deal. "BizBuyer.com collects a commission from the seller on the transaction," says Louvat, who adds that even after paying that commission, a vendor's costs are lower because the Web creates slick efficiencies.

Sound good? More than 20,000 vendors are already enrolled in BizBuyer.com, and Louvat anticipates strong growth. "Web-based procurement benefits everybody," he says. "Everybody wins with this system."

ProduceOnline. What do you do with a few tons of butter lettuce and no buyer? That's just the type of dilemma Chuck James, 42, CEO of Pasadena, California-based, ProduceOnline, wants to solve by creating a more narrowly focused online exchange that brings buyers and sellers of produce together. "In this business, you sell it or you smell it," says James, who last year shut down his family's 116-year-old brick-and-mortar produce distribution business in order to build his Web site. According to James, "This is an opportunity to reinvent the produce industry."

That industry today is little changed from how business was conducted when James' ancestors set up shop in the 1800s. It's a business that revolves around scraps of paper and "many small players," says James, who points out that while grains and livestock are increasingly in the hands of large corporations, "produce remains a business of small farmers."

At ProduceOnline, sellers list their available fruits and vegetables, and buyers use search tools to hack through the mountains of broccoli and rutabagas in search of the cherries they desire. Neither pays any subscription fee, with ProduceOnline's profits resulting from an up to 1 percent fee on completed deals. In the process, buyers may get lower prices and sellers still may reap higher margins, because "our system cuts transaction-processing costs by 70 percent," says James.

Will farmers take to this model? You bet, says James: "Farmers are already very entrepreneurial, and they're eager to find ways to increase their returns."

Ubrandit.com. Who would be nuts enough to go head-to-head against giants like Amazon.com and CDNow, which are fast on their way to devouring the online market for books and music? Meet Jeff Phillips, 32, CEO of San Diego's Ubrandit.com. But Phillips, who intends to make his profits selling those same books and CDs, just may not be nuts at all. His target audience is composed not of readers and music fans, but of media properties such as radio stations and local newspapers. Huh? Phillips explains: "They want to participate in e-commerce, but most don't have the resources to mount a fully functioning site. We offer them a turnkey site that doesn't cost them a dime. In fact, they'll get revenues from it."

The Ubrandit.com pitch: Pretty much any business (although the company focuses on media) can take the Ubrandit.com storefront, slap on its own logo, and, in a matter of minutes, be in the business of selling books, music and videos. On every sale, the radio station or newspaper gets 5 percent of the gross, while the rest goes to Ubrandit.com for handling the transaction.

Even so, don't e-tailers like Amazon.com offer affiliates--who bring in sales by posting, say, Amazon.com logos on their sites--commissions of up to 5 percent? Yep, acknowledges Phillips, but "our key difference--what we sell our customers--is that the site features their brand, not ours. When a radio station sends a customer to Amazon.com, it gets a commission, but Amazon.com owns the customer. With our service, the station's name is up front and they're earning money."

So far, 100 newspaper, radio and television outlets have signed up to use Ubrandit.com's service, but Phillips is expecting many more. "With our model, we're not competing against Amazon.com--our partners are, and in their markets they have well-recognized brands," says Phillips. "When you hear a radio interview with an author, why wouldn't you buy the book from the station's site? That's why we believe this model will work, for our partners and for our company."

SeminarSource.com. Each day around the world, hundreds of seminars, conventions and workshops are aimed at businesses. For potential attendees, the problem is finding the right ones. For seminar producers, the problem is getting the word out to target audiences. That's where 39-year-old Kim Folsom enters. "We list more than 25,000 seminars and meetings," says Folsom, CEO of San Diego-based SeminarSource.com, "and we're getting more than 250,000 page views per month from potential seminar attendees."

SeminarSource.com lets seminar producers list for free and charges attendees nothing. Revenues are based on services offered to meeting planners--from online registration to Webcasting programs--and selling advertising on the site. "We're not profitable yet," admits Folsom, who points out the company has raised more than $3 million to date, from angel and institutional investors. "The size of this market is $35 billion annually, and the Web is the perfect solution, both for meeting organizers and attendees. It's low-cost and efficient. This market will take off. Our only obstacle is getting enough people--attendees in particular--aware of what we're offering. As more people learn the advantages of online booking, more will look to us."

Want yet more for-instances? Surf the Web. Nowadays, new b2b businesses are popping up everywhere. "We hear VCs are investing $100 million each week in new b2b properties," says Smith. "There's a lot of excitement about the potential here."

The Future of B2B

You're not alone if the preceding b2b accounts sound too enticing to ignore. But the news gets better. "There will be thousands and thousands of successful b2b sites," says Smith. "There will be many fewer b2c sites that succeed."

A crucial reason: "Customer loyalty will be higher in b2b e-commerce," says Smith. Why? Consumers shopping on the Internet are proving to be price-driven. They'll switch vendors in the click of a mouse to save a few bucks. Businesses won't be so fickle. "Once you lock in a b2b customer, he'll be less likely to switch sites, because, as the b2b site integrates into the customer's way of doing business, it simply becomes difficult to switch."

That's why "first-mover advantage will be very important in b2b," says Phillips. "The players that establish early market dominance will retain it."

Marketplace Turbulence

Get ready to hold on, though. The sailing for early entrants won't be entirely smooth. In key respects, the bar may be higher in b2b e-commerce than it is in b2c. Case in point: "To succeed in this [arena], you'll need deep domain knowledge," says John Sviokla, a vice chairman with Chicago e-commerce consulting firm Diamond Technology Partners Inc. In other words, to successfully peddle peaches to consumers, you don't have to know much about farming, but to build an exchange for farmers, you've got to grasp the fundamental drivers in the industry.

"B2b e-commerce requires much more than technology skills," adds Sharma. "You have to really understand the domain, the underlying businesses."

Another hitch: B2b involves long selling cycles, and, before big deals are nailed down, "You'll need to do face-to-face selling," says Sharma. It's one thing to buy a $10 book with a mouse click. It's an entirely different thing to buy $100,000 worth of coffee mugs.

"A Web site won't close deals for you," stresses Geer. "You can't rely on a Web site. To make b2b deals, often, you've still got to put feet on the street."

And although b2b e-commerce is expected to detonate soon, that fast growth won't hit until the future. For now, few b2b sites report profitability. But Mark Hoffman, former vice president of management and technology consulting firm Booz-Allen & Hamilton's office in San Francisco, says that's all about to change, "We're just now seeing the tip of this iceberg. Mainstream big businesses had been skeptical about the Web, but no more. They're now jumping on the Internet. We'll be seeing many successful b2b sites. There is every reason to be optimistic about this market."


Robert McGarvey is Entrepreneur's "Web Smarts" columnist.