Peter Skrzypczak, MSM
Originally published December 5, 2005
Reprinted January 22, 2007.
©2007 Peter Skrzypczak, MSM. All rights reserved.
Affiliate programs,
e-Marketplaces, and online auctions all have their own characteristics with
advantages and disadvantages. In this article we take a look at the
characteristics of each type of channel and their implications for business in the
following 3-4 page summary. Best practices are examined and examples are given
of a business in each type of sales channel. We also examine the realties in
the last 5 years, in face of optimistic predictions for all.
“Affiliate campaigns are based on a revenue-sharing commission deal. When the user clicks on the merchant's ad or text link, it points to affiliate-tracking software, which registers the clickthrough, writes a cookie to the merchant's site and redirects the user there.” (Rigby, 2004) These can be run in-house or outsourced, the advantage of the former is to avoid the “cut” to the affiliate manager, and to the latter, the cost of the infrastructure and market contacts. (Rigby, 2004) One key differentiator between affiliate sales models and marketing models is that “the merchant pays for ads purely on sales, rather [] leads.” (Rigby, 2004) Limitations include consumers not comprehending affiliate marketing, so affiliate partners must be chosen selectively to avoid branding complications (Rigby, 2004), and ambiguity of the source of a referral if several are received for one transaction. One illusion about affiliate sales models is that it is relatively cheap. However in order to enable affiliates to do an effective job, and “grow the channel there must be enough financial and physical resources. Affiliates need to be rewarded in a decent way." (Rigby, 2004)
E-Marketplaces are “sourcing mechanisms that correlate information about supplier products and buyer needs in a common database and then display it on the Web. Once the buyer and the supplier have "met" on the Web, the exchange provides contact data so they can complete the transaction through traditional manual processes.”
“Aside from the basic transaction processing technology, such e-marketplaces also may require credit evaluation services, shipping and logistics calculators, and the means to negotiate on requests for quotes and final prices. In many industries, e- marketplaces [provide] a forum for electronic collaboration and ongoing supply chain administration” (Wilson, 2000)
In 2000, “26 percent of the 520 businesses that are purchasing goods over the Internet are doing so through trading exchanges. That compares with the 86 percent that are buying online from traditional trading partners.” (Wilson, 2000)
So in Y2000, there was an optimistic feeling that cost savings and lowering of barriers to markets would drive e-Commerce through this type of sales channel. High volumes of transactions were expected to cause “trillions of dollars [to] flow through B2B exchanges by 2004.” (Grey & Shi, 2005) Tibco, as one example, provided software that showed some initial successes (Wilson, 2000). The realities experienced within the next year were quite different.
One of the major issues is that the “build out” of these channels was a lot more complex and costly than first imagined. Integrations with legacy systems to eliminate the manual component cost of a transaction costs were costly themselves. These costs, being built into the basic cost of the transaction often exceeded any savings. (Wilson, 2000),(Grey & Shi, 2005) The transaction volumes were not there either, causing a reduction of the number of players in that market space, perhaps indicting the market model itself. “Despite the early excitement surrounding business-to-business (B2B) e-marketplaces during the Internet boom, many exchanges have since closed, citing their inability to generate sufficient revenue from thin transaction volumes.” (Grey & Shi, 2005)
Further observations identified that “the greatest promise of e-marketplaces lies in facilitating the formation of spot and futures markets without replacing or displacing relationship-based transactions. With e-marketplaces, it is not necessary for an exchange to be the central focal point of all market transactions; e-marketplaces and relationship-based contracting can peacefully co-exist. By using Internet [B2B e-marketplace] technology in conjunction with improvements to its business processes, [Volkwagen] was able to conduct 20 percent of its procurement spending through online transactions in 2002.” (Grey & Shi, 2005)
As far as “best practices go”, Versendaal & Brinkkemper (2003) conceptualized the “I-FRAME”. It is a synthesis of five different models to be used as predictors of success. “E-business aspects include business partners trust (Sheppard and Sherman, 1998), collaboration platform, e-auction (Timmers, 1999), channel performance (Clark and Lee, 2000), facilitation, matching, outsourcing (Dai and Kauffman, 2002), and value net integration (Weill and Vitale, 2001)” (Versendaal & Brinkkemper. 2003) “The achievable or potential benefits are grouped in four dimensions: Process, Cost, Product quality, and Organization.” (Versendaal & Brinkkemper. 2003)
“While the business-to-consumer (B2C) category of online auctions has been the most popular, the business-to-business (B2B) category of online auctions has become a significant model for businesses to auction their products and services to each other (Rupley, 2000). In fact, in 1999 alone, B2B transactions in online auctions totaled $109 billion, and that figure was expected to grow to $2.7 trillion by 2004 (Blackmor, 2000).” (Parente, Venkataraman, Fizel & Millet, 2004).
“B2B auctions can benefit both buyers and sellers. [] the Dow Chemical Company Co., [] routinely saves 2-5 percent, [up to] 20 percent, on purchases of raw materials and packaging materials (Gaudin, 2000).”(Parente, et. al., 2004)
Online auctions use a bidding process for either buying a good or for supplying a good (“reverse auction”, where low bid wins). “… it is estimated that 93 percent of B2B e-commerce [buying] in the year 2000 was conducted through private sites (Karpinski, 2000). (Parente, et. al., 2004)
“What's changed the model is the willingness of retailers to use the auction site to liquidate aged inventory at a profitable price. As shipping prices drop, a local retailer can develop an international business [].” (Carr, 2004)
“In prior years, consumers sold their used [sporting goods] on the site but today, eBay sells more new [goods] than old. [] sales of sporting goods, fan apparel and collectibles hit $1 billion last year ($1.8 billion worldwide).” (Carr, 2004)
“The success of B2C markets such as eBay (also consumer-to-consumer), Priceline, Amazon and Travelocity has demonstrated the transformational potential of electronic markets. However, there have been many widely publicized failures in both B2B and B2C markets including Enron's power trading market, eToys' retail market and Napster's online music distribution which suggests that there is still much to learn about designing electronic marketplaces to operate efficiently and effectively.” (Bodof & Forster, 2005). In published graphics in their cited work, Grey & Shi (2005) outlines the most effective market mechanisms per type of good and numbers of buyers vs. sellers.
David Bodoff, Paul Forster. (2005). A Virtual Market for Teaching Electronic Market Concepts in Information Systems Education. Journal of Information Systems Education, 16(1), 93-102. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 839644871).
Blackmor, D.A. (2000), "Where the money is", The Wall Street Journal, 17 April, pp. R30-2.
Bob Carr (2004, May). eBay Remains a Bright Spot in Online Retailing. Sporting Goods Business, 37(5), 10. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 640241401).
W Grey, T Olavson, D Shi. (2005). The role of e-marketplaces in relationship-based supply chains: A survey. IBM Systems Journal, 44(1), 109-123. Retrieved December 5, 2005 from ABI/INFORM Global database. (Document ID: 808583121).
Gaudin, S. (2000), "Auction action", Network World, Vol. 17, pp. 91-4.
Karpinski, R. (2000), "Private exchanges proliferate", B to B, Vol.85 No. 17, p. 22.
Diane H Parente, Ray Venkataraman, John Fizel, Ido Millet. (2004). A conceptual research framework for analyzing online auctions in a B2B environment. Supply Chain Management, 9(3/4), 287-294. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 711273351).
Emma Rigby (2004, October). The Revolution Masterclass on e-tail affiliate marketing. Revolution,66-69. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 711589211).
Rupley, S. (2000), "Biz-to-biz auctions", PC Magazine, p. 32.
Johan Versendaal, Sjaak Brinkkemper. (2003). Benefits and Success Factors of Buyer-Owned Electronic Trading Exchanges: Procurement at Komatsu America Corporation. Journal of Information Technology Cases and Applications, 5(4), 39-52. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 516485591).
TIM WILSON (2000, October). E-Markets Need Technology Boost -- Most exchanges are just beginning to use products needed to handle real-time trading. InternetWeek,(835), PG125-126. Retrieved December 5, 2005, from ABI/INFORM Global database. (Document ID: 63450648).