Academic journal article The McKinsey Quarterly

B2Basics

Academic journal article The McKinsey Quarterly

B2Basics

Article excerpt

There is no one right way for an e-marketplace to charge for its services, but there are many wrong ways.

Business-to-business (B2B) electronic marketplaces are brilliant at reducing transaction costs and removing inefficiencies from the supply chain. But unless they become more thoughtful about how they value and charge for their services, the profit from the benefits they provide will flow to everyone but themselves.

How much value do they capture? Much less, it would appear, than they create (see sidebar, "Four roads to value," on the next page). To induce major buyers to join before they affiliate with any other marketplace--or, alternatively, before starting a buyer-led one--B2Bs have been charging little or nothing for access and even offering buyers equity stakes. One insurance-claims B2B hub (launched in late 2000) is prepared to give as much as 75 percent of its equity to insurance companies. A recent review of 23 leading B2B companies revealed that only 2 levied substantial charges on buyers.

B2Bs have instead charged suppliers, which are now, understandably, pushing for improved terms or forming their own e-marketplaces. In addition, the equity markets, once so free with capital, currently view B2B players with a jaundiced eye. Pressured by suppliers, beholden to buyers, and with little income of their own, [1] B2B marketplaces are being painfully squeezed.

Can they ever build solid, profitable businesses? Yes--if they can grasp the value of what they offer and then use the whole range of ways to charge for it.

How will you charge?

There are probably as many ways to generate B2B revenue as varieties of B2B offerings. In many cases, an aggregator should deploy two or more approaches simultaneously. Choosing the wrong model can be expensive. The strategic objective of an insurance claims-processing aggregator, for example, was to handle all the claims of three of the largest US property and casualty insurers. But its pricing method, a flat usage fee, prompted them to send it only their more complex claims, which were of course also more costly to process. Quite likely, a capped subscription-based fee reflecting each insurer's volume of claims would have realized the aggregator's objective of processing the claims of all three companies, and with no sacrifice of revenue.

We see a number of ways in which aggregators can now charge for their services. Giving services away may not seem to be a pricing structure, but of course it is--and a distressingly common one at that. Many B2B companies are guilty of following this course because they fear that fees will repel reluctant suppliers or buyers, reducing the liquidity, and hence the value, of their sites. A desire to build scale quickly is understandable, but rock-bottom prices often don't make sense.

Setting prices too low or at zero poses two hazards in addition to forgoing much-needed revenue that could be obtained from selling valuable services such as order tracking, capacity planning, and inventory and logistics management. First, low prices establish themselves in customers' minds as "reference prices," which are extremely difficult to change as value modulates. Second, low prices imply that the B2B company itself isn't confident of its offering. One printing-services aggregator priced its order-management software at zero to promote the penetration of its market but found few takers. Once the company started charging for this product--and quite aggressively--customers saw its value and began to demand it. In another instance, a provider of content- and community-management software intended to charge a $5,000 up-front licensing fee but was persuaded to raise it to $200,000. The product was successfully launched at that price.

Charging for services is a good litmus test: if customers won't pay, you are not adding distinctive value.

Transaction fees

B2B pricing most often takes the form of transaction fees (sometimes called "cost-plus" pricing structures), which are charged to the buyer, to the seller, or to both. …

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