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E-marketplaces. We've covered them, tracked them, even ranked them.

But lost in the whirl of hype surrounding e-marketplaces are the answers to some very simple questions: How exactly do they work? How do buyers and sellers use them in their workaday world? And exactly what are the tangible benefits they deliver today--and will deliver in the future?

Conversations with some of the leading e-marketplace executives and many of their buyers and sellers yield some insights. Especially for companies that have yet to take the plunge and join one of the nearly 1,000 e-hubs now open for business, these reports from the front lines are invaluable.

One thing is clear: Marketplaces aren't all cut from the same cloth. Rather, they come in a wide variety of shapes and sizes.

"There's just an enormous diversity of business models, revenue models and business value that can be delivered by a marketplace," said Martin Boyd, director of product marketing for Ariba Inc., which is helping many marketplaces get off the ground. "Each point in an industry supply chain potentially offers a different value proposition."

Another clear, if surprising, fact about e-marketplaces is that they are relying on many traditional marketing approaches to drum up business and differentiate themselves in an increasingly crowded field.

Marketplaces are using the most traditional sales and marketing techniques to attract a critical mass of buyers and sellers. For instance, most Net marketplaces are building rather substantial sales forces--often with extensive industry knowledge--to get out into the field and attract new customers. There's no build-it-and-they-will-come strategy at work here.

Large sales force

Take construction marketplace BuildPoint.com. Its outside sales force of some 80 people, almost all recruited from within the construction industry, are combing the 50 top markets for potential customers. BuildPoint identified the top 5,000 contractors by region and sent its salespeople out to try to attract their business. Next month it will open a customer service center in Charlotte, N.C., staffed with another 40 people.

"We market ourselves in very traditional ways. It's very important for us to get in front of our customers and do a product demo. Within 90 minutes, hopefully, they're interested and want to try it out. This is a grass-roots effort for us," said Jim Piraino, president and CEO of BuildPoint. He was calling from the floor of an industry trade show, another key venue for fledgling marketplaces looking for customers.

The very nature of vertical marketplaces demands that marketing efforts be targeted and relationships deep. "Our view is, never take an approach where 'advertising sells,' " said Paul Bourke, president of Altra Energy Technologies Inc., an oil, gas and power exchange. "Our push is through a sales organization and through relationships we've built within our industry."

Maturity breeds selectivity

As marketplaces mature, buyers and suppliers are becoming much more selective and strategic about picking marketplace partners. Scientific products marketplace Sciquest.com, for instance, describes how one of its major buyers, Glaxo Wellcome Inc., spent 14 months kicking the tires before signing on with the company.

"Customers are doing extensive due diligence," said Peyton Anderson, Sciquest.com. VP-business development.

"They can't afford to have orders mishandled on the back-end. This is the lifeblood of their company."

The lessons here: While e-marketplaces may seem like exotic creatures, in truth they're really not so odd. They're most likely staffed by industry veterans you probably already know, who know how your industry works and how they can help make your business more efficient.

At the same time, understand that marketplaces are making the hard sell because they need you perhaps even more than you need them, according to Scott Latham, analyst with AMR Research, who recommends holding out for good terms. If you're a buyer, push hard on set-up and other fees. As a seller, minimize the impact on your margins.

And if possible, ask for equity. All they can do is say no, and very often, marketplaces will trade a 1% piece of equity for a commitment from a bigbuyer or seller.

With around 1,000 e-marketplaces in operation and perhaps four times as many due to arrive in the next few years, what's the best way to tell whether a marketplace is successful? See if it has become an important part of a particular buyer or seller's day.

Take Altra Energy Technologies, which many observers cite as the most advanced e-marketplace today. The company operates Altrade, a real-time marketplace for trading natural gas, power and crude oil. Most of its traders keep an Altrade screen up at all times, even as they are doing phone brokering, in order to see how prices are moving on the marketplace.

"Clearly, what we're in the business of doing is replacing what has been for many years a manual process," said Paul Bourke, president of Altra. "We've become a part of how our customers do business."

As an exchange much like a stock exchange, Altra may be operating the sexiest form of e-marketplace. Exchanges work best with commodity products. Early examples focused on oil, gas, chemicals and farm goods.

While today's exchanges let buyers make transactions at the day's market price, places like Altra will offer forward contracts and other financial instruments that will let buyers and sellers better manage the peaks and valleys of supply.

A close cousin to exchanges are auctions and reverse auctions. Both bring dynamic pricing to the selling process. Sellers take the lead in auctions, putting product up for sale and letting buyers bid up the price. Reverse auctions, as their name implies, work the opposite way: Buyers typically put out a request for proposal, and sellers vie to land the deal.

Sellers don't necessarily like to auction off their core products because the ultimate price they receive is too out of their control.

But the market mechanism works very well when a seller needs to liquidate excess or used inventory. For example, IronPlanet.com completed its third auction of used construction equipment this month. Buyers log onto the site from around the globe to bid on used equipment that IronPlanet has inspected and prepared for delivery.

"We have given buyers and sellers of heavy equipment what they have been asking for: easy access, no risk and a fair price," said Reza Bundy, IronPlanet founder and chairman.

But by far the most basic and widespread market mechanism is catalog aggregation. Here, marketplaces bring together catalogs from a wide array of industry suppliers, giving buyers a convenient, one-stop shop.

Buyers at a catalog marketplace can also search and compare products from different vendors in a single location and find new suppliers they might not have even known about.

For sellers, the proposition is more blunt: Get on board or get left behind.

"The concept here is not just to process orders, but to help our customers solve problems within the context of doing their normal work," said Sciquest.com's Anderson. Sciquest features a massive catalog at the center of its marketplace.

Sciquest offers its services to buyers--mainly individual scientists and the purchasing departments of large laboratories--at no cost.

Basic capabilities of the site include a sourcing catalog that includes some 8,000 suppliers, the majority of which (about 7,400) don't even offer products today via Sciquest, said Anderson. But Sciquest wants buyers to be able to sift through all available products, he said.

In addition to the sourcing guide, Sciquest offers a used-equipment auction and a service that helps companies properly dispose of chemicals in compliance with federal guidelines.

Electronics marketplace Partminer.com also provides sophisticated sourcing tools to help companies uncover hard-to-find products.

Contract electronics manufacturer Matco Electronics relies on the Partminer marketplace to purchase hard-to-find parts that aren't covered in its existing supply contracts, said Dana Pittman, Matco's COO.

Matco also is a seller on the marketplace. When it wins a deal to do contract manufacturing with a new customer, that company is often closing up at least a portion of its manufacturing operation. Matco helps the company liquidate its unused inventory via the Partminer marketplace.

The two-way flow that Partminer has achieved, with companies participating equally as buyers and sellers, is a hallmark of a mature marketplace.

However, the ultimate endgame for buyers is to integrate the marketplace directly into their back-end systems, such as enterprise resource planning (ERP) applications. That automates the buying process completely, from sourcing to purchasing to recording the transaction in a company's accounting systems.

Commerx, which runs several marketplaces including early player PlasticsNet.com, has found that what buyers really want in their marketplace is a hub that makes it easier to integrate with their key suppliers, said Commerx CEO Tim Stojka.

"If a company has five direct materials suppliers that they've been working with for a number of years, they tell us, 'I know these guys and have negotiated great prices. I don't need to go to a public exchange and source a new supplier and new prices. I just need a way to connect to my suppliers and do business more efficiently and electronically,' " Stojka said.

Indeed, PlasticsNet sees making the bulk of its money in the future from selling sophisticated software and marketplace services to companies to set up private partner exchanges, while allowing them to tap into its more open, public exchange when the need arises.

Buyer benefit, seller sorrow

Clearly, buyers have a lot to gain via marketplaces. At the same time, sellers fear they have a lot to lose, including their traditional close relationship with customers, as well as their price margins.

But marketplaces, intent on bringing as many suppliers online as possible, are much more intent these days on keeping suppliers happy.

Ventro Corp., which runs the pioneering Chemdex.com marketplace and is expanding into more verticals, has learned not to ignore its suppliers.

"We've got an increasing focus on the supplier. They're the ones who are paying my salary," said David Weber, Ventro VP-marketing, noting that supplier transaction fees are the main way Chemdex.com, and most marketplaces, make money. Buyers usually conduct basic transactions for free. "Ensuring supplier stickiness is crucial."

To that end, Ventro has rolled out a series of sales and marketing tools to help suppliers target buyers via the marketplace. Online tools let sellers quickly and easily update their product catalogs on a daily basis. Ventro has also begun building reports out of its reams of transaction data, to help suppliers assess marketplace performance.

Finally, "we're offering tools to help suppliers market directly to customers," Weber said. "We want to help them reinforce their brand in what might be construed as a brandless marketplace."

Again, marketing efforts are far from space-age. Ventro will hold online mini trade shows, dubbed Chemdexpos, at key buyer sites and let suppliers tag along to reach customers more directly. Ventro is also helping suppliers build marketing pages within its site to better highlight new products or brands they want to emphasize with buyers, Weber said.

Meanwhile, Sciquest.com, which competes directly with Ventro's Chemdex.com market, is also spending more and more upfront time working with suppliers, including working closely with companies to get their catalogs ready to upload to the marketplace. In many cases, Sciquest will swallow the cost of converting paper catalogs or programming in contract discounts a seller might have with certain big buyers--anything to get that supplier working through the Sciquest marketplace as quickly as possible.

"Marketplaces are a more efficient sales and marketing channel, but if suppliers aren't careful, they can erode their brand," added Sciquest.com's Anderson. "We've put a lot of time and energy to help companies build their brand and differentiate their products."

Value-added services

Enabling a simple transaction--via a catalog, an auction or an exchange--is just the entry point for e-marketplaces, with buyers and sellers alike looking for marketplaces to offer a complete suite of services surrounding that core transaction.

Some value-added services that look like winners include credit approval, payment and clearinghouse functions, logistics management, quality assurance and testing, insurance and more.

"Once a buyer makes a purchase, we help them think about how to get it to their plant," said Commerx's Stojka. "Our logistics application helps them find the best carrier and move that material most efficiently."

At energy marketplace Altra, the company has built a risk management system right into its marketplace, so traders can determine, even in an anonymous environment, whether or not they should risk doing business with a new supplier.

Meanwhile, IronPlanet set up a nationwide inspection network to check out each piece of construction equipment it puts up for sale. It also provides insurance that ensures buyers are happy with the equipment that shows up on their doorstep, and offers a no-cost avenue to return gear if something isn't right.

By offering services above and beyond transaction processing, marketplaces will become more than mere middlemen and will evolve into key business partners with the buyers and sellers they serve, analysts said.

Indeed, value-added services--not transaction fees--will be the main way many marketplaces make money in the future, believes A.T. Kearney consultant Ben Smith. Smith, who most recently was acting CEO of exchange platform vendor Casbah Technology before it was acquired by a fellow vendor, even suggests marketplaces pay buyers and sellers to trade on their systems, just for the chance to sell them extra services associated with each deal.

Collaboration

In the end, procurement marketplaces are just one piece in a new networked environment where trading partners collaborate much more completely via the Internet.

While today's EDI networks and ERP and supply chain applications can help buyers forecast demand and suppliers manage their inventories, marketplaces hold the promise of deepening those relationships. Companies can literally weave their business processes--the very way they interact with trading partners--into these marketplaces.

Construction marketplace BuildPoint, for instance, made a project-bidding and collaboration tool its first service out of the box. By helping contractors manage blueprints, work orders, change-orders and more online, the marketplace has been able to attract 10,000 contractors to the site. Now it is using that critical mass to launch its procurement service, BuildPoint Product Marketplace, to help those contractors bid for goods and services.

Suppliers such as Turtle & Hughes Inc., Linden, N.J., are finding the BuildPoint marketplace a keen way to cut costs with existing customers and attract new business, said the industrial supplies distributor's e-commerce director Robert Millard.

BuildPoint's collaboration marketplace is growing quickly. It has helped manage some 800 projects, valued at $6.5 billion, since it launched last November.

The marketplace won't take even the slightest piece of those dollars until it can turn its users from project management to procurement, but that day is coming, said BuildPoint's Piraino. "We've inserted ourselves into the industry workflow and created an easier way to order materials," he said.

Elsewhere, consumer packaged goods giant Procter & Gamble Co. is working with vendor I-Many Inc. to build a so-called contract portal to help it use the Web to manage complex incentive contracts with its trading partners. "Marketplaces tend to degrade the nature of commerce down to a pure price auction," said Tim Curran, I-Many's VP and general manager-corporate development.

"What manufacturers want to do is create sticky relationships that extend beyond the price of the week."

Derek Christian, P&G project manager, said: "Pricing communication is the cornerstone of e-commerce. If partners don't know what to charge, everything falls apart." His company will use the contract collaboration tool initially with individual customers, but he sees a day when it would be a valuable tool in its marketplace relationships.

Indeed, when marketplaces move beyond basic transactions and into mission-critical collaboration, the question of public vs. private exchange becomes even more pronounced. Many companies simply don't want to outsource this key function to a market that is outside their own control.

That alone may explain the rise earlier this year of all of the industry marketplace consortia that have swept through the industry.

"We want a neutral site, but we also want some ownership so we can share in the decision-making and be part of the development of the structure," said Fred Siegel, exec VP at metals distributor Thyssen Inc., one of the founding members of specialty metals marketplace MetalSpectrum.

"If we were to work with an independent site, we wind up sharing data on customers and on pricing with them, and we don't have a lot of control of the situation."

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