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Revenue Sources

The sources of revenue vary from one e-marketplace to another, depending basically on the primary function of an e-marketplace: is it an application service provider or an e-marketplace operator or an owner. The most significant sources of revenue are:

 Transaction fees
 Subscription and membership fees
 Advertising fees
 Software sales and licenses
 Professional service charges and
 Referral fees
 Gain sharing

A transaction fee, also called commission, is the most common source of revenue. It represents a percentage of the gross amount of each buy-sell transaction conducted throughout an e-marketplace. Commission is usually charged to the seller, except in the case of reverse auctions where usually buyers are charged. Companies like ChemConnect and FastParts charge both parties. A commission percentage may be a flat rate, or scaled according to the nominal value of the transaction. In some cases different fees may be charged for individual parts of the transaction, such as invoicing, payment services, cash transfers and transport documents. MetalSite, for example, charges suppliers that respond to a posted Request for Quota 2% of the revenue and as much as 5% plus $10 if the supplier lists its products on their e-marketplace. The actual amount of the commission primarily depends on the role an e-marketplace has in the transaction. Most e-marketplaces act as an agent offering different levels of services. Some of them offer just a platform to conduct a transaction with the interested parties. The whole risk of doing a business over the Internet remains on the participants’ shoulders. Others offer a variety of additional services that decrease the risk related to the transaction. Those services may be payment order systems, arbitrage, escrow and similar services. Such e-marketplaces charge higher commissions, proportionally to the higher risk they undertake. Another factor that influences the amount of the transaction fee is the level of fragmentation of the industry. Within a highly fragmented industry where search costs are high, services of an e-marketplace are highly valued. E -marketplaces can therefore charge higher commissions. Most of the e-markets within the food industry, like ecFood or GlobalFoodExchange, are able to live solely on transaction fees they charge to their members, due to the high fragmentation of the market, but also due to the fact that they are working with perishable goods.

The main problem an e-marketplace encounters when charging transaction fee is the supplier reluctance to be charged every time they decide to transact. Some e-marketplaces are therefore opting for a subscription or membership fee. Subscription or membership fees are generally collected in advance from registered users on a monthly or annual basis. They are usually based on estimated usage and may therefore vary depending on the size of the member company. Altrade, an electricity power e-marketplace, is an interesting example, because it obliges participants to pay a membership fee and a fee per transaction, but, to create an incentive to trade, it deducts individual fees from the paid membership up to a certain limit. A few e-markets have tried to charge a subscription fee per transaction, but this model proved to be highly unpopular, since it imposed higher charges on sellers and buyers and it tended to be confused with a transaction fee.

Advertising revenue is a less important source of revenue in B2B e-commerce than it is for B2C. This type of revenue is the most appropriate for industry portals offering community features such as chat, bulletin boards and e-mail discussions, aggregated catalogues with sticky prices and other content. Neoforma, for example, names health facilities as best in class and then sells sponsorships to the manufacturers of the equipment they use. However Community features of this type proved to be much more attractive within B2C than within B2B and just a few B2B e-marketplaces, having members with a large aggregated power as participants, are seriously counting on advertising as a main source of revenue. As a component of the total revenue mix, advertising revenue is mostly present at auctions and negotiation engines, but other revenue streams, such as subscriptions or transaction fees, generally represent a much higher percentage of the total revenue.

To summarise, transaction fees and subscriptions still represent the most important sources of revenue for most of the e-marketplaces. However their usage is expected to decline. According to BCG, transaction revenue has already declined 2 to 8% a year ago, and the downward trend is expected to continue. Some e-marketplaces already stopped to charge transaction fees, using transaction services as loss leaders to attract users. One such company is FreeTradeZone, PartMiner daughter-company, which enables buyers and sellers to utilize Internet-based communications to conduct business in a vendor-neutral environment free of charge. PartMiner owns the world’s largest database of electronic components and industry’s best parametric search tolls. By integrating it into FreeTradeZone and giving away free, it accelerates its adoption rate by users over competitors. FreeTradeZone and other like-minded companies make profit on transaction fees which are charged on value-added services. Those services may include credit, purchase order management, escrow, payment settlement and clearing, appraisal and inspection of materials, insurance of in-transit materials, warehousing, logistics, export documentation, letters of credit, and land, sea and air shipping. E-marketplaces mostly outsource those services to established players in these fields, which have deep domain expertise, and share the revenue with them. New types of services, which are also expected to become highly lucrative in the future, are services that support collaboration activities. The Boston Consulting Grouppredicts that over the next few years collaborative services, such as supply chain forecasting and planning tools, although difficult and expensive to fully implement, will become critical for the long term sustainability as they could account for a half of the total revenue for e-marketplaces.

The dominant technology providers, such as CommerceOne and Oracle, but also some e-marketplaces that have successfully developed their own technology platforms internally, such as E-Steel and FreeMarkets, have revenue models that resemble traditional software companies. They became platform providers to other e-marketplaces and are now recording two types of revenues. One revenue stream comes from software licensing, which may be a one time fee charged on a per user basis or flat, all encompassing “server” type fee to the e-marketplace, in which case the new user may be added over time without additional charges. The second, more lucrative, source of revenue is derived from services such as software integration, customization, maintenance and other professional, consulting services. FreeMarkets, for instance, licenses its BuySite customized software platforms, which handle the procurement of near-commodity items, and then charges separately for its ongoing professional services. Some of the technology providers are establishing as well transaction fees revenue-sharing agreements with e-marketplaces for which they provide software platforms for. In this way they transform their actual or potential competitors into their partners and, instead of spending enormous amounts on the combat for the market share, they earn additional revenue while actually expanding their market. For instance, iGetSmart, a subsidiary of WorkFlow Management, basically provides an online platform for sourcing, managing, warehousing and distributing custom printing and business products for its customers, but it additionally operates as an ASP. As ASP it licenses its system to print vendors and distributors and earns a revenue through a one time license fee, as well as through ongoing royalties on the sale of products that are managed by the iGetSmart system.

A referral fee, as another source of revenue, is made possible only by the existence of the Internet and its inherent characteristics in tracking customer movement in real time. A buyer registered on one e-marketplace is provided a link to the other, separately owned e-marketplace. He is tracked moving from one e-marketplace to another, and if he makes a purchase, than the referring e-marketplace collects a customer referral fee from the other one that concluded the sale. For example, BuyerZone provides purchasing tools and advices for SMEs. The company helps business shoppers learn about, compare and buy thousands of products and services from a full range of online and offline suppliers. Shoppers can quickly identify items that best suit their needs and conveniently place orders online from top suppliers. For each successful referral, the company charges a small referral fee to its partners.

Finally ‘gain sharing’ can be an additional revenue source, in particular in procurement. Gain sharing works according to the principle that an e -marketplace provider works out, together with its customer, the savings a company could make from participating in an e-marketplace. The provider then takes a percentage of these savings.

The vast majority of e-marketplaces relies on multiple sources of revenue. Most of those e-marketplaces that originally based their revenue models on transaction fees are only now expanding into other potentially lucrative areas. E-steel for example met a severe decrease in the transaction revenues and is now repositioning itself more as a tech provider than as an e-marketplace enabler, gaining additional revenues from the software sales and professional services. Its competitor, MetalSite, on the other hand, enhances its revenue from transaction fees by charging additional fees for services it provides, while MaterialNet, another competitor, earns instead on advertising.

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