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Sellers dance awkward tango with e-commerce

Sellers in all product categories, from raw materials to highly engineered machinery, have approached the Internet reluctantly.

    Sellers in all product categories, from raw materials to highly engineered machinery, have approached the Internet reluctantly.

    Because business-to-business e-marketplaces initially focused on attracting buyers, low prices naturally took priority over cost savings and growth opportunities that could benefit all participants in the marketplace. The prevalence of reverse auctions, in which sellers try to underbid one another to win particular orders, shows how strongly this ultracompetitive way of thinking has taken root in today's economy.

    From a seller's standpoint, B2B marketplaces not only offer advantages but also embody some of the Internet's least attractive tendencies. By efficiently matching sellers and buyers, these marketplaces take costs out of the supply-and-demand chain and increase the market's efficiency, particularly in the high-volume trading of commodities such as chemicals, metal and paper.

    Since customers of B2B marketplaces tend to focus on getting the best price, sellers face cutthroat competition and pressures to standardize products so that they are more directly comparable to the competition's?-thus diminishing the distinctiveness of the brand. B2B marketplaces also erode the direct relationships that sellers had with their customers.

    Many sellers have therefore avoided these marketplaces, preferring instead to establish bilateral e-trade relations by, for example, opening "extranets" or Internet sites to buyers of big-ticket items or to regular customers. In this way, sellers have solidified ties with their clientele, both by adding value to their offerings and by making it more costly to switch.

    The Finnish tractor manufacturer Valtra, for instance, uses its extranet to manage customer relationships throughout the entire life cycle of its tractors. Upon purchasing one from Valtra, farmers receive access to a password-protected extranet where they can find information about tractors and farming, exchange ideas with other Valtra owners, download software upgrades, order supplies such as oil filters, and trade in used tractors.

    Bilateral e-trade can be effective for companies from Valtra to Dell Computer. It is the only good way to handle transactions involving highly complex goods, such as heavy machinery and telecom systems: sellers can use the information garnered from close relationships with customers to tailor products to their needs and to make continual improvements in service and in the purchasing process. Nonetheless, bilateral e-trade usually requires an expensive human presence to personalize and tailor advice, negotiate prices, and encourage and train customers to move their business online.

    Many sellers have overlooked a third kind of vehicle for online trade: e-distributorships, which take title to goods obtained from more than one source and organize them into coherent offerings for potential buyers. Perhaps e-distributorships have received little attention because they play a role very similar to that of their offline counterparts or because people expected the Internet to make such intermediaries extinct.

    Even so, start-ups, traditional offline distributors and some manufacturers have established them. Grainger.com, which specializes in maintenance, repair and operations supplies, is just one of a host of e-distributors that help manufacturers in almost all sectors reach small and other hard-to-reach buyers.

    For more insight, go to the McKinsey Quarterly.

    Copyright © 1992-2001 McKinsey & Company, Inc.