Consumer sites offer lessons for e-business

Chief among them: Build a strong brand name, go public early on, and don't be afraid to switch business models. And don't forget about personalization to make each customer's experience different. The advice came today at Net Market Makers, the first conference to focus on business-to-business marketplaces.

"We are like the consumer space in 1994," said Mark Walsh, chief executive of VerticalNet and a former executive at America Online and Genie, a consumer-oriented online service once he ran for General Electric.

"You have to throw people at problems and opportunities," he added. "Sometimes big companies look rude or indifferent, but in fact they're just busy."

Indeed, VerticalNet has been busy--it made three announcements today, including the acquisition of catalog technology firm Isadra, selecting e-commerce marketplace software from TradeX (and investing $1 million in the company), and a deal to use Aeneid's research technology and content for VerticalNet's 39 industry marketplaces.

Emeric McDonald of investment firm Amerindo Investment Advisers cites VerticalNet as an example of one of the lessons to be learned from consumer-side e-commerce companies.

"Don't be afraid to capitalize on the public markets to expand your sphere of influence," said McDonald. "Everyone wants to partner with you, and it increases your marketing exposure. People place a value on you based on your market capitalization."

VerticalNet's claim on being the only pure play in the business-to-business side is about to disappear however. Ariba, Commerce One, and Chemdex have filed for IPOs, and an investment banker working on one of those deals say the floodgates will open with other business-to-business filings.

"It will be beyond the consumer Internet filings of 1996," the banker said, requesting anonymity.

But the examples of Yahoo, Amazon.com, and eBay also teach a more controversial lesson: Brand matters--maybe.

"For Amazon, what counts is brand, size, and capital," said Victor Hwang, a venture capitalist at Internet Capital Group. "What matters in these markets is a lot of domain expertise." That means that an entrepreneur setting up an industry marketplace needs to understand the industry.

Narry Singh, senior principal at strategic marketing firm McKenna Group, thinks brand is overrated in the business-to-business arena.

"Success means demonstrating a business value-add," he said, noting that six months ago large international clients were willing to do deals with Chemdex, which runs a marketplace for research chemicals, even though they'd never heard of the company.

Singh detailed a lesson the business marketplaces still haven't learned from the consumer side, saying that the personalization technologies used by MyExcite and MyYahoo are largely absent among business marketplaces.

"We talk about one-to-one marketing, and it's not just on business-to-consumer," he said. "It needs to come across to business-to-business."

Singh also expects that online incentives similar to coupons or frequent flyer miles, offered to consumers through companies such as Netcentives and CyberGold, need to be adopted on the business to business side too.

"There's a lack of thinking on different kinds of trade and barter," Singh said.

Then there's the "Get big fast" dictum that has driven Amazon.com to expand from books into new markets.

"Get to critical mass fast," advised Ravi Mhatre, who heads the business e-commerce practice at VC firm Bessemer Venture Partners. "That makes it difficult for any competing start-up to happen. Raise more money and try to create more footprints."

Amerindo's McDonald stressed the importance of business marketplaces remaining flexible in how they earn revenue.

"Don't be afraid to evolve the business model, be willing to adjust if you start running out of steam," McDonald urged. He cited Yahoo supplementing its ad-based revenues with hosting and transaction revenues in its acquisition of Viaweb a year ago. eBay, he noted, has moved from flea market status into high-end auctions with its acquisition of Butterfield & Butterfield and into vertical segments with its purchase of classic-car auction house Kruse International.

Several venture capitalists agreed that ad-based businesses are a low-cost place to start, but moving into transactions provides a more stable revenue stream.

Walsh, recalling his AOL experience five years ago, described the need for U.S. firms to partner when moving into overseas market. "That's why I'm talking to companies all over Europe now," he said, despite the fact that 40 percent of the traffic to his sites come from outside the United States.

"At AOL, we learned from the thing you thought you were providing the customers was what they cared about the least," Walsh said. At AOL, that proved to be not access to content but the 5,000 special-interest communities where subscribers gathered to discuss common interests.

For business-to-business, he thinks that career information, job postings, and resume services will serve a similar role.

"Business to business is a huge chunk of people who work but don't use the Internet at work," he said. Often those same people have kids at home on AOL or the Internet. "We can help those people become productive on the Internet."

But the business e-commerce differs from consumer sales by avoiding what Walsh calls "the death spiral" model--"If you're not the lowest-margin producer, you don't survive."

"People in business believe in margins and loyalty and features and efficiency," he said.

Conference organizer Kevin Jones noted that customer acquisition costs are much less important on the business commerce side.

"The lifetime value of these customers is so much more than consumers," he said. While consumer marketers of books or CDs hope to reduce the cost of attracting a new customer to under $100, they must sell a lot of products to break even on that customer.

But business customers will be more loyal, Jones contends.

"It's not a whim where you decide to buy chemical solvents today," he said. "The potential is immense if you can become the default seller in a category."