Sellers in all product categories, from raw materials to highly engineered machinery, have approached the Internet reluctantly. Because business-to-business (B2B) 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"1 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 on-line.

Many sellers have overlooked a third kind of vehicle for on-line 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 off-line counterparts or because people expected the Internet to make such intermediaries extinct. Even so, start-ups, traditional off-line distributors, and some manufacturers have established them. Grainger.com, which specializes in maintenance, repair, and operations (MRO) 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 (see sidebar, "A success story").

Offering a reasonable compromise between price and service, e-distributors combine many features of the other two models. Although they specialize in serving customers whose orders are too small for bilateral relationships, they can do so economically, since they make their money from markups. In this segment, e-distributors don’t have to worry about competition from B2B marketplaces, which depend on collecting a vast number of small transaction fees (exhibit).

Benefits for buyers

If a customer wants rock-bottom prices, it is likely to prefer a B2B marketplace; if it wants a close relationship with a supplier because its orders are large and critical to its core operations, it may prefer bilateral e-trade. But many customers don’t fall into either category. Some of them merely seek a wider variety of choices than a single supplier could offer; others want guidance amid the welter of options on the open market. An e-distributor offers both advantages, and such buyers are often willing to pay more to get them. In fact, however, all but the largest buyers can usually obtain better prices from e-distributors than they could on their own, since e-distributors obtain discounts from suppliers by aggregating demand.

Moreover, e-distributors provide the convenience of one-stop shopping for a wide range of products, from processed materials to finished goods—a virtue that is especially valuable to buyers in fragmented markets, such as office or MRO supplies, in which many products, brands, and suppliers vie for attention. Buyers that work with e-distributors like the idea of having only one order to place and track and only one invoice to pay.

Offering a limited, preselected range of goods and brands does more than serve the convenience of buyers; it also amounts to a form of advice on what to buy. Mercateo.com, for example, a start-up e-distributor of MRO products, carries the stock of only the top two or three suppliers in each product category. Sites often provide explicit guidance by posting the opinions of customers or independent researchers and by featuring troubleshooting guides.

Once buyers know what they want, the same search engine that located the product can facilitate the transaction. SciQuest, for instance, a distributor of laboratory supplies, has linked its on-line search-and-order engine to the in-house systems of its customers so that once an authorized manager has approved a purchase, the order is dispatched automatically.

E-distributors give sellers a chance to retain some control over their sales channels while at the same time minimizing their service costs

Benefits for sellers

The Internet has exposed many buyers to a range of suppliers they hadn’t previously known about and has promoted comparison shopping, thereby threatening their loyalty. Fortunately, e-distributors give sellers an opportunity to retain some control over their sales channels while minimizing service costs.

A seller without a strong brand name must spend considerable time and money attracting customers to its World Wide Web site. Working through well-known distributors such as Office Depot (office supplies) or GE Polymerland (plastics) is an alternative that is particularly advisable for sellers seeking to enter new geographic markets or to reach market segments in which individual customers are unlikely to make huge purchases.

Furthermore, e-distributors can take over a part of the value-added processing—arranging logistics, breaking bulk quantities into smaller lots, and even customizing products. GE Polymerland, for instance, distributes a range of customized plastic compounds and will mix resin colors to suit; it also offers troubleshooting guides and technical support. Ingram Micro, a computer distributor, configures hardware and installs software to order.

In addition, e-distributors assemble sellers’ products into packages. Office Depot, through its "business-in-a-box" concept, plans to offer home businesses many bundled products and services for payables and accounting, recruiting and hiring, and public relations. Piggybacking onto such offers can bring a seller new sources of revenue.

What kind of e-distributor provides the most useful service? Those with off-line experience and assets—unlike on-line pure plays—enjoy brand recognition, established customer and supplier relationships, and delivery logistics that have already been worked out. Office Depot, one of the world’s most successful e-distributors, has leveraged its strong brand recognition, preexisting customer base, and marketing and sales infrastructure to drive a critical mass of transactions onto the Web. Long-standing supplier relationships and strong warehousing and delivery capabilities have made it relatively simple for the company to fulfill its on-line promises. Start-ups, by contrast, must find partners to fulfill orders and lack the infrastructure to go beyond pure distribution by offering services such as breaking bulk lots into smaller quantities and customizing products to meet the precise specifications of customers. Besides, partnerships and acquisitions go only so far: most start-ups lack the know-how to fend off seasoned distributors that have moved on-line.

Before B2B marketplaces reshape their respective industries, sellers should establish bilateral e-trade relations with their most loyal customers. If that course isn’t feasible, sellers should try some kind of e-distribution arrangement if they serve low-volume markets or customers looking for a balance between low prices and customized service. Sometimes, perhaps, the answer will be to embrace two—or perhaps all three—models.