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Customers Are Using B2B Exchanges to Get Prices -- and Buy Offline

Joe Bousquin

If only the computer terminal you're reading this on had a coin slot mounted on its side. That way, it'd be a lot easier to make money off of the Internet.

Yet, as so many business-to-consumer companies have painfully learned in the last six months, that's not the way it works. The Internet, it turns out, is a great medium for communicating and sharing stuff -- like information -- but it's still really hard to make money at it.

A lot of B2B players are in for the same harsh lesson now, some analysts say. As businesses actually start using the Internet to do business, an interesting thing is happening: People who work for businesses, the analysts are finding, act a lot like the people shopping for themselves -- they try to save money. That, in turn, makes it very hard for the companies trying to sell them things to make a profit.

"The bottom line is that you want to get the best price you can," says Jon Ekoniak, B2B analyst at U.S. Bancorp Piper Jaffray. In a recent report analyzing the sector, Ekoniak wrote that many companies are basing their entire B2B business model on aggregating pricing information, a strategy that he thinks will ultimately be self-defeating. In short, they may be providing their customers with just enough information to shop elsewhere.

"Essentially, we believe that product and pricing visibility, the cornerstone of many B2B sites, will be commoditized," Ekoniak wrote. "This information may now be required as the price of admission into the B2B world, but we believe to base a business model on this information is a losing proposition."

Some sites that aggregate pricing information, while bringing together communities of buyers and sellers -- so-called market makers -- are VerticalNet (VERT Quote), MetalSite and ChemConnect.

B2B sites are likely to have the information turned back on them. As an example, Ekoniak cites farmers who routinely use the Web to research the best prices on supplies they need -- say fertilizer or pesticides -- and then take that quote to their trusted local supplier as a bargaining chip.

"If farmers are going out and saying, 'This is the price I can get on the Web, what can you do for me?', what does that mean for other businesses?" Ekoniak said.

What it may mean is a lot of bad news, particularly because people are usually willing -- whether for themselves or their employers -- to do a little legwork to save some money. We've seen it in the B2C space too many times before.

Take the example of automobile purchasing. J.D. Power and Associates says that 40% of new-vehicle buyers used the Internet to research their purchase during the first part of 1999, and it expects that to increase to 65% by the end of this year. But less than 5% of new-car shoppers, the research firm found, actually purchase vehicles online.

Instead, like the farmers, they go to their local dealer to try to get the best price possible. Which means for the dealers themselves, profits are going down, not up. J.D. Power, for instance, found that 75% of car dealers responding to its survey said sales generated by online buying services resulted in lower gross profits on their overall sales.

With B2B exchanges popping up by the day, the availability of pricing and product information -- now the carrot used to attract corporate buyers' eyes -- is likely to become a must-have for any B2B site. But to keep those eyeballs, B2B companies will need collaborative add-ons that allow customers to transact their business online. After all, it's still a painful reality of the business world that while many items are listed online, ordering and payment is still done with faxes and paper checks.

"It's like ordering a book online at Amazon.com (AMZN Quote) and getting a bill three weeks later in the mail," says Bob Austrian, B2B analyst for Banc of America Securities. "The real promise of B2B now lies in reducing the cost of doing business with suppliers, customers and partners, not merely in providing more information."

Austrian says only those B2B players that can actually connect buyers' and suppliers' back-office departments -- say purchasing and receiving -- with one another, or those who enable businesses to collaborate together in outsourcing tasks, will be the ones to gain traction in the B2B future. And those are two very complex tasks.

"People are talking about finding the best price for latex gloves," Austrian says. "That's useful, but not nearly as much as helping the supplier of latex gloves significantly reduce the cost of doing business with it."

Other factors in the B2B world that are starting to sound very B2C: layoffs and pulled IPOs. Just last week, medical B2B player Neoforma (NEOF Quote) announced a restructuring complete with 80 job cuts, while B2B incubator divine interVentures said it would lay off approximately 10% of its workforce. On top of that, the S1s are starting to disappear: Much-anticipated offerings from Noosh and Impresse last week crawled back into the relative comfort -- at least for now -- of being closely held.

All this comes at a time when the term "B2B" is just now becoming recognized by the masses. Relative to B2C, then, B2B is coming apart at the seams with horrific speed, even in light of the sickening state of consumer-oriented Web sites.

"On a real macro level, what you're seeing is the life cycle that played itself out in B2C play itself out much more quickly in B2B," says Edward McCabe, B2B analyst for Merrill Lynch. "We came out more quickly, capitalized more quickly, and now we're having the shakeout much more quickly."

In fact, one mantra that the huge investment bank and research firm has been stressing for the past several months is that 75% of B2C Internet companies will likely not survive independently over the next five years. And the outlook for B2B could be even worse.

"I wouldn't be surprised to see a shakeout in B2B similar to that, if not even more Draconian," says McCabe. "If you are one of seven potential market makers in a given industry, two might make it. Numbers 3, 4 and 5 won't."