Supplier Marketplaces/Sourcing Discovery Networks: Abandon Hope, Average Suppliers Who Enter Here

Since Ariba Discovery began to make a name for itself as a prototypical supplier search tool in the past 12 months, I've gotten a number of questions from both the purchasing community and investment types about the economics of such models, especially for vendors. Personally, as a supplier, I think advertising in such environments is not necessarily a bad investment. In fact, if you excel in responding to requests online and have a ready-made product for a highly-transactional situation, it can be a great investment. Without question, suppliers that excel in an online environment like MarkMaster can do exceptionally well. According to the above-linked press release from Ariba, MarkMaster's CEO suggests that 80% of its "business comes to us through Ariba Discovery."

Now those are some pretty impressive numbers. But how does the average supplier fare in supplier networks and marketplaces? The answer might surprise you. In digging into the business models of a number of networks, we've found that these environments, at least from a supplier search/discovery perspective, are largely winner-take-all. The suppliers that do well end up excelling disproportionally to the average vendor, who often ends up losing money in cases where upfront or yearly fees are required.

Last year, Spend Matters spoke with Kevin Govin, CEO of MarkMaster, the supplier referenced above. He suggested that "Fees are inconsequential. For our organization, as a manufacturer focused on custom products, it is the cheapest way to acquire customers. For MarkMaster, being on a platform (i.e., Ariba) reminds people to order." Around pricing, Govin told us, "volume-based fees are better for us based on our size." However, "Customers need to realize the fee structure is changing and that the supplier fees are ultimately added back into the product cost." In other words, even a world where network discovery and supplier search appears free to buyers, it really never is. They're just bundled into suppliers' SG&A costs, which are eventually pushed back on buyers.

The Spend Matters bottom line on this nascent yet growing market is that any supplier tempted to write a check to a vendor like Ariba should realize that statistically speaking across typical marketplace business models, most will probably not see it back. But suppliers that excel will do exceptionally well.

Jason Busch