Roberta Kowalishin, vice-president of technology ventures at
chemical exchange Chematch.com, explains why "liquidity" has become
the hottest issue in electronic marketplaces
B2B markets often claim that they have the most "liquidity" by
trumpeting the number of members, or volume of transactions.
Transactions and members, however, do not measure liquidity - one
of the most misused terms in marketplaces today. A market is only
liquid to the extent that a buyer can easily find and transact with
a seller willing to take the other side of a transaction or vice
versa.
The single largest issue in B2B markets today is how to get
enough liquidity so that when buyers and sellers come to a
marketplace, they find what they are looking for and can complete a
transaction. B2B marketplaces that don't find the secret to
building liquidity quickly won't survive - and those that do have
already made a respectable start to the complex "chicken and egg"
issue of building liquidity. Successful B2B liquidity building has
five principles:
- Domain expertise is essential in understanding customers,
processes and transactions today and helping move them online
- Creative incentives are needed to lure halfhearted traders into
the marketplace
- A human "swat" team needs to monitor activity and provide
personal real-time service while the market is running
- Products need to be described and launched in a thoughtful,
orderly way
- Technology must provide a simple, satisfying
experience.
You can't set up a chemical exchange without knowing something
about chemicals or having a relationship with at least some of the
major manufacturers, buyers, traders, distributors, speculators or
resellers of chemicals.
Understanding the dynamics of the industry will determine
whether to recruit buyers or sellers first. Focusing first on the
group and processes with most pain means understanding the industry
well enough to know the pressure points. Domain expertise is the
reason that Chematch.com identified lack of price
transparency and the ability to manage risk as pressure points in
the bulk chemical market.
Back in the early 20th century, the Chicago Board of Trade used
creative incentives, like a daily free lunch of cheese, crackers
and ale, to lure traders when "weeks could go by without a single
transaction taking place".
Today, large companies recognise their power and know that the
liquidity they bring to marketplaces is very valuable, often
requesting equity in return for their liquidity. This means it is
now essential to develop a plan for rewarding selected marketplace
participants with private incentives like equity, aggressive early
pricing, or volume discounts.
In the early B2B days, equity was given freely, often not even
tied to liquidity metrics. The right incentives today need to
target selected companies and be tied to achievable
transaction-based metrics so that both the marketplace and the
participant share in value creation.
Real-time human "swat" teams are another essential ingredient.
Human relationships are needed to build liquidity, particularly in
markets whose participants are used to transacting this way. The
liquidity swat team qualifies members and knows their trading
preferences personally. Throughout the day, the swat team monitors
activity and fair trading practices and its members regularly make
phone calls, or provide in-person training. Above all, the swat
team has first hand knowledge of how the most active participants -
the early adopters - are using the tools and provides frequent
input to product development teams.
Helping buyers and sellers find what they are looking for is a
complex, underrated problem for many marketplaces. Without standard
classifications or product specifications, a marketplace becomes a
bulletin board, where similar products can be entered freeform,
making search and comparison almost impossible.
Experience suggests that it is best to define and deliver on
liquidity for a small number of products first before broadening
the set of products and services offered. A marketplace needs to
present a clear message for the industry about the liquidity today
and strategy for the future, so that expectations are met when
buyers and sellers enter the market.
Finally, a fatal error for B2B marketplaces is implementing
elegant, sophisticated technology tools that can create
highly-engineered, theoretically pure market designs that are well
beyond current industry practices. For highlytraded products, a
central liquidity pool will form to create some kind of electronic
exchange. For less liquid products, other types of systems that
allow attribute matching, "crossing" or auction formats are needed.
In any case, simple processes and uncluttered interfaces are best.
As the sophistication of participants grows, so can the
technology.
Liquidity equals domain expertise plus technology, where domain
expertise includes creating the right incentives, human swat teams
and product definitions for the market.
Companies that are developing e-services like logistics, credit
and payments would be well-advised to partner with marketplaces
that understand and are delivering liquidity - because without
liquidity, nothing else in the marketplace matters, including
worrying about which e-services to offer and how to integrate into
a company's back office.