B2B e-commerce hubs tend to be two-way networks that mediate between buyers and sellers and create benefits for both sides. The value created by consumer hubs increases linearly the number of buyers and value created by B2B hubs increases as the square of the number of participants.

Here’s the math. At Buy.com, the benefits to an individual buyer are roughly the same whether there are 100 customers or 100 million customers, because the benefits to buyers are primarily the time saved from going to a physical store and looking for an item. Buy.com does, however, benefit on the supply side, by tallying savings in marketing and procurement. These benefits tend to be linear in that the total value created by Buy.com rises linearly in the number of customers.

Profitable hubs
Now, consider a B2B hub. It creates value by reducing search costs, reducing information transfer costs, standardising systems and improving matching for both buyers and sellers. Buyers benefit because they have more choices and sellers benefit because they have access to more buyers.

Take the case of five potential sellers and buyers in a B2B market. In the absence of the hub, each seller would have to determine the identity of each buyer, through advertising or a direct sales force. Each seller would have to contact each buyer each time it wanted to do a transaction. Without a hub, the participants would have to undertake 25 searches - each seller looking for five buyers - and then make 25 contacts each time the sellers wanted to sell.

Now look at this electronically: the hub finds the buyers and sellers, reducing the number of searches to 10. Similarly, each time the sellers want to sell, there are only 10 contacts - five postings on the hub, and five views by the buyers.

The methodology is similar for matching buyers and sellers, standardising systems, and transferring information such as credit checks, product descriptions and evaluations. Further, the complexity of the benefits a hub offers makes it difficult for competitors to offer customers similar benefits. This is particularly true for matching between buyers and sellers in auctions and exchanges. A buyer is far less likely to find a match in an illiquid hub than in a liquid one. Small wonder, then, that eBay is profitable and commands a rich valuation.

Focus needed
In contrast to pure financial marketplaces, hubs are contextual marketplaces, hubs focus on a specific dimension of it. Attempting to be everything to everybody is a recipe for failure.

A hub, though, can specialise vertically along a specific industry, or it can specialise horizontally along a specific function or business process. Based on these dimensions, the universe of hubs boils down to two primary types: vertical and functional. Together, they form the quilt of B2B e-commerce.

Vertical hubs
Vertical hubs serve a vertical market or industry focus. They provide deep domain-specific content and domain-specific relationships. Examples: Altra Energy (energy), Band-X (telecom), Cattle Offerings Worldwide (beef and dairy), SciQuest.com (life sciences), e-Steel (steel), Floraplex (florists), IMX Exchange (mortgages), PaperExchange (paper), PlasticsNet.com (plastics) and Ultraprise (secondary mortgage exchange).

The likely success of a vertical hub increases with the following: greater fragmentation among buyers and sellers, greater inefficiency in the existing supply chain, creating critical mass of key suppliers and buyers, domain knowledge and industry relationships, creating master catalogues and sophisticated searching, and adjacent verticals for leveraging existing supplier or buyer base.

Functional hubs
Functional hubs focus on providing the same functions or automating the same business process across different industries. Their expertise usually lies in a business process that is fairly horizontal, which means that it is scalable across vertical markets.

The success of a functional hub increases with the following: degree of process standardisation, process knowledge and work-flow automation expertise, complementing process automation with deep content and ability to customise the business process to respond to industry-specific differences.

The primary challenge for functional hubs is to deliver industry-specific content. They target functional managers who organise their work around their functional area. The risk: gravitating towards a vertical hub for their industry and relegating the functional hub to become a back-end service provider.