Business Models - Brokerage Model

BROKERAGE MODEL

Like Amazon, eBay is another pure-play Internet company, meaning that it conducts business solely on the Internet. However, instead of using the retailing model employed by Amazon, the firm uses a brokerage format that brings sellers and buyers together. The world's largest online auction site, eBay was founded by Pierre Omidyar in 1995 as Auction Web, a site that allowed sellers to list descriptions of items for sale, require a minimum bid, and set an auction's length between three and 10 days. When the auction expired, the highest bidder was able to purchase the object for the bid price, providing the minimum had been met. The buyer and seller were responsible for handling payment and delivery.

As site traffic grew, Auction Web began charging a small fee, basing it on the final price of each object sold. Because the auctioning process was automated, overhead costs were kept to a minimum and the site achieved profitability quickly. A feedback forum, which allowed buyers and sellers to rate one another, was put into place in 1996. Auction Web changed its name to eBay the following year. Despite competition from the Internet leaders like Yahoo! and Amazon.com in the late 1990s, eBay continued to thrive, mainly because it had developed the online auction business model first and had secured an extensive base of buyers and sellers.

Auction site Covisint functions as a B2B marketplace for the worldwide automobile industry. Launched in November of 2000, Covisint was first conceptualized in late 1999 by industry leaders Ford Motor Co., General Motors, and DaimlerChrysler to streamline the purchasing and production processes of automobile making in an effort to cut costs. The auto-makers envisioned an online marketplace that would improve new parts development processes by enhancing communication between automakers and suppliers; cut the time needed for vehicle development; and grant dealers more inventory control by helping them to stock what consumers want and maintain fewer cars on their lots. In mid-2001, Covisint functioned mainly as a procurement vehicle, making its money by charging fees for each transaction.

According to a July 2001 article in PC Magazine, eBay and Covisint stood out among the many online marketplaces that failed soon after they launched. It explained: "The Web-based business-to-business marketplace assumed that automating transactions would be enough to bring buyers and sellers together online." According to the article, successful implementation of this business model also requires a high volume of buyers and sellers, as is the case with eBay, or a strong incentive to join, which in Covisint's case stems from the ability of the large automotive buyers to ask smaller suppliers to participate the marketplace.

Another type of online brokerage model is the reverse auction. Using reverse auction technology, Priceline.com allows users to name the price they are willing to pay for airline tickets, hotel rooms, automobile rentals, mortgages, new cars, and long-distance telephone calls. Customers who submit a price are obligated to complete the purchase if a seller matches that price. Priceline makes its money via any spread between the price it pays for tickets, rooms, etc. and the price consumers are willing to pay. The firm achieved profitability in July of 2001, roughly six years after it was founded, lending credibility to the frequently criticized business model.

MySimon.com is an online brokerage that locates the lowest prices on a wide range of products and services for consumers and allows them to link directly to merchants to complete purchases. Known as a shopping bot, mysimon.com uses virtual learning agent software to search the inventory of more than 2,000 e-tailers. Search results may be sorted by price, merchant ratings, and other criteria. Shoppers who reach a decision about which item they wish to purchase begin the transaction by clicking the "Buy" button located beside each product. They are then routed to the Web site selling the item, where they can complete their purchase. Shoppers can use mysimon.com for free; the site makes money via online advertising and by charging merchants who wish to boost their visibility by paying a fee to add a bolder typeface to their listing.