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Brokerage Model

BROKERAGE MODEL

Whether a company sells products or services to consumers, other businesses, or both, there are many different ways to approach the marketplace and make a profit. Business models, of which the brokerage model is simply one, are used to describe how companies go about this process. They spell out the main ways in which companies make profits by identifying a company's role during commerce and describing how products, information, and other important elements are structured. Just as there are many different industries and types of companies, there are many different kinds of business models. While some are simple, others are very complex. Even within the same industry, companies may rely on business models that are very different from one another, and some companies may use a combination of several different models.

General business models by themselves do not necessarily map out a company's specific strategy for success. Strategic marketing plans, which are a specialized type of business model, are used for that purpose. They identify the specific situation a company finds itself in within a particular marketplace, the differentials that set a company apart from its competitors, the marketing tactics used to accomplish strategic objectives, and so on.

Business models involve different levels in what are known as supply/value chains. Value chains outline the activities involved in creating value from the supply side of economicswhere raw materials are used to manufacture a productto the demand side when finished products or components are marketed and shipped to re-sellers or end-users. Companies review and analyze different steps in value chains to create optimal and effective business models.

Some long-established business models used in the physical world have been adopted on the Internet with varying degrees of success. Among these are mail-order models, advertising models, free-trial models, subscription models, and direct marketing models. Other business models are native to the Internet and e-commerce and focus heavily on the movement of electronic information. These include digital delivery models, information barter models, and free-ware models.

Every business model has its own inherent strengths and weaknesses. Just as is the case in the physical world, online business models vary in their suitability for different enterprises. Business models themselves are not enough to guarantee success in the physical or online worlds. As Jeffrey F. Rayport explains, "Every e-commerce business is either viable or not viable. They hardly qualify for the paint-by-number prescriptions that business people seem to expect. Business models themselves do not offer solutions; rather, how each business is run determines its success. So the success of e-commerce businesses will hinge largely on the art of management even as it is enabled by the science of technology."

THE BROKERAGE MODEL

One Internet business model is the brokerage model. At the heart of this model are third parties known as brokers, who bring sellers and buyers of products and services together to engage in transactions. Normally, the broker charges a fee to at least one party involved in a transaction. While many brokers are involved in connecting consumers with retailers, they also may connect businesses with other businesses or consumers with other consumers. A wide variety of different scenarios or business configurations fall under the banner of a brokerage model. These include everything from Web sites posting simple online classified ads and Internet shopping malls (Web sites that sell products from a variety of different companies) to online marketplaces, online auctions, aggregators, and shopping bots.

Some brokers simply focus on fulfillment between buyers and sellers. Travel agents like Travelocity.com are one example of this approach. According to the company, Travelocity.com was the third largest e-commerce site in the early 2000s. Along with a large database of information on different travel destinations, Travelocity.com was able to provide reservations "for 95 percent of all airline seats sold, more than 49,000 hotels, more than 50 car rental companies and more than 5,000 vacation and cruise packages."

Online marketplaces are example of brokers with a business-to-business focus. These entities bring large groups of commercial buyers and sellers together online. In the early 2000s, third-party companies like Commerce One Inc. and Ariba Inc. offered software and services that were used to operate different online marketplaces. Numerous other companies provided similar kinds of services and applications. Online marketplaces existed for many different industries, ranging from the food and beverage industries to consumer packaged goods and interior design. The costs for participating in an online marketplace varied. In some cases, participating companies (sup-pliers, purchasers, or both) were required to purchase special software from a third party. Third parties also levied different charges for making transactions, joining the network, updating catalogs of available products, and so on.

Aggregators are brokers that bring business owners or consumers together to get better rates on things like long-distance telephone service. The key concept is group purchasing, which enables individual businesses or consumers to get better rates than they could obtain on their own. In the early 2000s, a business-to-business aggregator called Demandline.com combined similar requests for core business services like retirement plans and Web site hosting from small business owners and used a reverse auction approach to obtain rates normally reserved for larger corporations. Demandline.com received small commissions from service providers and did not charge its customers (those bidding for services) any fees.

Metamediaries are another kind of broker. These entities, which include online shopping malls, not only bring interested parties together, they also provide different services related to the actual transaction, such as billing or order tracking. HotDispatch was one such broker. It provided services involving technical communities (groups of technical professionals with specific interests). These professionals used HotDispatch to market and purchase knowledge services, including bids for different technical projects, software, and even questions and answers. According to the company, members of this service were able to "post a question or project and assign a dollar value for either the resolution of the question, or the compensation fees associated with the outsourced project. Once the question or project is posted, it is visible to members in all of the technical communities that subscribe to the service."

Intelligent agents such as shopping bots are essentially software programs that operate unattended on the Internet. Consumers use them to search for product and pricing information on the Web. Each shopping bot operates differently, depending on the business model used by its operator. In one scenario, shopping bots direct users to retailers who, by subscribing for a fee, are part of a closed system.Shop-ping.Yahoo and [email protected] were examples of this model in the early 2000s. Open systems are a more common arrangement and involve agents that include the entire Web in their searches. Shopping bots were very popular with consumers in the 1990s and early 2000s. International Data Corp. revealed that about 4 million shoppers took advantage of the technology in October 2000 alone. However, shopping bots weren't popular with some companies because of their ability to initiate bidding wars and eat away profits in the process.

In addition to searching for durable goods, electronics, and other items, consumers also were expected to use bots more frequently in the area of personal finance. In Bank Systems & Technology, Andersen Consulting reported that personal financial bots (PFBs) would reshape this industry by becoming "virtual financial intermediaries" that carry out transactions and searches for financial products via ATMs, wireless phones, and televisions. While this concept had not been widely adopted in the early 2000s, it posed a possible threat to the umbrella model used by many traditional banks, in which several products and servicesincluding loans, credit cards, and insurancewere offered to customers by one provider.

FURTHER READING:

"About Demandline.com ." Demandline.com, Inc. April 27, 2001. Available from www.demandline.com.

Bambury, Paul. "A Taxonomy of Internet Commerce." First-Monday. 1998. Available from www.firstmonday.

Baumohl, Bernard. "Can You Really Trust Those Bots?" Time. December 11, 2000.

Gove, Alex. "Bot and Sold." Red Herring Magazine. August,1999. Available from www.redherring.com.

McDowell, Dagen. "Dear Dagen: Business Models Explained." TheStreet.com . September 13, 1999. Available from www.thestreet.com.

Pallmann, David. Programming Bots, Spiders, and Intelligent Agents in Microsoft Visual C++. Redmond, Washington: Microsoft Press. 1999.

Rappa, Michael. "Business Models On The Web." April 9, 2001. Available from www.academic.uofs.edu.

Rayport, Jeffrey F. "The Truth About Internet Business Models." Strategy & Business. Third Quarter, 1999. Available from www.strategy-business.com.

Schneider, Ivan. "R2-D2 Meets 401(k)." Bank Systems & Technology. November, 2000.

Schwartz, Ephraim. "Web Bots Enhance Self-Service Experience." InfoWorld. February 7, 2000.

Timmers, Paul. "Business Models for Electronic Markets." Electronic Markets. April, 1998. Available from www.electronicmarkets.org.

Van Winkle, William. "Strength in Numbers." Home Office Computing. September, 2000.

SEE ALSO: Aggregators

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