6. On-Line Transaction

As the web continues to grow the ability to locate sites and goods/services of interest becomes taxing for potential consumers. This is a "good news, bad news" story—the selection of items available in the virtual market place is ever increasing but it is harder to find the best product and the best price due to the expansive size of the network. Some quick thinking firms are moving to fill the void and act as cyber-intermediaries on the web. These firms match buyers and sellers and collect fees from one or both of the parties. Other firms are finding a niche in the e-commerce world by specializing in the handling of specific transactions for which they collect a fee. The firms can generate revenues by specializing in the processing of specific transactions and collecting fees while minimizing the overall cost of handling the transactions. The most common example of this type of an on-line transaction-processing firm is a company that specializes in handling credit card transactions. Despite the predictions of massive "disintermediation" in the virtual marketplace, new intermediaries have found ways to create value for consumers and generate revenue through on-line transactions.

Business Drivers for the On-Line Transactions Model and Cyber-Intermediaries

There are several elements of the business environment that resulted in the rise of cyber-intermediaries: the cost of search time for consumers, the size of the web, the cost of advertising and acquiring of customers for sellers, and the economics of specialization. Firms that use the on-line transaction business model have used one or more of these elements to create a unique position for themselves in a particular segment of the market.

• Cost of search time – Consumers who use the web have reported frustration with the their inability to find what they are looking for on the web (see http://www.gvu.gatech.edu/user_surveys/). They cite this as one of the primary reasons for not purchasing more goods over the web. Cyber-intermediaries that specialize in particular types of goods or services can help consumers reduce their search time by providing an easy to use gateway to a variety of sellers of a particular good or service. Several of the travel services including Travelocity perform this function.

• Size of the web – This element relates directly to the amount of time it takes to search the network. Intermediaries that have a large number of down-stream partners and/or highly refined search engines can "reduce" the size of the web for consumers.

• Cost of Customer Acquisition – In a recent interview, an executive of the Internet Shopping Network indicated that the current cost of acquiring a new customer is in the $7-8 range. He indicated that the cost must be reduced to around $4 for their business model to be successful, given the range of products they sell and the margins they are able to charge. ISN is one of the oldest, most well known firms on the web. Other less well known companies must have significantly higher customer acquisition costs. Cyber-intermediaries can reduce the overall cost of acquisition for firms by aggregating large numbers of potential customers through one site and distributing them to the appropriate web pages. The intermediary can collect a referral fee that is lower than the receiving site's average cost of customer acquisition.

The Basis of the Business Model

The cyber-intermediary or on-line transaction model is based on the intermediary receiving a fee from one or both parties involved in a transaction. The most common implementation of this model involves the collection of a fee from the ultimate seller of a good or service. This can take the form of a percentage of the purchase price, a fixed fee per transaction, a fee for the referral of a customer(regardless of whether or not a purchase actually occurs), or the payment of a subscription fee that allows the merchant to participate in the referral process.

There are many examples of the "percentage of purchase" and "per transaction" fee schedules. Several of the "malls" on the web are not really malls but a form of cyber-intermediary where the "mall" provider(intermediary) collects a percentage fee for all goods sold through the mall location. The vendors save on search costs and the intermediary leverages the high traffic flow through the site as the "value add" that is then charged to the vendors. Credit card and debit card processing is another example where the intermediary can charge fees based on either the volume of the purchase or the transaction. Credit card surcharges are a percentage of the sale. The major credit card companies will charge processing sites, which do large volumes of business and have higher levels of security and integrity checking. These firms can act as intermediaries for other firms based on their economies of scale and operations. Debit card transactions, which would be processed by the same intermediaries, have a flat per transaction fee which is not affected by the value of the purchase.

One of the more interesting new models is the "subscription" model. Under this approach a vendor pays the intermediary for the right to receive customer requests for services. This model was implemented by Auto-By-Tel which charges automobile dealers an average of $1000 a month to be part of the "network". When a customer submits a request for a quote through Auto-By-Tel the system forwards the request to dealers that carry the requested model of car. The dealers are also selected to receive the request based on geographical location and whether or not they have paid a fee to be an exclusive dealer in a specific market. This model is very different from the one used by Autoweb.com. This intermediary charges no monthly fee but collects $25 for each qualified request it forwards to a dealer. Again, the dealer(merchant) pays the fee.

There are few intermediaries that charge the buyer a fee for using the service. A select few sites that conduct on line auctions for collectibles such as baseball cards and beanie babies charge "buyer premiums". Under this approach, the auction proceeds and the winning bidder pays a percentage(usually in the area of 10%) to the auction house.

Some Well Known Examples

Cyber-intermediaries are often not readily identifiable by simply logging onto their sites. The financial arrangements are often not visible to the consumer and it is often the case that the buyer does not even know they are dealing through an intermediary. Sites like Auto-By-Tel sell no merchandise and carry no inventory. Others like NECX are experienced at matching buyers and sellers and operating as a true distributor or middleman.

So who are the new cyber-intermediaries? So examples include:

• Cybermeals: This organization works with restaurants and the major search engines to create the world's largest on-line meals network. Cybermeals has signed up 25,000 restaurants nationwide and concluded agreements with Lycos, Yahoo, Excite and AOL to be the primary reference site for on-line meal requests. In the past two months Cybermeals has announced over $30million in agreements with the major search engines. The company also offers a revenue sharing program with sites that refer clients to Cybermeals. Although the exact details of the reimbursement program were not available, Cybermeals pays a percentage of the meal costs back to the site that refers the customer.

• Auto-By-Tel: This company has participated in the sale of over $2 billion in car sales since its inception. The company has a network of over 2,700 participating dealers which pay a monthly subscription fee that averages $1000. Although the firm has backers that include the likes of GE Capital it has not yet turned a profit. The Auto-By-Tel model is unique because the company generates revenues from the subscriptions regardless of the volume of referred customers or cars sold by the dealers.
• Travelocity: This company has taken the model of the traditional travel agent and transferred it to the web. Travelocity has interfaces to all the major airlines, hotel chains, and car rental companies and presents a wide array of additional information on destinations from the web site. The company generates revenues through the commissions it receives from the travel industry firms including the airlines and hotels.

Conclusions

The much heralded death of intermediaries on the Internet has not occurred. In fact, as the network continues to grow the opportunities for cyber-intermediaries appear to growing in number. There are three major areas that are ripe for intermediaries: markets that are composed of many, hard to find providers, markets where the products are information rich, and markets where the value of the product is high and therefore the risk associated with a "bad" purchase is high. The collectibles market typifies a market that is composed of dispersed providers. Intermediaries that aggregate data from many small sources (including firms like Cybermeals) can flourish on the web. Products like mortgages, life insurance, stocks, and shipping services are all information rich and would be well served by high performing intermediaries that collect data from the world-wide market. Finally, consumers will use intermediaries that help them reduce price and quality exposure on high-ticket purchases. Cars and homes are both examples of products that can be successfully managed through intermediaries on the web.