While our previous articles (such as Capturing Value at the Edges) have focused primarily on the community of customers, there are many instances where your own supplier community is also vitally important. When your organization acts as a market-maker, both communities must be addressed equally to truly seize the opportunities available.
Also known in some circles as a middle man, a market-maker is an entity that facilitates both ends of a buy/sell transaction, typically making a profit on the spread. One of the much-heralded benefits of the internet is the reduction of the need for middle-men. Instead, it is claimed, buyers and sellers can find each other directly, reducing the cost of doing business.
Obviously, this has not entirely been the case. Consumers still like one-stop shopping and suppliers prefer having fewer interactions to move their products. Transactional costs have not been reduced to zero, and every transaction still maintains some fixed cost in terms of time and effort spent. Larger transactions then incur a lower cost as a percentage of the deal. This is similar to paying the $2.50 ATM fee on a $20 withdrawal or a $200 withdrawal. In the first case, the transactional cost is over 10%, while in the second, it's an order of magnitude smaller.
Market-makers can aggregate these transactions into fewer larger transactions, providing value to both ends while still realizing a profit.
EBay and PayPal
EBay, particular when paired with PayPal, represents a market-maker. Consumers effectively have one-stop shopping, and suppliers likewise have basically one entity to deal with. EBay reduces the transactional friction through both its reputation system and the PayPal payment system.
Google AdSense and AdWords
Google's AdSense and AdWords advertising network is a true market-maker, in that buyers and sellers never directly interact at all. From each perspective, Google is the only buyer of space, and the only seller of space. If each website had to make arrangements to sell its advertising space, the cost of doing so may end up being prohibitive. Likewise, if each seller of advertising had to contract with each site to arrange for display of its ads, the same would be true.
A quick browsing of the web will turn up many websites that make a handful of dollars a month selling space through AdSense. The transactional cost without Google would make the effort futile.
The Supplier Community
In the Google world, the multitude of blogs and sites selling advertising space are the suppliers. Google, being a trusted market-maker makes it easy for these small suppliers to realize income where not previously possible. Google treats the supplier community well, in this case. They provide tools necessary to sell the space easily, incurring virtually no transaction costs for the supplier, regardless of the number of buyers.
Market-makers profit on the spread in each transaction. Since the consumer side of the market is fairly evident and strong, these middle-men should concentrate on the supplier community. By investing in the supplier community, they can increase the value of the goods supplied and also increase their own margin. Google can help suppliers, through education and tools, increase the value of the space they provide to advertisers. EBay can help sellers make their products more attractive and help increase stock turn-over.
When a Fortune 100 company buys products from another Fortune 100 company, their sheer size makes them their own market maker. General Motors can buy advertising from Time-Warner fairly easily, without much of a transactional cost due to the size and number of transactions they do on a regular basis.
When either end of the transaction is a small entity, the transactions themselves tend to be small, and can benefit from a market-maker between the consumer and supplier communities. In effect, the middle-man is a community proxy, allowing outsiders to address the multitude of members as a single entity.
Micro-economies can finally occur when the transaction costs of doing business become low enough to realize actual profit. An organization that sits between communities of suppliers and consumers can reduce the transactional costs by aggregating them into fewer larger transactions. Without them, the entire community would evaporate.
Traditionally middle-men have been seen as purely adding costs ("we eliminate the middle-man!"), but positioned correctly in a potential micro-economy, the middle-men become the enabling factor, helping grow the entire market.
While the internet was claimed to allow direct connections between the supplier and consumers, the real value comes from allowing small suppliers and small consumers to do business on a larger scale through aggregation as enabled by a market-maker. Ultimately, the market-maker has to treat both ends fairly, or the market will find other avenues to conduct business. All three parties are in essence fungible.