ROOM TO GROW: B2B MARKETPLACES
In our previous blog post, ‘Consumer Marketplace Strategy: Building The Next Disruptor,’ we dissected the role that online marketplaces have played across consumer products and services. In the consumer space, there is no shortage of multi-billion-dollar online marketplaces including businesses like, but certainly not limited to, Airbnb (~$116B market cap), Uber (~$77B), and Etsy (~$31B). While there is still significant room for disruption in that space, we believe there is an even greater opportunity to shine in business-to-business.
Attractive Market Size
Global B2B spend is estimated to be $120T per year—more than double the estimated B2C spend1. The B2B opportunity is spread across billion-dollar and even trillion-dollar markets—with just a handful highlighted below. In recent years, we’ve spoken with a number of disruptive B2B marketplaces across a variety of verticals and the message from industry experts remains the same—B2C has innovated, while B2B is stuck primarily being run through email servers, phone lines, and fax machines.
Retention and Price Point
Beyond market size, B2B marketplaces can also benefit from unique spending dynamics not often seen in B2C transactions. In the B2C marketplace blog, we previously explained the importance of evaluating revenue retention alongside average order value (AOV). Most consumer marketplaces have either low AOVs and high retention or high AOVs and low retention. Some B2B marketplaces, on the other hand, can achieve both.
Assuming the B2B marketplace is well run, high retention is possible because the demand side of a B2B marketplace is a business with—more often than not—consistent supply requirements. This predictability of supply and the sheer purchasing power of businesses also leads to large AOVs relative to the consumer space. For instance, if you’re an organic, sugar-free protein manufacturer, it’s likely you’ll be purchasing organic erythritol in bulk on a regular basis. It’s true the take rate percentage of that transaction in a B2B marketplace will likely be low relative to B2C, but the absolute dollar value of that margin is made significant by the large transaction size.
“…High retention is possible because the demand side of a B2B marketplace is a business with—more often than not—consistent supply requirements. This predictability of supply and the sheer purchasing power of businesses also leads to large AOVs relative to the consumer space
In any business model, the customer value proposition needs to be clear to support sustainability. For marketplaces, both buyers and sellers need to feel they are better off using the platform than not. Through our conversations with B2B marketplace founders, we’ve found that buyers, when compared to suppliers, are often more receptive to leveraging a marketplace because of the almost instant appeal in having a greater selection, higher price transparency, and streamlined online purchasing. This means that B2B marketplaces are often more supply-side constrained. To combat this, customer acquisition is often focused on scaling supply to ensure the marketplace remains balanced as both sides grow linearly.
The best way to start off building supply is to focus on a handful of early adopters that are forward-thinking who see the online B2B marketplace opportunity. In the beginning, it’s often best to onboard suppliers that don’t directly compete to avoid a conflict among your pool of early adopters. For instance, a bulk-food ingredients B2B marketplace would be wise to onboard one flour supplier to start with. In doing so, B2B marketplaces can avoid the friction associated with forcing suppliers to list directly next to a competitor as they grow. Although demand will initially see less price competition, the marketplace will still offer a streamlined online purchasing experience, fair prices, and a one-stop shop for various products within the vertical.
Over time, competition on the supply side is inevitable as demand outpaces supply. At this stage, early adopters on the supply side will likely be driving too much additional revenue through the marketplace to leave and new suppliers will want to be a part of the proven model. The holy grail of the B2B marketplace occurs when multiple suppliers are competing for strong demand such that the marketplace begins to show the best possible price to buyers.
B2B Marketplaces: The Timing is Now
It’s hard to reconcile why B2B marketplaces are still in the early innings of adoption given the highly attractive nature of the market and the speed at which the B2C market has evolved.
One potential reason for the historical lag is the sheer complexity of B2B transactions compared to B2C. B2B transactions are coupled with complex workflows including specific payment terms, negotiated pricing, required documentation, and customized products.
With open architecture as a standard and software development efficiency on the rise, it’s now more realistic than ever for founders to build API-driven, vertical-specific software to support complex B2B marketplace transactions. We are also at a point in time where champions at various companies have grown up as digitally native consumers and they are demanding traditional industries to shift online. More than ever, founders are taking advantage of these dynamics to tackle this attractive B2B marketplace opportunity.