So, you are a business. And you are looking to sell your products/services to other businesses. Where would you find your potential buyer? While word-of-mouth marketing, and references are traditionally proven strategies, in today’s day and age, it is called B2B Marketplace.
As the name suggests, it is a digital platform, an eCommerce platform, that allows businesses or the B2B buyers and sellers to commence businesses and network. Think of a B2C eCommerce platform like Amazon, where end users can buy any product of their requirement, a B2B Marketplace will help businesses sell their products/services in bulk with a single most glaring difference, on a B2B marketplace, the sellers are the brand themselves, manufacturers, suppliers, and wholesalers. And your end customers will be other businesses. The transactions between them are moderated by marketplace operators.
What Amazon is to B2C, Amazon business is to B2B.
B2B sales are more complex and lengthier compared to B2C. To simplify things, a B2B marketplace allows businesses to connect and trade on one platform. This helps businesses streamline their communication and transactions.
Successful B2B marketplaces share a common goal: offering a user-friendly experience and tools to stay competitive. While specific features may vary, there are essential functions to consider when choosing a B2B eCommerce platform.
It represent a pivotal aspect of a robust B2B marketplace solution, affording you the ability to exert control over your company page and associated information. This encompasses comprehensive management access for your profile, content details, contact information, pricing structures, and team role administration.
It is imperative within the realm of B2B eCommerce marketplaces. Many individuals prefer autonomous order placement rather than engaging with customer service representatives. Consequently, a robust B2B eCommerce marketplace must offer features that facilitate this self-service paradigm for companies opting for such an approach. The marketplace must exhibit high responsiveness and intuitive design to foster an enjoyable user experience. Notably, businesses frequently seek solutions involving quote requests, order submissions, and shipment tracking—attributes that should be seamlessly supported by the chosen B2B marketplace.
These are paramount in the digital domain, and B2B marketplaces are no exception. Ensuring the utmost confidentiality and security of data is essential for instilling trust and confidence among organizations utilizing the platform. Choosing a B2B marketplace that prioritizes data protection and shields against potential breaches is of paramount importance.
It is a fundamental component of any B2B eCommerce marketplace. The platform should facilitate user-friendly filtering and searching mechanisms for specific vendors and businesses. An ideal marketplace boasts an intuitive search functionality enabling swift and accurate seller filtering based on brand, price range, and product availability.
The cornerstone of a B2B marketplace lies in its agility and speed, aligning seamlessly with the dynamic nature of markets and industries. The marketplace’s eCommerce functionalities must exhibit adaptability, accommodating shifting trends and demands. Buyers and sellers must rely on a flexible and customizable platform that empowers them to personalize onboarding strategies, modify order submission and processing protocols, and replenish supplies promptly when required.
These are integral to the efficacy of any technology. A well-rounded B2B eCommerce marketplace should seamlessly interface with existing applications and tools within your organizational ecosystem. This harmonious integration fosters streamlined processes and enhances the overall experience for both buyers and sellers.
Want to know 10 Crucial KPIs for B2B eCommerce marketplace? Read this
A B2B eCommerce marketplace can serve as a potent tool for organizations seeking to revolutionize and optimize their business operations. By harnessing the capabilities of a B2B eCommerce platform, companies can streamline their processes and engage with like-minded enterprises to accelerate their business growth.
Utilizing a B2B eCommerce marketplace offers several benefits, including:
1. User-Friendly Solution: B2B marketplaces simplify interactions between organizations, providing a digital platform for businesses to showcase their products and services while facilitating bulk order placements. As organizations prioritize digitization and automation, adopting B2B software that supports secure virtual transactions can give you a competitive edge.
2. Enhanced Profit Margins: Typically, B2B businesses offer products at wholesale prices, encouraging larger order quantities and faster revenue generation. With numerous buyers and sellers on the same B2B eCommerce platform, marketing expenses can be reduced, as it becomes easier to connect with and promote products to other companies.
3. Increased Security: Many transactions on B2B eCommerce marketplaces occur through pre-established contracts, instilling a sense of security for both buyers and sellers. Additionally, digital B2B platforms leave a traceable digital trail for each order, providing transparency from order placement to invoice processing, ensuring peace of mind.
4. Expanded Market Potential: B2B marketplace platforms enable companies to effortlessly reach a wide array of buyers and sellers spanning various industries. The flexibility inherent in most B2B eCommerce platforms allows your business to showcase its expertise and leadership within its niche. Instead of hunting for new potential customers, the B2B Marketplace connects you instantly with a diverse audience.
While there are significant advantages to participating in a B2B marketplace platform, it’s crucial to anticipate and address common challenges that businesses encounter when initially engaging with an eCommerce platform. Here are four prevalent challenges you should be prepared for when commencing business on a B2B Marketplace platform:
1. Complex Onboarding: Starting on a B2B platform can be perplexing as you navigate the process of finding and retaining customers. It often demands extensive research and effort to grasp how to effectively appeal to marketplace customers. Building a consistent and substantial order volume to support your business operations may require a considerable amount of time and effort.
2. Costly Entry: Most B2B eCommerce marketplace solutions entail substantial costs, both in terms of time and finances, during the initial lead acquisition phase. This necessitates allocating significant budgets for marketing expenses in addition to the fees associated with joining the platform.
3. Fierce Competition: Online B2B marketplaces inherently breed intense competition. With numerous buyers and sellers congregating in one digital space, the competitive landscape can be challenging. Given the multitude of businesses offering similar solutions, distinguishing yourself and capturing the attention of buyers becomes paramount.
4. Limited Customer Pool: B2B businesses can achieve substantial sales volumes; however, the pool of potential consumers on an eCommerce platform is inherently limited, excluding individual consumers. This constraint reduces the scope of your target audience for promoting products and services. Furthermore, fierce competition for B2B sales can lead to negotiations and contractual agreements that place constraints on profit margins.
Having closely engaged with this industry, it’s evident that the time has arrived for substantial growth in the B2B sector. This growth extends beyond funding, encompassing the caliber of founders driving businesses, the increasing adoption of technology, and the digitization of micro, small, and medium-sized enterprises (MSMEs) and small manufacturing units. A significant catalyst for this surge is the pivotal role played by MSMEs, contributing to the thriving B2B landscape.
To revisit the fundamental definition, B2B signifies business-to-business transactions, distinct from B2C, where the end customer is the consumer. However, the journey from a product’s creation to its consumption involves numerous layers within the supply chain, incorporating several B2B interactions, a domain we delve into in B2B.
Consider the clothing we wear; it is either purchased directly from a brand or through a retail store. In this context, the brand or retailer represents D2C or B2C. But how does the retailer source these products? Often, it involves interactions with factories and various intermediaries along the way. The exchange from the factory to the brand or retailer constitutes one facet of B2B commerce.
Now, let’s explore further. How does the factory manufacture the shirt? They acquire yarn and raw materials from mills, machinery from suppliers, and MRO packaging materials from vendors, among other inputs. Thus, as a factory manufacturer, you engage in multiple B2B transactions. Extending this downstream, you encounter imports and raw materials, ultimately culminating in the creation of the end product for the consumer.
Each of these intermediary transactions contributes to the realm of B2B. When examining the B2B marketplace, we encompass the entirety of these interactions, ranging from the retailer to the end customer, the finished goods marketplace spanning from the factory or farm to the brand or retailer, and the raw material marketplace.
With numerous intermediaries involved, there exists significant potential for disruption at each juncture of the supply chain. This is why the B2B market’s size dwarfs that of B2C, estimated to be four to five times larger. Delving into the figures, the U.S. market annually consumes trillions of dollars’ worth of goods.
A rough estimate breaks down these consumption patterns, including dairy products, fruits, vegetables, animal protein, staples, FMCG, lifestyle products, and electronics, amounting to a trillion-dollar spectrum of what the average American consumer uses. Behind this trillion-dollar consumer stack lies a colossal $1.5 to $2 trillion worth of B2B transactions that empower this consumer-driven economy.
In the years spanning from 2005-2006 to 2017-2018, the bulk of innovation was centered around the end consumer stack. Understandably, consumers were the first to undergo digitization, possessing the propensity to pay more. Consequently, numerous companies catering to B2C emerged. As B2C customers digitized, the digitization of B2B supply chains followed suit.
While B2C boasts large horizontal marketplaces, the B2B landscape features numerous vertical marketplaces. This diversity contributes to the sector’s current fascination and rapid expansion, with approximately $2 trillion in B2B transactions taking place across various segments.
So, we are seeing $2 trillion of B2B transactions happening with multiple different cuts where there would be a lot of marketplaces created which is why the sector is so interesting and booming now.
The backbone of the B2B marketplace has long been the Micro, Small, and Medium Enterprises (MSMEs), which play a pivotal role in enabling the trillion-dollar retail industry. Over the past 5-6 years, significant transformations have occurred within the MSME landscape. In the past, these enterprises operated within an informal economy, primarily engaging in transactions with familiar parties, often involving cash transactions. However, a substantial shift has taken place towards digitization, bolstered by factors such as widespread access to affordable internet and the catalytic impact of the COVID-19 pandemic.
Today, MSMEs are equipped with technology, benefit from cost-effective data access, and are comfortable with online transactions. These developments have paved the way for increased engagement with online marketplaces, fostering trust in technology-enabled platforms—an aspect that was challenging a decade ago. In the past, factory visits by investors involved a single desktop computer and a dedicated IT specialist to navigate the technological aspects. Nowadays, all it takes is a simple barcode scan. Direct document uploads, real-time order processing, and inventory management through interactive dashboard applications have revolutionized the industry’s operational landscape.
This transformation extends beyond the startup environment and funding aspects. Operational workflows are becoming more streamlined and refined, thanks to AI-driven capabilities, contributing to the ongoing disruption. Notably, the expectations of MSMEs have evolved from a push model to a pull strategy, where they demand a broader product variety to cater to a wider audience.
We’ve discussed the digitization of SMEs in the context of the economy, where many such enterprises are embracing technology, aligning themselves with the formal economy, and placing trust in online marketplaces. When considering the evolving geopolitical dynamics, these trends are further amplified. The world is witnessing a shift towards diversifying supply chains away from a heavy reliance on Chinese manufacturing. While China has traditionally been the global manufacturing hub, there is now a quest for countries with strong manufacturing capabilities, cost-effective labor, and abundant resources.
This realignment of supply chains is not only driven by digitization but also by increased worldwide production to meet rising demand. Many innovative companies are emerging, pledging to fulfill this demand while emphasizing trust and quality. Investors are supporting factories with excess capacity in anticipation of increased demand, reflecting the growing sophistication of MSMEs as they proactively prepare for future challenges.
The challenge lies in how to effectively meet this increased production capacity. It necessitates exploring new sources and channels, which is where B2B marketplaces come into play. Even global enterprise leaders are recognizing the importance of diversifying supply chains and sourcing from multiple destinations. However, the adoption of technology and digitalization in the B2B realm remains relatively modest, accounting for only around 13% in the United States.
As investors, we tend to prioritize technology and network effects when evaluating opportunities in most sectors. However, when it comes to B2B, there is a question of whether technology takes a backseat, with the focus primarily on executing transactions and operations first, with the potential to build tech infrastructure later. Is the role of technology underappreciated in B2B?
The straightforward answer is that technology is the driving force behind all these developments. The initial catalyst for this transformation was the formalization of the economy and the widespread adoption of technology. Without technology, scalability and nonlinear growth would be unattainable. Here’s an intriguing question to consider: Are these businesses purely tech-driven? No, they are tech-enabled businesses. While there may be technology on the customer-facing side, pivotal changes have occurred in the operational aspects on the ground. These are comprehensive businesses with heavy operational components, but it’s technology that empowers them to scale efficiently.
Tech is the linchpin that enables scalability. There have been B2B companies worth billions of dollars that struggled to scale because, beyond a certain point, the aggregation of supply, quality monitoring, inventory assessment, order management, fleet coordination, and logistics management become imperative. Tech plays a pivotal role in each of these aspects.
Additionally, understanding customer demand, predicting it, selecting the right products, and making recommendations all rely on technology. In B2B, collection is also a critical element. After providing a service, collecting payments, and managing collections is technology driven. Every facet of the supply chain is orchestrated through technology, and this remarkable transformation would not have been feasible without it.
Consider perishable supply chains, where two key elements come into play: procuring at scale and conducting quality assessments and grading. The gradation of supply is purely driven by technology, and without it, such precision and efficiency would be unattainable.
In the realm of B2B, the emphasis is always on vertical marketplaces, and the reasons behind this divergence from the horizontal model in B2C are quite distinct. In B2C, horizontal marketplaces have achieved significant scale, with many global giants spanning various geographies adopting this approach.
But why does B2C favor horizontal marketplaces, while B2B leans towards verticals? In B2C, companies often acquire customers by offering competitive prices on one product, say electronics, and subsequently generate revenue by selling items like clothing, private labels, books, and other higher-margin products. It’s a strategy of customer acquisition followed by capitalizing on a longer customer lifetime value (LTV) and customer acquisition cost (CAC) ratio. As trust and brand loyalty grow, customers keep returning to make additional purchases.
Now, let’s shift the focus to B2B. If you sell electronics to a B2B customer, will that customer ever buy fashion products from you? Absolutely not. B2B and B2C serve distinct customer sets across verticals. Unlike B2C commerce, where wholesalers can aggregate a variety of products and sell them on platforms like Amazon, B2B involves specialized businesses. A fisherman sells fish, a farmer sells agricultural products, a shoe factory offers shoes, and a clothing factory provides clothing. These factories differ in nature, form, and geographical location, leading to diverse customer bases, sellers, and unique logistics and supply chain dynamics.
Building a horizontal marketplace in B2B essentially means creating multiple distinct businesses, each catering to a specific vertical. We believe that a strong founder should initially focus on solving one problem exceptionally well, rather than juggling multiple challenges across various verticals. Therefore, it’s advisable to begin with a vertical marketplace, excel in it, achieve product-market fit (PMF), profitability, and robust return on capital (ROC) characteristics before considering horizontal expansion into adjacent sectors.
This brings us to the concept of fragmentation. On the demand side, there can be both fragmented and consolidated markets, but on the supply side, fragmentation is a key consideration. We advocate investing in exceptional businesses led by outstanding founders. What defines a great business? It’s one where you can generate substantial outcomes with minimal capital investment. The equation revolves around the Total Addressable Market (TAM), the percentage of market share a company can capture, and the resulting margins that can be generated from that pool, leading to net earnings and valuation.
The primary variables at play are the funds required for customer acquisition cost (CAC), working capital, and capital expenditures (Capex). Businesses that aspire to be large must possess a combination of these characteristics:
1. A substantial Gross Merchandise Value (GMV) pull.
2. High net margins.
3. Minimal working capital and Capex requirements.
We seek large markets with the potential for significant market share, high contribution margins, low working capital, and minimal Capex. Achieving this balance is the hallmark of building a strong business. When evaluating Vertical B2B marketplaces, we assess their potential to create substantial contribution margins with minimal working capital by analyzing the level of fragmentation. If a marketplace merely acts as a trading platform, facilitating the movement of goods from supplier to buyer without adding significant value, it may struggle to generate substantial margins.
In essence, our investment focus lies in businesses that have the potential to create significant margins while requiring minimal working capital, and fragmentation plays a crucial role in determining their viability.
The dynamics of trust in the B2B marketplace play a significant role in determining profit margins. Consider a scenario in which the end customer places trust primarily in the supply brand and not the marketplace or platform facilitating the transaction. For instance, when purchasing an iPhone, the primary concern is the iPhone itself rather than the marketplace where it’s bought. In such cases, where the supply is consolidated and branded, and the end customer has unwavering trust in the supplier or manufacturer, the influence of the marketplace is limited. As a result, profit margins in this context tend to remain modest, typically hovering around 1-2% of net margin. The well-established supply chain, with multiple stakeholders, operates efficiently, and those profiting do so based on the labor and value they contribute.
Conversely, when the supply is unbranded and lacks consolidation, the situation shifts. As a customer, if I don’t know the specific factory producing the clothes, the marketplace assumes a more pivotal role. In this scenario, the marketplace becomes the trusted entity responsible for facilitating product discovery, conducting quality checks, ensuring timely delivery, and, most importantly, building trust with the end customer.
Furthermore, in categories where Maximum Retail Price (MRP) regulations do not apply, the opportunity to generate margins becomes more viable. To reach the desired end-state of building a business with a 7-8% EBITDA margin, which necessitates a 20% gross margin, these characteristics become crucial in the B2B marketplace context. This underscores the fundamental point that without these attributes, achieving the goal of a 7-8% EBITDA business becomes challenging.
If you want to learn more about B2B marketplace or explore the best B2B marketplace platforms, make sure to give this article a read: Essential Guide to B2B Marketplace
Source: Matrix Partners India https://www.youtube.com/watch?v=51DyCXaD-cU