A Primer on B2B Marketplaces: Challenges and Opportunities
As consumers, we can order almost anything online in a few clicks: books, taxis, cars or manicures, you name it. Businesses, on the other hand, are stuck in the dark ages, often relying on the phone, email, fax and even pen and paper when it comes to ordering goods or services. Whilst consumer-facing marketplaces have become an essential part of our daily lives, business-to-business marketplaces are only just beginning to emerge. Think back to the days of eBay and Craigslist, that’s pretty much where we stand with B2B marketplaces. Horizontal e-commerce solutions like Alibaba and Amazon Business have made great strides, but sector-specific solutions are only just beginning to take off. I believe that this is where the next generation of marketplaces will be built.
In this post, I will dive into some of the opportunities and challenges that this new generation of marketplaces faces. In particular, B2B transactions tend to involve higher average order values (AOVs) and generally have much more complex workflows. As a result, capturing these transactions online is significantly more challenging than for consumer-facing marketplaces. Doing so generally requires building in additional trust, workflow tools and, in some cases, a shift away from traditional commission based monetization models. Whilst this means that B2B marketplaces may be tougher to build than their B2C counterparts, it should, in theory, result in more engagement and higher retention rates. In line with this, I suspect that most B2B marketplaces will end up looking more like verticalized SaaS businesses than traditional consumer marketplaces.
Large AOVs and Complex Workflows
Let’s start by digging into the challenges. Namely, the tendency towards higher order values and complex workflows. B2B transactions, by nature, tend to be significantly larger than B2C transactions. As a result, the stakes are much higher: a single bad transaction can damage the business and reflect poorly on the supplier. B2C transactions tend to be driven by price, convenience and availability, the heightened risk around B2B transactions means that much more emphasis is placed on quality and trust when choosing a supplier. This emphasis results in entrenched supplier-buyer relationships that are difficult to disrupt, longer sales cycles and, in some cases, reluctance to interact online. On top of this, larger average order values translate into more complex workflows: negotiation based pricing, complicated payment terms, customised orders and multi-party relationships, amongst other things. This makes it much harder for B2B marketplaces to capture transactions online when compared to their B2C counterparts.
To capture these transactions, B2B marketplaces need to build significantly more value into their platforms. To get users comfortable with transacting large order values, these platforms should continuously solve for trust through supplier vetting, standardising the supply base or, in certain cases, taking on a managed marketplace approach. For instance, #p9family member Laserhub, a marketplace for sheet metal, automatically connects the buyer to the most appropriate supplier (marketplace-picks model), they handle the logistics and always act as the only contractual supplier. Even though there are an array of different suppliers on the platform, the buyer always feels like he or she is only interacting with Laserhub. This helps solve the problem of discovery in a hyper fragmented market and creates a sense of trust, which in turn, significantly reduces the likelihood of churn. Some marketplaces go a step further, offering insurance or financial guarantees, to instill customer trust.
Due to the complex workflows involved, B2B marketplaces must not only solve for trust, but also for convenience. Need a reminder on why trust and convenience matter? Check out my latest post here. By convenience, I’m referring to workflow or productivity tools which help streamline and automate some of the complexity involved in B2B transactions. Without these tools, most B2B platforms will struggle to embed themselves into the transaction flow. Because of this dynamic, my guess is that most B2B marketplaces (particularly those with high AOVs) will be SaaS-enabled by default.
Let’s take cargo.one, a marketplace for freight forwarders to book air cargo online and another #p9family member, as an example. They were able to transform a complicated, multi-step process which took several days into a fast and easy booking process as seen in the two diagrams below.
Before cargo.one
After
Not only did they build a front-end to enable seamless booking on the demand (freight forwarder) side, but they also built a SaaS tool on the supply side to help airlines digitize their back-office and manage their revenue. This supply side tool was a vital component because it enabled them to own a part of the airlines’ workflow and, in turn, allowed them to capture the transactions on their platform.
What’s more, B2B marketplaces have the potential to build convenience for both sides of the platform. If we look at B2C marketplaces, they generally build software for the supply side (the B in B2C). When it comes to B2B marketplaces, both the demand and supply are businesses so there is potential to build for both parts of the platform. For instance, RigUp, a marketplace for contractors in the oil and gas field, provides software to help companies (the demand side) source, vet, onboard, pay and manage contractors. Meanwhile, it provides contractors (the supply side) with a tool to help them manage, track and do their work more effectively. This SaaS-heavy tendency means that B2B marketplaces will often end up providing much more value in terms of convenience compared to their relatively SaaS-light B2C counterparts.
To summarise, due to the large AOVs and complex workflows involved in B2B transactions, B2B marketplaces generally require a more complex product and are more likely to be SaaS-enabled than B2C marketplaces.This should, in theory, mean that they are able to provide more value to their users, particularly in terms of convenience, which should lower the risk of disintermediation and result in a much stickier user base similar to a typical SaaS business. In fact, as mentioned above, many of these B2B marketplaces might end up looking more like verticalized SaaS businesses as opposed to our traditional understanding of a marketplace. Not only will they be more SaaS-enabled, but their monetization models may end up being based on monthly fees as opposed to commissions.
The Holy Grail and Monetization
When I first started looking into B2B marketplaces, I naively assumed that, because of the above, B2B marketplaces would be able to unlock the holy grail of marketplaces: high AOV and high frequency. In general, consumer marketplaces can only ever achieve one of these two things, either they have high frequency or they have high AOV. Let’s take Uber or Amazon, for instance. They tend to have high frequency, however, their order values tend to be relatively small. On the flip side, OpenDoor, the marketplace for homes, has very high order values but their frequency is extremely low. In theory, due to their higher average order values, B2B marketplaces have the potential to attain both high frequency and high AOVs. Metalshub, another P9 portfolio company, is a prime example of this: users order several times per month and average order values are four to five figures. Transfix, a freight marketplace, and Xchange, a marketplace for shipping containers follow a similar pattern (although the AOV is not as high).
Whilst many B2B marketplaces are able to touch the holy grail of high AOV and high frequency, they often struggle to unlock its benefits. In other words, monetizing large transactions tends to be a challenge. Very often the take rates on the large order values can act as a disincentive to interact on the platform. Moreover, compared to B2C marketplaces, with thousands and sometimes millions of customers, B2B marketplaces risk having a much more concentrated demand base. In some cases, for instance, their demand-side is driven by large enterprises that each make up a significant proportion of the marketplace’s demand. If this occurs, the demand side has much more leverage to push down take rates, diminishing the marketplace’s ability to set prices. The same applies when there is a concentrated supply base. As a result, many B2B marketplaces end up having to accept very low take rates or not taking a commission at all and charging a SaaS fee instead.
Whilst this may lead some to conclude that B2B marketplaces are a lost cause, this is far from the case. For one, B2B markets are huge (annual global B2B spend is more than $100 trillion) and relatively untapped, with most transactions still taking place offline. To add to that, the larger order values generally compensate for the squeeze in take rates. Moreover, those marketplaces that charge a SaaS fee tend to be rewarded with stable and recurring revenues as well as higher retention rates. This is something which historically has been favored by public markets compared to the more volatile GMV driven growth. In line with this, many marketplaces like Hired.com, for instance, have forgone their commission-based models in favour of SaaS. They used to charge up to 25% of the hire’s base salary and recently pivoted to a SaaS model in an attempt to drive usage and deliver more value to their customers. Likewise, Xchange, a P9 portfolio company and a platform for shipping containers, has adopted a SaaS model early in their life since day one as a means to increase retention. In an ideal scenario, some of these businesses will be able to benefit from the best of both worlds: high frequency and retention due to their workflow components whilst gaining from the uplift in GMV by taking a cut in the transaction.
Arguably, the playbook is still being written for B2B marketplaces and time will tell which models prove to be most effective. One thing is for sure: there is a massive untapped opportunity when it comes to B2B marketplaces. Large order values and complex workflows will make building these platforms challenging, and, doing so will require building in trust and workflow tools to help streamline transactions. The upside of this is that most B2B marketplaces will end up delivering much more value, particularly in terms of convenience, when compared to traditional SaaS-light marketplaces, resulting in higher retention. As a consequence, many of these B2B marketplaces may end up looking more like verticalized SaaS businesses than our traditional understanding of a marketplace.
Stay tuned for my next posts where I’ll be digging into monetization of marketplaces in further detail and will, hopefully, start outlining a potential playbook for B2B marketplaces.
Thanks to Josh Breinlinger, Connor Watumull and my awesome colleagues Point Nine Capital for the feedback on the initial iterations of this post!
