Distributors: Here’s everything you need to build a business case for your marketplace.
For distribution companies that have embraced ecommerce, a marketplace approach is the next step for business growth. Of course, no growth initiative is free or instant. Adding third-party selling to your website provides a new way to make money, and in turn, calls for an upfront investment.
To green-light a digital transformation of a marketplace’s magnitude, you’ll have to convince decision-makers, like senior leadership, budget keepers and boards, that the ends justify the means. Securing buy-in requires an ironclad business case — and that means setting leadership’s expectations around the realities of a marketplace launch.
This article examines the trials and triumphs of early marketplace adopters to equip you with the insights you need to build a business case for your marketplace.
When leadership asks: What are the proven benefits of launching a marketplace?
When you’re building your business case, start by fleshing out the question on everyone’s minds: Why are distributors launching marketplaces in the first place?
Marketplaces allow you to expand inventory. The more products you have on your site, the more opportunities you have to sell. Product assortment and expansion provide a better experience for buyers — including shorter wait times and convenience. Third-party selling enables distributors to expand their inventory without taking on the risk of holding it themselves.
Marketplaces open new revenue streams for distributors. Marketplaces offer distributors an opportunity to monetize the ecosystems that surround the products they offer. Think installers, inspections or even maintenance and service personnel. Oftentimes, after buying a product from a distributor, a buyer has to purchase additional services to use that product.
Distributors can leverage the marketplace model to capture the traffic they already have and offer these core-adjacent services without having to worry about fulfillment.
Customers want marketplaces. And what customers want, customers get. Distributors’ customers are frequently turning to marketplaces to get their needs met. Research from Distribution Strategy Group found that 88% of distribution customers buy from one or more marketplaces, and 33% purchase from five or more. Just as consumers increasingly look to marketplaces to make purchases, that buying habit is spilling over to businesses. As Brian Beck, co-founder of Master B2B Commerce, said in a recent interview, “The smartest companies recognize that you can’t control buyers or where they go to look for products. You need to embrace their preferences and get in front of these customers. Because if you don’t, your competitors will.”
When leadership asks: What kind of ROI can we expect?
It’s clear that an investment is required for a marketplace launch, but is the return worth it?
Ultimately, it doesn’t matter if your business is offering more products or expanding its operations if those results don’t show up favorably on the balance sheet.
A recent Forrester Consulting study commissioned by Nautical, From Marketplace to Market Share, polled 121 decision-makers at distribution companies on the costs and benefits they experienced after launching a marketplace.
Businesses that launched a marketplace experienced an average growth of 44% in customers, 42% in overall revenue, 38% in revenue per account/user, and 36% in average order value (AOV).
When leadership asks: What is the breakdown of the required investment?
Joe Cicman, Principal Analyst at Forrester, said it best: “A marketplace represents a new way for you to make money.” But, to tap into this revenue stream, an adage holds: You’ve got to spend money to make money.
Without question, marketplaces require significant investment. Leadership and budget gatekeepers need to understand this upfront.
The Forrester study established three key benchmarks that you can use to set expectations with leadership:
- Budget: More than half of respondents’ firms spent $3 million or more on their marketplaces.
- Personnel: All respondents hired employees to help with adoption and management, and almost half hired more than 15 additional staff — most of them in IT.
- Time to launch: Two-thirds of respondents took half a year or more to launch their marketplace.
It’s important to note that these figures were higher than most firms expected. Upwards of 80% agreed that launching their marketplace required more personnel, took longer to launch and had higher costs than initially anticipated. For this reason, the approach you take to launch your marketplace is essential to containing your investment.
When leadership asks: How can we contain costs and maximize returns?
Understand that marketplaces are more than commerce
The businesses that lose control of their marketplace investment often approach a launch from the perspective of commerce — and commerce alone.
In reality, commerce is just the tip of the iceberg. There’s a whole mass of logistics and finance needs under the surface that need attention and support. When businesses fail to consider and budget for these components, it can result in a lot of unanticipated headaches down the road.
Choose your technology strategy wisely
In the past, when companies established marketplaces, they were required to develop their own technology to handle the intricate backend processes. Fortunately, today, marketplace technology is becoming more accessible, reducing the burden on companies to create these systems from scratch.
However, an important question likely remains on the minds of executives when it comes to making a buy-or-build decision – will a business that takes advantage of readily available marketplace technology experience greater advantages in terms of cost savings and wider adoption?
In the results from the Forrester study, self-built marketplaces were 43% more likely to spend $6 million or more on the build compared to those who purchased a platform solution. Seventy percent also encountered challenges with third-party sellers’ ability to adapt and their internal team’s willingness to use the technology. For firms with purchased marketplace platforms, this number fell below 47%.
Take a phased approach to launch
One sure way to wreak havoc on your budget, customers and internal champions is to embark on a transformation that attempts to do everything all at once. While flicking on the switch to get a marketplace up and running might seem desirable, in reality, it creates a whiplash effect that exposes you to innumerable failure points. Orchestrating new marketplace processes, anticipating customer preferences, and incorporating third-party systems into your business is a lot to troubleshoot all at once.
This is where a phased approach to a marketplace launch can provide businesses with a soft landing when hiccups arise. Launching a marketplace in smaller steps lets you validate the model quickly and de-risk unknowns by identifying problems early and problem-solving without stalling operations.
Finding the answer to marketplace success
Launching a marketplace is a proven way to increase revenue, customers, and your average order value. To reach the destination, you’ll likely face some bumps in the road. But when you know the bumps are there, you can take the appropriate steps to avoid them. Fortunately, some distributors have driven this road before and their learnings are invaluable to help you develop a map for a smooth journey to marketplace success.
Tyler Nemiro is the Vice President of Sales at Nautical — the end-to-end marketplace commerce platform. Prior to Nautical, Nemiro built the GTM strategy at fabric. He also spent nearly four years at Shopify Plus managing the e-commerce platform's enterprise sales division across North America and more than six years with Adobe Commerce (Magento).