Platforms are indeed “eating the world.” Most distributors can still choose whether they will do the eating or be the meal.
This post presents key findings into new leadership strategies for distributors to add value in a post-pandemic world. These findings were originally published in a National Association of Wholesaler-Distributors report.
Want to learn more about building your own marketplace strategy? Download our recent report on the topic now.
In 2015, technology leader Tom Goodwin wrote: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”
That “something interesting” was the rapid emergence of platform businesses across many industries.
As Alex Moazed and Nicholas L. Johnson point out in their book Modern Monopolies: What It Takes to Dominate the 21st-Century Economy, many of these firms have gained monopoly power not through accumulating enormous amounts of assets, but by connecting enormous numbers of people.
Marketplaces: One type of platform business
Though many platform companies exist to connect people and are primarily funded by advertising, some platform companies exist to facilitate transactions. These are called marketplaces and are funded by transaction fees, advertising or both.
In his 2021 book, Marketplace Best Practices: Transforming Commerce in the Platform Economy, McFadyen Digital founder Tom McFadyen writes:
“Marketplaces are a type of platform that promotes and enables transactions between multiple parties, such as a customer and a third-party seller. Marketplaces generally do not fulfill the products or services purchased. Marketplaces generally charge fees for enabling the transaction.”
We use the term “platform” to refer to any kind of network that grows value exponentially through connections instead of assets. We refer to “marketplaces” as a subset of platforms that focus on transactions, often by leveraging assets and working capital owned by other organizations or people.
Tom McFadyen provides a useful classification of marketplaces in his book:
- Horizontal Marketplaces (Amazon, Walmart, Amazon Business, eBay)
- Vertical Marketplaces (GHX, Farmers Business Network, PartsTrader, Zoro)
- Digital Goods Marketplaces (HealthCare.gov, Coursera, Getty Images)
- Niche Marketplaces (Bearings Deal, Made in America Co., ToolKart)
- Services Marketplaces (99Designs, LiquidSpace, Uber Freight)
We have identified four other types of marketplaces we believe are relevant to distributors, including one recently explained in detail by Alex Moazed at Applico:
- Inventory-Sharing Marketplaces
- Distributor-as-Storefront Marketplace
- Software-as-a-Service (SaaS) vs. Marketplace-as-a-Service (MaaS)
- Merchant vs. Non-Merchant Owned
Marketplace risk for distributors
Distributors need a framework for evaluating the risk for each marketplace they consider. In this case, we use “risk” to mean the likelihood that the marketplace will rely on distributors in the short term only to switch strategies that might include one or both steps:
- Create house-branded products to replace manufacturers’ products or begin carrying products directly that it currently sells from distributors who are third-party sellers.
- Disintermediate distributors and have manufacturers handle fulfillment.
As we have seen in our research, a growing number of manufacturers are willing to risk channel conflict with distributors. When we surveyed suppliers last year, 72% of them said marketplaces would become more important to their customers over the next five years.
We believe there are two primary factors that affect risk levels when distributors sell through marketplaces:
1. Merchant/Logistics Status
A company that is itself a merchant with logistics capabilities—like distribution centers, inventory, product managers and buyers—can theoretically sell the same SKUs you do in most cases. A company with none of these can’t.
For example, Walmart could decide to contact manufacturers and sell almost any product directly instead of through third-party sellers on Walmart Marketplace. eBay owns no logistics network and holds no inventory. Hence, eBay is “less risky” than Walmart because it simply has no way to sell direct.
2. Commitment to Distributors
Most B2B marketplaces have manufacturers and distributors as third-party sellers. However, we believe the goal of some marketplaces is to remove distributors from the supply chain for many products.
The goal would be for the marketplace to continue to provide all the front-end functions like marketing, merchandising, sales, customer services, etc. The manufacturer would take on the small order fulfillment duties like warehousing, picking, packing, shipping, etc. The two parties would split the value-added activities previously provided by the distributor and split the profits as well.
We have developed a model to help distributors understand the risk and develop a strategy for marketplaces that fits their business model. Learn more in our whitepaper, Developing a Marketplace Strategy.
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at iheller@distributionstrategy.com.