Digital marketplaces are changing the way we do business. Over the past 20 years, marketplace giants like Amazon, eBay, Upwork and Udemy have redefined traditional industries and drastically changed how we shop, travel, eat and learn.
As of May 2021, the world’s marketplaces had a combined value of $5 trillion. Digital marketplaces are tightening their grip on the global economy. Behemoths like Amazon already command a significant portion of the world’s digital buying. New marketplaces are popping up left and right, biting at the chance to receive funding from venture capitalists (VCs).
Initially, most of the marketplace buzz and excitement was around B2C marketplaces. Now, investors have seen the writing on the wall and are pouring funds into the growing B2B-shaped hole in the market.
According to Crunchbase data, in the last year, VCs have invested $80 billion into online marketplaces. While that number may not represent direct competition in every instance for distributors, it does showcase a larger trend they need to be paying attention to: The promise that marketplaces will play an important role in the B2B buying process long into the future.
These investors believe that distributors in B2B aren’t paying enough attention to their customers’ needs and that marketplaces can edge their way into the market by offering customers a more personalized, robust omnichannel experience.
With digital marketplaces commanding billions in funding, distributors must either step up to the plate or risk losing their hold on the B2B market.
For this article, we spoke to two venture capitalists to understand:
- What marketplaces offer that traditional suppliers don’t
- Why marketplaces are so tempting to investors
- How distributors can fight back
What Are B2B Marketplaces?
A B2B marketplace is an ecommerce platform that brings third-party B2B sellers and buyers together in a central, digital space to facilitate transactions.
SaaS-enabled marketplaces offer these advantages:
- Marketplaces make it incredibly easy for buyers to find items, prices and product info and know what’s in stock.
- All buyer activity is tracked on marketplace platforms. This data drives improvements in the customer experience.
- These iterative improvements enhance the buying experience and make it more personalized, which makes buyers more attracted to purchasing from marketplaces.
- With robust support systems, flexible payment options and competitive pricing, marketplaces give customers everything they need in one central location.
“Trillions of dollars of payments are still flowing through legacy systems. I think the thesis around B2B marketplaces today is similar to what got people excited about software investing 25 years ago, which was the truly low-hanging fruit of bringing people into the modern world and getting them off of physical pen and paper,” said Amelia Miller, venture capitalist.
B2B buyers want digital ecommerce options, and traditional procurement without that integrated online option simply isn’t cutting it anymore. Buyers don’t want to spend hours on the phone or in meetings haggling over price and struggling to find the right product. Instead, they want an efficient, simple way to buy what they need.
“There are reports that survey B2B buyers across verticals, and 97% say they’re unsatisfied with the customer experience of purchasing. Close to 40% say that they’re experiencing order errors on a daily or weekly basis, and 70% prefer accessing product information online and don’t feel like they have access to all of that,” Miller said.
What Makes B2B Marketplaces Appealing Investments?
COVID-19 sparked a shift in how B2B customers buy from and interact with their suppliers. As a result, more customers want the option to buy online and are willing to pay for that convenience.
As a whole, the global B2B ecommerce market was $14.9 trillion in 2020 – more than five times the size of the B2C market. VCs know if they can squeeze their way into this market, they will see substantial returns.
To be disruptive enough to justify investments, though, B2B marketplaces must do several things, including:
Have an edge over traditional distributors – John Nordin, co-founder and early-stage technology investor at J Ventures, says that a marketplace must have a convincing value proposition and offer better services than conventional distributors to be a worthwhile investment.
“To compete, marketplaces need to have an edge over a traditional distributor: an angle for why (a customer) would come to the marketplace instead of straight to a distributor. Something that traditional distributors need to watch out for is how they are going to make sure they aren’t getting flanked on core value adds for their customers. Some big ones are credit, delivery times and SKU availability. Those are probably the biggest things that matter to customers [apart from price].”
Attain a high average order value and frequency of transactions – Nordin points out that marketplaces work best in industries with fragmented supply and demand. Customers in these environments often prefer to use marketplaces because they can consolidate their purchases rather than buy from multiple suppliers. This is especially useful for buyers with high average order values and frequent transactions. Marketplaces that simplify complicated customer journeys a la DoorDash and Airbnb tend to retain customers better, improving their growth economics and making them more attractive investments.
Serve a market with complex workflows – B2B buying isn’t as straightforward as B2C. B2B marketplaces are appealing investments partly because they serve a commoditized and distributed market. Plus, there’s no clear market leader today. B2B buyers want a consolidated digital experience. Marketplaces developed for B2B can give it to them. Marketplaces that utilize SaaS features offer improved workflows and functions.
Be a value-added marketplace – Not all marketplaces offer more from their platform than being a place to complete transactions, but VCs tend to gravitate toward marketplaces that do. Marketplaces that make it easier for customers to find products faster and provide distributors with improved workflows and functions, such as mobile access, integration with multiple sales channels, artificial intelligence, procurement solutions and more, are more appealing to VCs. By combining these software-as-a-service (SaaS) features with FinTech technology, marketplaces can offer more flexible payment options, including allowing purchasers to buy in installments – something challenging to provide through a traditional website.
As Miller points out, “The vertical marketplaces that we are most excited about are the marketplaces that are SaaS-enabled. So, it’s not just about matching supply and demand, but about adding some real core value like workflow tools on either the supply or demand side. We are looking for the marketplaces with the most friction today in existing workflows because more friction means more value-add opportunities. Friction can come through in a lot of different ways. There can be friction through really fragmented supply-side industries where it’s hard for the demand side to actually manage their communication with a lot of different vendors and compare prices across vendors. But, I think friction can also come from things like compliance and regulatory restrictions. The more high-friction the marketplace in the physical world, the more excited we are about the potential for vertical marketplaces to disrupt them.”
The Takeaway for Distributors
Customer expectations are evolving. To compete against the growing marketplace trend, distributors must also evolve their ecommerce offerings. This means creating a more robust platform with greater flexibility where customers can easily find products, independently research information, utilize more flexible payment options and see pricing comparisons.
“I think it comes down to a little bit of an arms race. If all demand is on marketplaces, then distributors have no choice but to participate, eat the take rate and access demand. But, it’s also a question of how quickly distributors can spin up a compelling digital experience on their own that doesn’t leave buyers dissatisfied and looking for a better way to do business,” said Miller.
B2B marketplaces generate revenue in two ways:
- Transactions: In this model, marketplaces get a fee or “take rate” for transactions conducted through their platform. The fee amount varies by platform but generally goes hand-in-hand with the gross merchandise volume (GMV) or value for merchandise sold.
- Subscriptions: Many emerging B2B marketplaces provide additional functions and services. Instead of taking a flat rate for each transaction, these marketplaces charge users a recurring subscription fee.
While both models are great for investors, high take rates and costly subscription fees can hurt the distributors who want to sell through these platforms. Unfortunately, as Miller points out, many distributors have to decide whether to take the hit and list their products on marketplaces or create a platform of their own.
“Distributors are going to have to pay in some way for their digitalization if they aren’t already digitized. So the question is, which option is the cheapest and most strategic for them? Is it easier for them to stand up their own compelling, digital experience where no intermediaries taking a take rate? Or is the demand generation these marketplaces offer valuable enough (and building a digital storefront is costly enough) that eating the take rate is the better option?” Miller said.
Distributors can use technology to improve their business and fight back against disruptors with a modern ecommerce platform that looks good and is easy to navigate; has up-to-date, robust product info and imagery on the site; and utilizes the latest technology such as AI. Customers won’t tolerate lengthy phone calls, clunky workflows and traditional procurement anymore.
To meet their expectations, distributors must also support their sales reps with better workflow tools and AI-powered smart recommendations that guide them to make due-to-reorder and other personalized recommendations for customers.
These solutions are available from software vendors today and can help distributors compete against marketplaces fairly quickly.
“If we think about the market at a steady state where it’s just table stakes to have a digital experience, it’s not going to be a differentiator to have a website where you can purchase things online. Even procurement tools will become much more table stakes because it will be how everybody does business. So having really smart and effective sales tools will be an important way to differentiate in this environment. And I think the next layer of value-add tools beyond workflow will be personalization,” Miller said.
Distributors are in a race, whether they realize it or not. Although it’s easy to get caught up in the day-to-day, distributors must look beyond their traditional rivals and brace themselves for a new kind of competition.
“It’s a race between the distributors digitalizing and having a more compelling, direct digital experience, and the marketplaces capturing share of market in a way that makes it a better experience for buyers,” Miller said.
Thankfully, a good market will leave room for anyone to succeed if they take the right steps. Early technology adopters already show that distributors can win against marketplaces with the right tools and strategies.
As Nordin said: “One good thing about venture is there are enough people in it that we can disagree completely and fund different things. Some people are going to be wrong, and some people are going to be right. That’s the nature of any good market.”
Benj Cohen founded Proton.ai, a growth engine for distributors. His company’s mission is to help distributors harness cutting-edge artificial intelligence (AI) to drive increased sales. Benj learned about distribution firsthand at Benco Dental, a family business started by his great grandfather. He graduated Harvard University with a degree in Applied Math, and speaks regularly at industry events on the benefits of AI for distributors. Benj has been featured in trade publications including MDM, Industrial Distribution, and Industrial Supply Magazine. His company, Proton.ai, announced a $20 million Series A round of funding in 2022, led by Felicis Ventures.