We’ve all become pretty familiar with marketplaces. They have been studied in-depth over the past decade, both in academia and by practitioners. In B2B, however, marketplaces are still a fairly recent phenomenon and although we love that space, the jury is still out as to their future success. As a matter of fact, there are only a handful of really successful scale-ups to date (see our previous blog).
Our ingoing hypothesis when we started this research was that the specificities and challenges facing B2B marketplaces were not well appreciated. So we went out and spoke to 20+ founders to understand their daily struggles, dive into their business models and hear about the make or break moments of their journey…
What we learnt was that, of course, they faced the usual challenges of early stage startups, and that many of these challenges were typical of marketplace businesses, whether B2C or B2B. All our interviewees reported having to overcome the infamous chicken & egg problem, keep a close eye on their CAC, and curate their suppliers, as well as addressing other issues familiar to all marketplace founders… But we also discovered that there are at least three challenges which uniquely characterise B2B marketplaces. This is what our second article is about.
Before they can get the flywheel going, B2B marketplace founders need to crack three tough nuts:
1. Changing the behaviour of a professional buyer
2. Overcoming the complexities of B2B trade
3. Avoiding platform bypass
Let’s go through these challenges one by one and highlight some of the strategies that we’ve seen at play to overcome them.
The number one factor that came up time and time again in our interviews was that there is often an existing relationship between a professional buyer and his/her suppliers. Usually, this relationship has been established and consolidated over the years, and requires a lot of effort to make any changes. Most marketplaces have buyers whose persona look like this: “Well, I’ve been buying electrical equipment from XYZ for more than 10 years, I like them and their products are good quality, plus I get discounts above a certain volume, I’m not sure I want to try out something new.”
Of those who do take the plunge and try out a new solution, a noticeable portion only uses the marketplace as a fall-back option for when their traditional suppliers are not available, rather than the go-to destination. Until an enduring change in buyer behaviour has been achieved, retention will remain an issue for the marketplace.
The other consideration that distinguishes B2B from B2C is that professional buyers are not only procuring for themselves, they also have their clients and stakeholders in mind. This means that, when switching to a new supplier, buyers need to ensure that their quality standards are up to par with their existing suppliers. Average Order Value (AOV) is often higher in B2B which means that mistakes are typically more expensive – not only in terms of money but also in terms of operational and reputational risk. Professional buyers thus tend to be more conservative in their choices. As the old saying goes, “Nobody gets fired for buying IBM”... but people might get fired for switching to obscure providers! This is especially true on a marketplace where, not only is the marketplace an unknown quantity, but each of the suppliers on the marketplace is too.
Lastly, corporate decision cycles are longer than those in B2C. Procurement decisions are usually made based on several quotes, after consulting multiple internal stakeholders and gatekeepers. Changing the behaviour of an individual buyer is tough enough, changing the purchasing behaviour of an organisation is even more challenging. That’s why B2B marketplaces need to come up with a proposition that’s “10x” better than the incumbent process or the incumbent provider. Otherwise, corporate inertia will prevail.
Here’s a snippet of the winning strategies to overcome this first challenge (note: we’ll expand on the winning strategies in a subsequent blog):
One of the upsides of B2B trade is that it often involves both high AOV and high frequency, which is usually unattainable in B2C (as discussed in a previous blog). The downside is that these large repeating trades are associated with substantial intricacies largely unknown to B2C:
Organising supply: Cataloguing was often flagged as a headache by our interviewees. The myriads of SKUs and variants add complexity to the supply side of B2B marketplaces. For instance, patio doors can come with 20+ variations, and a simple piece of timber can spawn more than 300 SKUs. Most platforms we met had to undertake a significant classification effort to organise the supply side. One founder even confessed: “We’ve got a product naming DNA”. No wonder some marketplaces make it a feature to allow buyers to share accurate descriptions of what they’re looking for (e.g. LaserHub provides buyers with a CAD design upload tool).
Procurement workflows: More complex products or services also means more complex selling / procuring workflows. It’s not only about clicking on an item, placing it into a basket. B2B procurement often consists of running a mini-RfP process that involves several departments on both sides (supplier & buyer). In addition, several marketplaces mentioned having to build sophisticated user management features to support different individuals, with their different authorisation rights and delegations of authority.
Pricing and payment: Pricing structures tend to be more complex too. Volume-based discounts are widespread and expected. Several founders also reported using different pricing grids depending on the customer segment. To add to this, higher AOVs imply that credit cards and other B2C payment methods are not at all adapted to B2B. In fact, many buyers still expect payment terms and/or invoices, which can generate volatility for a marketplace – bad debt can quickly pile up and dent the reputation of a platform. Invoicing is no easy task either. As Olivier Vaury (ManoMano) puts it: “invoicing has to be taken to the next level of robustness in B2B”.
Logistics and aftersales: Logistics are often an integral part of the offering as buyers face huge costs of opportunity from receiving the goods late or damaged. In addition, many B2B marketplaces provide complementary guarantees to professional buyers in order to match incumbent propositions. Some even go above and beyond existing market practices, for instance, ManoMano’s “garantie béton” (whereby the marketplace steps in to indemnify the buyer in case of a dispute with the supplier) or Faire who will cover the risk of unsold items for retailers.
Sector idiosyncrasies: Founders starting a B2B marketplace need to be familiar with all the intricacies and standards of a given industry. Whilst almost anyone can put themselves in the shoes of a consumer, it often takes years to get to grips with the workflows and complexities of a given sector.
Here are some winning strategies we have gathered in our survey:
As Ankorstore's founder (previously founder of A Little Market - now Etsy France - and investor in multiple marketplaces such as Backbase and Agriconomie) puts it:
Buyer retention repeatedly came back as a major issue in our interviews - in truth, more than we expected.
As a two-sided platform business, marketplaces usually enjoy positive scale economics. The more participants on the platform, the higher the value for everyone and the better the economics. Whilst this is generally true, B2B marketplaces are also more exposed to the risk of bypass over time, which hinders the potential economies of scale. In actual fact, it even seems that the value created by a B2B marketplace may decrease over time for a given user. How could this be?
In practice, the value to the marketplace participants is pretty high at the outset when discovery and trust need to be established, but it erodes after the first couple of transactions. In many B2B verticals, buyers need to nurture a network of reliable suppliers with whom lots of repeat transactions are going to happen over time. After a while, it then becomes tempting to move off-platform to avoid the marketplace’s commission. Obviously, this applies more to certain goods or services marketplaces, less so on logistics or freight marketplaces where discovery needs to happen at every transaction (the Uber model).
Therefore, it can be untenable for some marketplaces to justify a high take-rate in the long run once the initial matching has been done.
Here are some recipes that founders have mentioned to create repeat and avoid bypass:
When people think of marketplaces, what they often have in mind is the act of bringing together buyers and sellers. Whilst this is their core function, marketplaces generally need to provide much more value aside from discovery and matching to ensure that users keep coming back to their platform.
This is particularly true for B2B marketplaces. So much so, that many of the B2B marketplace founders we’ve spoken to over the last year don’t really view themselves as marketplaces. In fact, some went as far as refusing to be associated with marketplaces, instead positioning themselves as B2B software solutions. This also transpired in their monetisation model, with several marketplaces moving away from purely transactional models to subscription ones.
In B2B, retaining clients and increasing their lifetime value (LTV) goes well beyond matching - it hinges on creating sustainable value for a whole supply chain. In our next three blogs, we will examine some crucial questions: