B2B distribution is finally embracing marketplaces. While the industry has been hesitant to engage with marketplace models, in large part out of fear of margin compression and channel disruption, the mindset has begun to shift. Many industry leaders have accepted that B2B marketplaces are here to stay, and they aren’t going anywhere.
Distributors are launching their own marketplaces, industry associations are embracing marketplaces, B2B marketplace startups are taking off, and of course, Amazon Business has surpassed $25 billion in annual sales and is still growing fast.
Suddenly, marketplaces are everywhere in B2B. And B2B customers are clear: they want the marketplace experience. Any distributor that doesn’t have a well-developed marketplace strategy today risks being left behind—and fast.
How you engage with marketplaces, and whether you should own one, are key strategic questions to answer. But the answer for every distributor will not be the same. There is no one-size-fits-all marketplace strategy. The answers depend on company size, where you sit in the value chain compared to your competitors, your strategic objectives, and challenges unique to each vertical in B2B distribution.
To Own or Not to Own?
The first key question: should you own a marketplace? For small and midsize players in B2B, the answer is short: you likely can’t. Marketplaces typically require meaningful capital investment to scale or to acquire. So, for small and midsize distributors, you should be looking for how best to play with the marketplaces in your vertical.
Ideally, you want to be selling on not just one marketplace, but rather multiple marketplaces in your vertical. When marketplaces compete, sellers win. If only one marketplace dominates your industry—as Amazon does many areas of B2C—then you can expect to face margin compression as the marketplace gains market power. Marketplaces rarely raise prices on buyers—they squeeze the sellers first. So, you want to diversify your marketplace channels and hope that multiple B2B marketplaces continue to thrive in your industry.
For large distributors, the equation is a little more complicated. Do you want to own a marketplace? Maybe. The alternative is to retreat toward high value-added services and areas where you provide a lot more than just facilitating a transaction. This strategy can be successful, but the resulting business will often look very different from how the business has looked in the past.
These two strategies are not mutually exclusive. It is possible to do both. Combining a strong marketplace strategy with a revamped core business can give large distributors the best of both worlds—high value-added service revenue and higher volume marketplace revenue.
To Build or Not to Build?
If a distributor has decided to own a marketplace, the natural first question is: should we build it? If a marketplace is viewed as a bolt-on to the business and not strategically important, then yes. There are plenty of marketplace-as-a-service and software-as-a-service marketplace solutions that can get you up and running quickly. But this path often has very limited upside.
For those that view B2B marketplaces as a key part of their business strategy, the answer is simpler: it’s probably too late to build. In most verticals of B2B distribution today there are simply too many B2B marketplace competitors with meaningful scale (>$100 million in gross merchandise volume [GMV], or in many cases, >$1bn) in each industry for it to make sense to build from scratch.
While this path may seem attractive at first, many large companies tend to significantly underestimate the cost and time it takes to scale a B2B marketplace successfully. They also tend to underestimate the execution risk of building from scratch and underappreciate the value of established marketplace or tech startups in their industries.
While the valuations of tech startups in your industry may seem high, it’s important to realize that that the value of that business includes not just the sales that the marketplace generates but also all the time and lessons it learned from trying and failing. Building a marketplace business is notoriously difficult, especially in B2B. And when you build from scratch, you’re likely to lose much more time than you originally anticipated by repeating those mistakes.
Lastly, unlike traditional distribution, marketplace competition tends to be winner-take-all. There’s usually only room for two marketplace winners in a given vertical. If you’re starting from tens or hundreds of millions in GMV behind the leading startups in your industry today, it will be at best very expensive and more likely impossible to catch up. Capital alone is often not enough. Timing and competitive dynamics are very important when it comes to successfully scaling a marketplace.
If building won’t work, that leaves two main paths to controlling your marketplace destiny: M&A and strategic investment.
Deciding on a Marketplace Ownership Strategy
If you’ve decided to own a marketplace, the next question is: how much do you need to own? Do you need to—or can you—own and control the marketplace? Or should you look to take a minority stake and partner? Figuring out the right level of marketplace ownership and control for your business is a key factor in making your B2B marketplace strategy a success.
For a large distributor, if an investment or acquisition is off the table, the next best option is to become a key strategic partner to the marketplace. This is a riskier path, as you lack control of your own destiny, but if investment or acquisition are not feasible routes, then partnership is the way to go.
Additionally, if your leadership team is unsure about how to engage with B2B marketplaces, establishing a strategic partnership with the right marketplace is a good way to dip your toe into the water. If the initial partnership is successful, you can then approach the ownership question with more confidence.
Ecommerce is Table Stakes—Product Data is Key
To understand how your business should engage with B2B marketplaces, you also need to understand what makes these marketplaces tick. One of the key ingredients is product data. Another is connectivity that helps turn that product data into transactions and transaction data. Whether you’re looking to partner with or scale your own B2B marketplace, figuring out your product data strategy is the first step.
Product data and connectivity lie at the heart of every leading marketplace—and, not coincidentally, they are age-old challenges in B2B distribution. Here’s the question: if Shopify gives you the best ecommerce tool in the industry—but the data you put into the tool isn’t good—do you still have a good ecommerce experience? Of course not!
Many distributors have a solution of ecommerce, but robust product data initiatives are severely lacking throughout B2B. With a need for nice photos, merchandisable product descriptions and proper meta-data attribution for product recommendations, product data has never been more important. A recent survey found that 41% of B2B customers viewed product data on a supplier’s site as a top priority. Another 48% considered it highly important. B2B marketplaces are stepping up to solve these challenges.
Historically, B2B distributors have relied on a mixture of manufacturer-provided data, industry association data efforts, point-of-sale cooperation, and other third-party data providers. Up-and-coming marketplace and tech companies in the B2B distribution space are bringing new approaches and solving age-old product data challenges with technology.
For a B2B marketplace, its business model forces it to solve for data in areas of the industry that are often neglected or ignored by large, established distributors. In the words of Frank Sinatra, “if you can make it there, you’ll make it anywhere.” These tech startups are solving hard data problems that, if proven successful, will mean that the rest of the vertical’s data requirements are theirs for the taking.
Centralized Product Catalogs and the Power of the Network
Why is this data so key for marketplaces?
There are many ways to think about B2B product data throughout the ecommerce experience: from searching for a product and receiving a properly suggested item, to reading a great product page and then clicking through to a recommended product. These are just a few of many examples of different types of product data—not to mention user-generated reviews. All these experiences get stronger with more interaction and engagement from customers and sellers. The common platform phrase is: “technology is a commodity, the power is in the network.”
Marketplaces receive two-sided engagement and will receive inventory listings from third-party sellers that reference products completely differently. It’s then up to the marketplace to identify which products are the same and map them to a centralized product catalog. These data challenges are unique and require the use of technologies like AI and machine learning to solve the problem at scale. The more sellers and customers interact with the marketplace, the more it can train its technology to improve the product data.
Building the Network Bottom Up, Not Top Down
Once you’ve figured out how to solve for product data, the next challenge is how to build the network, particularly on the supply side.
Many large B2B distributors are doing partnerships with other large distributors in adjacent verticals to offer more comprehensive, multi-vertical offerings to their customers. The large distributor partners may have competitive product data and a large selection of products, but what’s the catch? The economics.
Marketplaces build their network of third-party suppliers from the bottom up. They thrive off fragmented markets with smaller distributors and manufacturers looking for incremental demand. Large distributor partnerships fail when they result in a higher cost to the end-customer through either pricing, fulfillment or suboptimal experiences.
SaaS tools that provide marketplace solutions are great for these kinds of partnership integrations with mid-to-large distributors. The distributors’ product catalog is fairly well developed and has a pretty robust selection, so the marketplace doesn’t need hundreds of third-party supplier integrations. It just needs a few impactful ones to present a meaningful difference in available inventory to the customer.
SaaS Tools Want to Become Marketplaces—And Vice Versa
For distributors that go the MaaS or SaaS route to stand up a marketplace quickly, be aware that these tools come with their own risks, too.
Whether Shopify is launching its own product marketplace, Shop, or launching its developer APIs to make an app store—just about all SaaS companies want to become platforms. Mirakl’s evolution into Mirakl Connect, its service for marketplaces to connect with third-party sellers, is a similar example. The SaaS tool has a much more difficult time to solve product data challenges. Instead, a marketplace as a service has its own network of third-party sellers and can more easily get access to the suppliers’ product data.
B2B marketplaces also move in the other direction, providing software tools to their buyers and sellers beyond just the transaction. Marketplaces are more than just ecommerce technologies. To overcome the chicken-and-egg problem, they need to subsidize value in the early years for customers and/or suppliers. Usually, a common way to do this is through technology, and, in particular, product data and connectivity capabilities.
When a marketplace is young, it doesn’t have enough demand from customers to satisfy a broad spectrum of third-party suppliers. So, instead, it needs to provide extra incentives for suppliers. Hence the phrase: the technology is a commodity, the power is in the network. If a marketplace startup can provide utility to suppliers in the form of technology, data and/or connectivity, this is a proven strategy to help the marketplace get more supply-side liquidity. This strategy is called “commoditize the complement”—where the platform gives away, or undercharges for, adjacent software to attract users to its network.
For example, GrubMarket, a Top 10 B2B marketplace in Applico’s top 50 ranking, provides a lightweight ERP solution to smaller food distributors. Or NuOrder, a B2B marketplace for wholesale fashion and textiles in the Top 10 ranking, which was just acquired by a point-of-sale provider for clothing retailers due to the synergy between the marketplace and SaaS offering. These SaaS tools like ERPs, point-of-sale systems, or business management software help subsidize the value so the marketplace can get better access to customers and/or suppliers.
B2B’s Marketplace Future
Marketplaces are here to stay in B2B. But the marketplace future could take radically different forms. In one scenario, Amazon Business could become the dominant, multi-category marketplace the way Amazon is in B2C. If Amazon realizes this ambition, then distributors are in for the same type of pain that the retail sector continues to undergo.
However, Amazon’s B2B dominance is not foreordained. There are successful marketplaces today in just about every vertical of B2B. Many of them are growing fast, but ultimately only a few in each vertical will win out. While many large distributors view these upstart marketplaces as a threat, they are also your greatest ally against Amazon and other tech monopolies. The enemy of your enemy is your friend.
By finding the right ways to play with B2B marketplaces—whether that’s selling products, entering strategic partnerships, investing, or more—large distributors can help create a future for B2B distribution that is more competitive and dynamic than what we’ve seen happen in B2C.
Marketplaces are a key part of B2B’s future, but distributors still have the opportunity to play a key role in crafting what that future looks like. But if they don’t—Amazon likely will.
Alex Moazed is founder and CEO, and Nicholas L. Johnson managing director, of Applico Inc., a digital business advisory firm.Favorite