Changing Nature of B2B transactions- The Rise of B2B marketplaces

The history of e-commerce is intertwined with the history and boom of online marketplaces. Using technology to connect buyers with sellers and efficiently facilitate transactions, these online marketplaces have overcome the limitations of an offline market. In an offline world, transactions are limited by geographical reach/information asymmetry and are facilitated by intermediaries, online marketplaces however open a broader market for the buyers and sellers to meet and transact. Marketplaces also have been a go-to model for the tech entrepreneurs and investors because if executed well, they have inherent structural advantages to create a large scale and unlock huge values. Some of the most successful innovative businesses of the last few decades have been online marketplaces.

Consumer marketplaces (B2C) have been around for quite some time and have gone through multiple evolutions of business models, starting from listing focused classifieds, they evolved into transactional ‘open’ and ‘managed’ marketplaces. While we have large horizontal marketplaces like amazon where you can find anything, we also have vertical marketplaces for a specific category like fashion, furniture, makeup, etc. Now as a consumer, we have an efficient way of buying almost everything online.

While B2C marketplaces have evolved, innovated, and have become ubiquitous in a consumer’s life, the same can’t be said about B2B. In most economies, B2B transactions usually gross-up much more than B2C as every supply chain has multiple businesses in between a producer and a consumer. Unlike B2C where the transactions are usually for personal consumptions, here the purchase is typically part of a chain and the cost of delay or quality failure can be very high. Most industries have complex supply chains, low transparencies, and rely on inefficient intermediaries for trust. B2B transactions happen in different value chains/supply lanes wherein the dynamics and participants don’t usually overlap. Inefficiencies in the value chains make sure that there is a very strong case for efficient B2B marketplaces.

The Indian Landscape

India presents an even more interesting landscape. We are an economy of small businesses. 99% of Indian businesses are what is classified as a ‘micro’ business. These firms are usually ‘family’ or ‘single person’ owned, have very few employees, and turnovers in the range of a few crores of rupees per annum. Most of these micro-businesses have poor margins/efficiencies and also have low levels of technology adoption. While these small businesses are millions in numbers, they contribute to about 30% of the Indian GDP resulting in smaller throughput. Being largely a fragmented market dotted with millions of suppliers and buyers transacting largely in localized markets, India represents a strong case for B2B marketplaces to disrupt the traditional procurement models. Recent changes like GST, digital penetration, and a generational shift can prove to be tailwind for this.

Below we have mapped out a few Indian B2B marketplaces/Platforms.

(*This is a representative landscape and by no means an exhaustive list)

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All market(place)s are not equal

B2B marketplaces have not always worked out. For every successful one, there are numerous more that have faltered in the long run. There can be a lot of reasons for failure like a bad economic model, poor execution, lack of investment and most importantly choosing the wrong market. There are some markets where an online marketplace (or intermediary) creates value while somewhere it does not.

Before jumping in and start building a digital B2B business, it is better to look through some factors that affect the success of one. There are numerous resources to read about it but Bill Gurley’s 2012 article “All markets are not created equal” is still probably the best starting point. There are quite a few things to think through before building a marketplace, we have listed down some of the important ones for a B2B marketplace

  1. Use of technology- First and foremost it is important to understand, what is the value that technology can bring in this supply chain; Is it discovery? (increasing the number of buyers and sellers), is its user experience? (better workflows) or efficiency? (intelligent matchmaking). Also, marketplaces tend to be one side oriented i.e. it will solve for the key problem(s) on either one of supply or demand, think through where is the bigger pain point to be solved using technology.
  2. Fragmentation- This is one of the most important factors to consider before jumping in with a marketplace. The biggest problem that a marketplace solves is of discovery and transaction facilitation (by inducing trust), this is what creates value for the intermediary. In the case of supply and demand concentration, this value tends to diminish very quickly. All other things remaining equal, High fragmentation in buyers and suppliers is positive for the marketplace. High concentration in both the sides, practically renders a marketplace (or intermediary) redundant. If you have to look at a market with concentration on one side, It is usually better to build in markets where supply is fragmented.
  3. Throughput- It is important to look at what is going to be the Average order value in the supply chain and also what is the frequency of transactions. A high AOV, enables the marketplace to grow faster. A high-frequency marketplace tends to be stickier with high recall value and so (generally) higher cost of shifting. Ultimately, the average transaction value, frequency, and margins (take rate) define the long-term economic viability of the marketplace. It’s important to remember that in B2B, more often than not, margins are lower than B2C, on a per-transaction basis the unit economics (most of the time) makes sense if the average transaction value is high.
  4. Value chain margins- A key difference between consumer and B2B markets is that the inherent motivation for a business to transact is economic rather than consumption, this makes the value extraction by the marketplace to be mostly dependent on (and capped to) the overall value chain margins. Given that one of the key lures for the participants (supply and demand) is going to be an economic advantage, the take rate will be a smaller piece of the value chain margin. Interestingly, there are cases where the value chain margin is not rigid but expandable, in cases where capacity utilization/inventory liquidation/ ‘sweating the asset’ is important, dynamic pricing can unlock better margins.
  5. Commodity Vs specialized product- An online marketplace usually brings in value of discovery and trust between the transacting parties. In the case of a commoditized or branded product, trust is not that big an issue, in such cases, generally, margins tend to be much lower than specialized/custom products/services.
  6. Direct Vs Indirect- Whether the underlying product/service is direct (eg-raw material) or indirect (eg stationary) expense, defines the underlying motivation for the customer. For a direct spend, price becomes top priority along with the expectation of zero failure rate in fulfillment. Inertia to change vendors is high in this case which results in lower take rates and longer sales cycles. If successfully executed, direct spending provides a recurring, predictable, and sticky business to a marketplace. For indirect spends, take rates can be higher but the barrier to replacement for the marketplace is comparatively lower.
  7. Monetization and business model- Depending on the value chain margins and overall marketplace dynamics, the business models can go from an open marketplace to a managed marketplace. Similarly, the monetization at scale can be through transaction take rate, subscriptions/advertising, or ancillary services (logistics, credit).
  8. Network effects/Moats- Typically open marketplaces have strong network effects and moats. For managed marketplaces specific workflows, data, and allied services can help create effective structural moats.

 To summarize, it’s critical to choose the right market and a business model before diving in to build a B2B marketplace. The marketplace for a custom/specialized product in a highly fragmented market has a better chance of success compared to a marketplace in a highly concentrated market with a standard product. Also in B2B specifically, it’s critical to think through how you can acquire, onboard, and manage the customers and suppliers efficiently. Because of higher-order values and criticality of transactions, the zero human touch model is difficult to succeed (at least in initial days). Business workflows, decision making, and payment terms are also not simple and straightforward, one of the big challenges that the B2B marketplaces have to navigate (which their consumer siblings don’t) is managing collections, working capital, and credit. It is critical to keep it on a tight leash and put-in processes to skip the downward spiral of the cash trap.

We at Kae Capital continue to be very bullish on B2B commerce and are early investors in Zetwerk, Niyotail, and a vertical B2B e-commerce marketplace (to be announced soon). If you are building something in B2B, give us a shout to gaurav@kae-capital.com



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