The Marketplace (R)evolution

Marketplace-Driven Growth Opportunities in B2B
Ubiquitous Commerce

For centuries, marketplaces around the world have met buyers’ changing needs through the optimization of supply and demand. Today, a connected economy ushers in a new era of choices offering scale, speed and solutions for individuals and for industry, unlocking a wealth of new growth opportunities specifically for manufacturers, brands and distributors. 

Tapping these new opportunities while controlling brand messaging, mitigating channel conflict and delighting customers with relevant, beautiful experiences comes with a number of challenges and risks that can be mitigated or avoided altogether.

In this piece from Razorfish, we will highlight:

  1. Marketplaces of the past, present and future with an emphasis on B2B examples
  2. Driving factors for activating a marketplace channel and options for entrants to consider
  3. Insights and recommendations for how market leaders can play to win

Next-Generation Marketplaces: Evolution or Revolution?

Istanbul’s Grand Bazaar has operated for over 550 years, hosting 4,500 merchants across a Byzantine space that spans 10 football fields and commands the highest rents in the city. Flash forward to 2012: Amazon launches its first B2B-centric marketplace that, after just four years, offers over 2 million items from more than 30,000 globally connected sellers.

Seller-centric features and services make it easy to join, transact and optimize sales to over 400,000 business customers across the globe, often without any setup fees, listing fees or minimum commitments. Annual sales exceed $1B and are growing at 20% month-over-month as traffic to Amazon’s family of sites eclipses 2 billion visits per month.

Impressive as this may be, the B2B marketplace crown has historically rested on incumbents like Ariba, Alibaba and TradeIndia, which collectively control billions of transactional dollars yet are increasingly under siege from new competitive threats.

Like Amazon, challengers like Staples and Newegg have begun encroaching deeper into broadline B2B territory by also tapping their extensive base of B2C customers. What’s more, competition has emerged from niche operators serving industry verticals or increasingly specific B2B needs. For example, Joor and NuORDER cater to the apparel industry while Field Engineer takes a page from B2C leader TaskRabbit by offering on-demand engineering support to the telecom industry.

While the fundamental purpose and spirit of the marketplace have remained unchanged, technological disruption and channel complexity have altered the rules and underlying economics, leaving many organizations wondering how to respond.

Back to Basics

B2B marketers are faced with a new landscape of growing customer demands, rapidly maturing technology and disruptive moves by competitors while under age-old pressures to deliver higher revenue, margin and customer satisfaction. The Marketplace (R)evolution offers untapped opportunities to combat these threats and exploit new growth opportunities in each.  

Driving Customer Satisfaction – Research shows that B2B customers increasingly expect broad selection (82%) and consistently low prices (84%). Leading B2B marketers can capitalize on these preferences by more fully serving buyer needs while delivering engaging, personal end-to-end experiences often informed by expectations set by their consumer counterparts.1

B2B shoppers expect consumer-like experiences:

82% favor sites with the broadest selection, 84% expect consistently low prices

Boosting the Top Line – Revenue growth for B2B marketers can come in many forms: selling more to existing buyers or markets, reaching buyers in new high-growth markets or adopting creative pricing and bundling strategies to increase order value. A unique opportunity borne from the Marketplace (R)evolution centers on offering complimentary products and services, something that has traditionally meant inventory investment or lengthy negotiations and time-to-value horizons. Leveraging a marketplace model can offer an accelerated path to new revenue streams with nominal upfront investment and reduced risk.

Bolstering the Bottom Line – Margin contribution from new revenue streams is equally important, especially for publicly traded companies striving to deliver higher earnings-per-share (EPS). Those challenged with shrinking margins can buoy them with a marketplace operation designed to generate margin-rich sales, thanks to the manner in which transactions are typically calculated for the operator.

A Closer Look Reveals Important Distinctions

In a typical scenario involving a buyer and third-party seller, the revenue recognized by marketplace operators is derived from the value the operator contributes to the transaction represented by a commission rather than the total sale price or gross merchandise value (GMV) in a direct sale. For B2B marketers, this means the gross margin percentage on such transactions can be significantly higher than that of a direct sale.Typical Online Retail Transaction vs. Marketplace Transaction

Gaining Insight and Loyalty – Data resulting from a more complete picture of customer needs lets operators refine and tailor the user experience, improve product development and service offerings and even partner more strategically to deliver more customer value — insight that can also be offered to participating partners or even repackaged and monetized for others.

The opportunity to translate deeper understanding into customer retention gains is especially attractive. As illustrated in the figure below, the cost of selling to new customers significantly exceeds the costs of keeping the customers you’ve already acquired. Or consider that a mere 5% increase in customer retention can generate a 25–100% increase in profitability.

Manage cost, improve profitability and bolster revenue by increasing customer loyalty.
Figure 1. Loyal customers boost profits by driving costs down and revenue up as they evangelize the brand to their peers. Source: Gartner

A range of approaches exists to drive more sales with more SKUs at higher margins without significant inventory investment, but should manufacturers and distributors create their own platforms or participate in existing ones? Which approach is right for the enterprise entrepreneur?

Winning Moves: B2B Manufacturers and Brands

Manufacturers, OEMs and B2B brands often rely on complex, multi-tiered distribution networks and channel partnerships to bring their products to market. Due to their relative position in the value chain and valid concerns over channel conflict, most manufacturers have opted to build web properties that provide product content and technical support while steering clear of commerce. This reinforces the chasm with converting channels causing sales leakage, especially in commoditized markets where competition is fierce and buyers have myriad choices.

Some manufacturers attempt to bridge this gap by linking content-rich, commerce-free sites to their network of channel partners; others offer limited prototyping quantities. This moves beyond a pure content play, but it still requires prospects to journey through multiple sites to complete a purchase, especially one at production scale, leaving open the potential to pivot toward a competing brand.

Leading manufacturers, on the other hand, go beyond partner links to include channel partners and extend traditional content-driven sites with commerce-like capabilities. By transacting channel sales on the brand site itself, participative manufacturers still empower customers with choice while giving partners opportunities to fulfill. Supported with real-time inventory and pricing, this approach optimizes conversion and attributable channel sales while partially restoring channel master status (with all of its data riches). Above all, a model like Branded Commerce mitigates direct-to-consumer concerns and slays the channel conflict dragon.

Branded Commerce mitigates direct-to-consumer concerns and slays the channel conflict dragon.

Looking beyond core products, manufacturers can also seek extend assortment with ancillary SKUs, third-party tooling or industrial supplies sold by or drop-shipped from distribution partners. These margin-rich transactions benefit both parties while capitalizing on customer preferences for one-stop shopping and low prices.

This is especially relevant for aerospace, industrial and automotive manufacturers that have seen increased levels of OEM participation, as surplus and overhauled materials cannibalize sales of new spare parts. Rather than stand idle, OEMs can participate or even create these secondary markets. By exerting more control in the supply chain, OEMs and their agents recover a piece of the action to either include or compete with incumbent players. For example, Caterpillar recently partnered with Ritchie Brothers to auction used equipment. ILS, a Boeing-owned marketplace for aerospace, marine and defense products and services, now boasts over 85 million listings including OEM material in a variety of used, surplus, as-removed and overhauled conditions.

Meanwhile, other OEMs collaborate directly with major marketplaces like Amazon to list products that extend their reach while reducing operational burden. This approach can be tricky, however, if product lines are known sources of channel conflict. It may be possible to offer more exclusive lines to anxious partners or take only new brands and product lines otherwise unencumbered by channel drag into third-party marketplaces. Regardless of the approach, product content and brand messaging must be thoughtfully managed downstream.

Winning Moves: B2B Distributors and Wholesalers

The wide assortment (and razor-thin margins) realized by most distributors provides an ideal backdrop to launch a marketplace strategy.

Growth for a distributor or wholesaler often means adding new SKUs and brands bolting on value-added services, an analog approach that is both tedious and capital-intensive, requiring lengthy contract negotiation, costly inventory acquisition and the accrual of non-value-added time and cost to allocate inventory throughout an often-global network.

Alternatively, opting-in to a digital marketplace lets distributors add new product lines and brands in ways that save time while reducing risk and capital intensity. The need to invest capital in inventory requiring additional warehouse space suddenly vanishes along with the expense and operational demands of stocking a distribution network. Also eliminated are inventory carrying costs, which typically run 20%+ per annum. What’s more, the contribution from these transactions can be significantly more margin-rich. The opportunity to pilot new high-margin product lines on an accelerated timeline with near zero investment should perk up the ears of any growth-oriented B2B distribution leader.

The opportunity to pilot new high-margin product lines on an accelerated timeline, with minimal investment, should interest growth-oriented B2B distribution leaders.

Operators of such a marketplace can apply either an “endless aisle” approach to extend assortment with longer-tail products or, for distributors especially focused on availability, a “bottomless bin” approach to backstop inventory on higher-volume SKUs with that from third parties to prevent stockouts or backorders. These two options are not mutually exclusive. Most importantly, increasing the assortment of relevant SKUs moves distributors to a state of higher relevance with buyers, graduating from a parts house to a solutions provider without pressuring working capital in the process.

And while the focus has primarily been on physical goods, another strong call in the marketplace playbook is to enrich transactions with value-added services. Consider listing complementary services like installation, maintenance, repair and overhaul options alongside products perhaps offering warranty and service plans, transaction services or financing options as upsell opportunities. At Razorfish we refer to this as “Solutions over SKUs.

Third-party sellers fuel assortment: 92% of Amazon SKUs are listed by marketplace merchants, of which 50% leverage Fulfillment by Amazon (FBA)

Conclusions and Recommendations

Activating a marketplace strategy can appear daunting, bringing with it a multitude of business and technology trade-offs.

Build and Facilitate vs. Join and Fulfill
Figure 2. Build and Facilitate vs. Join and Fulfill

To Build and Operate a New Marketplace – B2B marketers should align on a broadline industry-centric or niche offering. The economic model should be based on transactions (commission) or on-access (subscription), or some combination of the two. Next, they must ensure the end-to-end experience for both buyers and sellers is superb, otherwise one side of the supply/demand scale can tip out of favor, muting or destroying the flywheel effect.

Consider the following:

  1. Should it be an extension of the existing brand, a new brand or a cooperative brand with others?
  2. How will sellers be courted, onboarded and subsequently managed? How can the operator make it efficient to recruit new vendors and be scalable enough to maintain a consistent level of quality among them?
  3. How will catalogs be integrated and managed? Who will own product data, attributes, categories and overall catalog assortment?
  4. What about pricing? Discounts? Shipping and freight?
  5. Are there geographic restrictions or will the platform be global?
  6. How will orders be managed? Which internal and external systems are affected and which is the system of record in the process of orchestrating orders?
  7. How will payments be handled? And what about financial reconciliation between sellers and the marketplace operator?
  8. How will customer service be handled? Who will be responsible for addressing inquiries pre- and post-purchase? How will returns or exchanges be managed and who will manage them?
  9. Is the organization ready to support a marketplace?  Are the right talent, documented processes and enabling technology in place?

There are multiple paths to consider when building marketplace capability:

  1. Bolt-On Marketplace Platform – Solutions now exist that productize and operationalize many of the unique business requirements in a marketplace model. Platforms like Mirakl have matured to the point of enterprise scale with purpose-built functionality and integrations to major technology platforms that reduce time-to-value without creating unnecessary risk. Most licenses are offered SaaS and involve an access fee with a scaled percentage commission of each transaction.
  2. Extend Commerce – More and more B2B players throughout the ecosystem are deploying e-commerce platforms, although few have maximized their potential capability. While this may require more heavy lifting (versus bolting on a productized marketplace solution like Mirakl), some have extended platforms like SAP Hybris, IBM WebSphere or Oracle ATG with marketplace-like features and related business processes like seller management, catalog integration, order orchestration and customer service.
  3. Go Custom – The option to develop a bespoke solution blending technology and business process from the ground up may be viable for some, but the implications across commerce, supply chain, finance and customer service systems and teams — and the time horizon to do so — must be carefully calculated before wading into deep water.
  4. Partner or Buy – Is there an existing industry partner with which to consider combining forces in some way? In a competitive counterstrike to Amazon, Walmart recently acquired Jet.com for $3.3B after just one year of operation, securing Jet’s dynamic pricing engine and smart cart in the process. Jet will eventually assume leadership of Walmart’s e-commerce operations and leverage talent and realize scale in the process.

To join and sell on an existing marketplace, consider these key questions:

  1. Which marketplace platform(s) best reach the target demographic?
  2. Which provide the optimal value proposition in terms of access vs. transaction costs?
  3. Which product lines are best suited for this channel?
  4. Should we launch a new brand or extend the existing brand?
  5. How should we price the marketplace assortment?
  6. Are there sources of channel conflict? If so, how can we mitigate them?
  7. How can we maintain product data in a timely and scalable way?
  8. Should we retain or outsource fulfillment and customer service?
  9. Do we have the right team, business process and support infrastructure?

Think Big, Start Small, Move Fast

From their humble origins to their sophisticated capabilities today, marketplaces offer manufacturers, brands, distributors and wholesalers more options than ever to thoughtfully augment their channel strategies. As the connected economy matures and shoppers in B2C and B2B continue to exhibit preferences for one-stop shopping and consistently low prices, marketplaces will play a role in accelerating shifts in existing channel relationships, causing marketers to ask how and when they should respond.

Enterprise entrepreneurs will undoubtedly face challenges along the way, but the opportunities presented by the Marketplace (R)evolution offer solutions to those who thoughtfully strategize and carefully execute. Leaders who deliver stellar customer and stakeholder experiences while staying true to their purpose for charting a new channel direction — be it growing satisfaction, revenue, margin, insights or retention — will win the day.

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