B2B marketplaces will be the next billion-dollar e-commerce startups

Startups involved in B2B e-commerce such as Faire and Mirakl have burst out of the gates in 2020. Almost overnight, these startups transformed into consequential platforms, earning billion-dollar valuations along the way. The B2B e-commerce industry has broad reach, encompassing everything from commerce infrastructure and payments technology to procurement and supply-chain solutions. But one area of the B2B e-commerce sector holds outsized promise: marketplaces.

These venues for buyers and sellers of business-related products are exploding in popularity, fueled by better infrastructure, payments and security on the back-end and companies’ increased need to conduct business online during the pandemic.

Even before the pandemic, B2B marketplaces were expected to generate $3.6 trillion in sales by 2024, up from an estimated $680 billion in 2018, according to payments research firm iBe TSD. They were already growing more quickly than most B2C marketplaces that predated them, and when COVID shutdowns hit, many companies scrambled to shift all purchasing online. A survey of business buyers conducted by Digital Commerce 360 found that 20% of purchasing managers spent more on marketplaces, and 22% spent significantly more, during the pandemic.

For many entrepreneurs running B2B marketplaces, the pandemic created new demand for their platforms. Yet to convince businesses to make a permanent shift to online purchasing, B2B marketplaces cannot simply remain stagnant, serving as simple transactional platforms. Those that innovate now to introduce adjacent services will emerge as winners in the next few years, with some inevitably becoming billion-dollar companies.

As a venture capital investor in B2B e-commerce companies, I’m carefully watching the industry and have seen several forward-thinking business models emerge for B2B marketplaces. The predominant revenue model of B2C marketplaces, the gross merchandise value (GMV) take rate, or percentage of each transaction, doesn’t always translate well in the B2B world. Instead, B2B marketplaces are discovering creative new ways to monetize their networks, ensuring their approach is tailored to the complex and nuanced world of B2B e-commerce. I’ll delve into each of these models below, providing examples of marketplaces that have successfully begun implementing them.

What makes B2B transactions unique? Before discussing how B2B marketplaces can deploy new business models, it’s important to think about how B2B transactions typically work.

Payment methods: There are four main ways to make a B2B payment: paper check, ACH transfer, electronic fund transfer (wires), and credit/debit cards. Nearly half of B2B payments are still made by paper check, but digital payment solutions are quickly gaining.

Financing: It is customary in B2B transactions to pay “with terms,” such as net 30 or net 60, effectively giving a line of credit to the business buyer that enables them to send payment after delivery of the good or service. Supply-chain financing and dynamic discounting are two mechanisms business buyers use to settle invoices with suppliers on preferred timelines.

Bulk discounts: Business buyers often expect and receive discounts in return for placing high-volume orders. While not a concept unique to B2B, negotiated or custom volume discounts can complicate the checkout process.

Contractual pricing: Businesses often enter into enterprise-level pricing agreements with their suppliers. In some B2B verticals, such as the veterinary supplies market, there is little consistency and transparency regarding the market price of any given item; instead, each buyer pays a bespoke price tied to contractual agreements. This dynamic typically benefits suppliers, which can price discriminate based on buyers’ ability and willingness to pay.

Delivery method and timing: Unlike consumers, businesses may place orders for goods but delay delivery for weeks or months. This is particularly common in the commodities market, where futures contracts specify a commodity to be delivered on a certain date in the future. B2B transactions typically include a negotiation on delivery method and timing.

Insurance: Business buyers frequently purchase insurance as part of their transactions, particularly in high-value verticals such as jewelry. Insurance is designed to protect against damage to the goods in transit or theft.

Compliance: In some verticals, particularly those related to healthcare and chemicals, there is a heavy compliance burden to ensure goods are properly sourced and transported. Is the seller legally registered to sell and transport sensitive goods such as medical equipment or pharmaceuticals?

With all of these considerations, it’s no wonder B2B e-commerce has been slower to digitize than B2C. From product discovery through the checkout process, a consumer buying a bag of licorice looks nothing like a retailer buying 100,000 bags of licorice from a distributor. The good news for B2B marketplace founders is that, based on the parameters above, there are many creative ways to extract value from transactions that go beyond the GMV take rate. Let’s explore some of the creative ways to monetize a B2B marketplace.

Sampling fees

In most B2B verticals, individual transactions are so large that charging fees on a percentage basis means scaring potential customers away. In high-value markets with infrequent orders, charging a take rate on purchase orders will be perceived as unfair, especially when suppliers and buyers know each other already. But the fee-per-sample model is a unique wedge to aggregate suppliers and buyers, who often sample supplies before placing large orders.

One of our portfolio companies, Material Bank, has used this monetization strategy with success. Material Bank is a B2B marketplace for construction and interior design materials that warehouses samples (fabric swatches, paint chips, flooring materials, wall coverings, etc.) from hundreds of brands. Architects and interior designers can order free samples from Material Bank and receive them the next morning, and then ship samples back for free when they’re no longer needed. Material Bank charges the manufacturers a fee every time one of their samples is shipped out. Manufacturers receive new customer leads that require no effort to generate and are happy to outsource sample fulfillment, which was historically a cost center and not a core competency. Other B2B markets where sampling is well-established include chemicals, apparel and packaging materials.

Data monetization

In mature markets, reliable longitudinal sales data exists at the SKU-level, enabling manufacturers to understand exactly how their products perform relative to peers. The best example is the role Nielsen and IRI play in the consumer packaged goods (CPG) industry. These two companies have exclusive point-of-sale integrations with major retailers. They collect, cleanse, package and analyze sales data, which they then sell back to CPG brands and manufacturers via data services portals.

Brands rely on this information for product development, marketing, distribution and strategy decisions. In most B2B verticals, sales data isn’t centralized to the same degree, so suppliers often have no idea what their precise market share is, or how a certain product performs against its closest competitors. B2B marketplaces have an opportunity to change that. Those that achieve scale will be able to monetize insights from the transaction activity on their platforms, playing a key role in data capture and analytics.

Companies that have successfully monetized B2B commerce data include Panjiva, a global trade data company, and BroadJump, an expense management platform for the healthcare industry.

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Embedded financial services

Embedded financial services is the premise that fintech is an ingredient within a broader product suite as opposed to a standalone business model. An oft-cited example is Shopify, which started as virtual storefront software, subsequently monetized payments volume and later introduced Shopify Capital, a small business financing program. Another example is Toast, a software platform for restaurants that started as a point-of-sale system and gradually expanded into other financial services over time, including lending and payroll management. There are three prongs of embedded financial services: integrated payments, lending and insurance. B2B marketplaces are well-positioned to offer all three.

LeafLink, a wholesale marketplace for the cannabis industry, is a pioneer of embedded fintech. The company has amassed a significant share of cannabis wholesale buyers (retail stores) and growers on its platform, a marketplace with embedded inventory management and CRM tools, and is now facilitating noncash payments and supply-chain financing. Due to a lack of federal legalization, many banks are constrained in serving cannabis customers even in states where trade is legal, effectively leaving buyers and sellers unbanked (or you might say high and dry).

Cash on delivery (COD) is the most common payment method, making it difficult for cannabis companies to access financing to fuel growth. LeafLink is solving these vertical-specific challenges with its embedded fintech offerings.

Targeted advertising

Advertising on B2B marketplaces can take several forms, the most common being sponsored listings, similar to Google Adwords. If someone searches for certain products on the website, a supplier can pay to have their products show up at the top of the list. Advertising can take a more traditional form, too, such as printed marketing materials included in packages delivered to buyers. With an understanding of buyers’ profiles and order history, marketplaces can function as originators of direct mail to targeted, qualified buyers.

As a marketplace, wading into advertising can be tricky because neutrality is key, but giving suppliers the option to selectively market to buyers can be a powerful tool. One B2B marketplace that has successfully monetized through advertising is Construct Connect, a bidding platform for construction projects.

Subscription fees

B2C marketplaces rarely charge subscription fees. Dating apps like Tinder, OKCupid and Raya are notable exceptions, since they provide users with access to a valuable curated network, but there are no monetizable transactions (at least, we hope not). In the B2B world, however, monetization through subscription often makes sense. Suppliers are likely to pay for access to high-quality buyers in vertical markets because business buyers tend to be repeat customers making large purchases.

A useful way to attack the “chicken or egg” problem is to aggregate a group of buyers on a platform without charging them. When you reach a critical mass of coveted buyers on a platform, sellers may then be willing to pay a subscription fee to access them. A few examples of B2B marketplaces that have succeeded with subscription fees include Bamboo Rose, a global supply chain management platform, and Cvent, a platform for event management professionals.

Private-label products

Drugstores and department stores have sold merchandise under their own brands for decades. E-commerce sites like Revolve, the multibrand women’s apparel retailer, launched private-label brands over the years without customers realizing it. But in B2B commerce, the notion of private-label products is less common. It wasn’t until 2019 that Amazon launched its first B2B private-label brand, a product line of bulk toilet paper, tissues and paper towels (and subsequently got in hot water with regulators for leveraging its sales data to develop its own brands). We should expect to see more private-label products from vertical B2B marketplaces.

Analyzing sales data on their platforms, B2B marketplaces can not only create private-label products based on those which are the most popular and/or where gaps exist, they can also drive high sell-through on their own items. There’s nothing stopping vertical marketplaces from assuming the role of manufacturer, marketer and distributor of their own products.

The pandemic placed a spotlight on the importance of digitizing B2B transactions in every sector, from pharmaceuticals and CPG, to construction materials, food, supplies, manufacturing and beyond. B2B marketplaces stand to profit from this move to the digital realm, but only those that offer far more than just a place to transact will become billion-dollar businesses.

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* Mirakl and Material Bank are both Bain Capital Ventures investments.