The 10 Commandments for Building a B2B Marketplace
It’s hard to believe that fax machines and the Rolodex are usually the first challenges a B2B marketplace founder has to face when starting their company. Large industries, with billions in transaction volume, often rely on old technology, old reinforcing habits, and a thick layer of personal relationships cemented over decades.
While traditional industries, such as construction, processing or manufacturing are still generating healthy profits and benefit from attractive margins, large piles of cash are being left on the table due to inefficient processes, and the lack of transparency. That’s where B2B Marketplaces come into the game.
Tech startups like Timberhub (Timber), Schüttflix (Bulk Material), Harbor Labs (Marine), Mercanis (Service Procurement) and Yolda (Road Freight) are just some of the B2B marketplaces in traditional and largely un-digitized industries in which the Speedinvest Marketplace & Consumer Team has recently invested.
In this article, we’ll go through tips and observations from our experience. We will take a deeper look into what it takes to crack the biggest challenges while building in traditional B2B industries using a collection of insights from our portfolio founders and Investment Team. We’ll also draw from the Marketplace Conference, an annual marketplaces event organized by Speedinvest and our friends, where the likes of James Currier from NfX are sharing unique, actionable insights for marketplace founders and builders.
Build trust with your customers
Starting out as a marketplace founder in the above-mentioned industries can be tough. In most cases, building up supply will be the biggest challenge. On the other hand you could argue that supply follows demand. So where do you really start? How can you get your hands on supply and demand quickly if trust is usually built up in lengthy enterprise sales processes?
Building trust, in this case, has two very important pillars: Personal relationships and operational excellence a.k.a delivering on your promises in a reliable way. On personal relationships, we let the founders speak for themselves:
“SEO and SEM will not get you far while starting,” says Christian Hülsewig, Founder of Schüttflix. “A field sales force on the road, which is convincing partners on site, giving them a face to your company is crucial for trust building for all parties involved.”
Indeed, you won’t find your first clients online, but through cold calling and visiting them on-site - borrowing this strategy from classic enterprise SaaS sales teams.
“Adjust to their way of working at the beginning and complete transactions offline before digitizing their processes,” adds Ion Sergis, Co-Founder of Timberhub. “This is how we are building relationships with our customers and unlocking the market.”
Industry veterans have their own way of doing things. Before trying to break these habits by force, understand their way of working, adapt, and transact offline as long as you feel there is a need to do so.
“Build friendships. Schedule lunches and dinners, go to weddings, and conferences,” suggests James Currier, Founder NfX VC during his talk at the 2020 Marketplace Conference. “This might take up 50 percent of your time during certain phases, but it builds trust –– and helps you to get to know your client's language.”
Building these networks will lead to network effects in the long term. Usually, they require more heavy lifting (as hard to scale) in the beginning but are easier to maintain once you reach a certain critical mass.
Get stuck in your customers' head and make them feel safe
John Armstrong, Founder of Reibus says that winning hearts and minds is a much bigger challenge than providing a good technology solution. Here are some tips you should consider implementing with your B2B marketplace to start the journey of connecting with your customers.
- Integrate provider visually: Include logos and names on the platforms that your customers already know from their day-to-day interactions with clients.
- Use the nomenclature of the industry: Learn to speak the language of the industry and use already existing terms.
- Allow for customization: If a client needs a specific metric for production or information for shipping, add that field to enable the highest possible degree of customization.
Crazy marketing stunts might help establish a connection with your B2B customer as well. Try having the coolest merch in town or, at a later stage, partner up with celebrities who are popular in the industry. Make sure your clients think about you often and be visually present. Our portfolio company Schüttflix for example, knowing their customers very well, picked two prominent faces (Sophia Thomalla - TV Celebrity/Actor and Lukas Podolski - Soccer Legend), to spearhead their marketing campaigns, launching various content and merchandise campaigns with them, in order to target truck drivers and construction workers.
Many users of B2B software are still dealing with old-fashioned, on-premise software and its often clunky “MS DOS style” interface. However, since technology adoption is one of the biggest challenges you’ll face, the B2B marketplace has to feel like a “consumer product” to the user. Outside of their work, B2B customers are also regular consumers who are accustomed to the usability and user experience of products like the iPhone, Shopify, AirBnB or Instagram. There is no reason why their tools at work shouldn’t offer the same level of UX & UI. It has to be fun and reflective of your personal life, just like Amazon does for your personal orders with notifications and maps to your product. Everyone loves to have visibility and updates on the status of a transaction.
When it comes to product assortment and category management, start with a small selection of “must have” features, products or services while keeping the option to expand into adjacent categories later on: Don’t make it too complex from a SKU (Stock Keeping Unit) perspective. Few SKUs are enough. Amazon started with DVDs and books. You can start out with a few types of product variation and quality: Start with a handful of dimensions (e.g. construction material or wood) and focus on certain industry standards. Simplicity makes it easier for the customer to understand your value proposition and offering.
As a rule of thumb think about supply acquisition from the perspective of enterprise SaaS sales teams and about demand acquisition more through the eyes of consumer-oriented products and services.
One way to get a foot into the market is by adding industry veterans to your cap table. Securing small tickets to guarantee you a certain volume through your platform is a good way to test your product-market fit, and processes and get first liquidity on your platform.
“At the beginning, we had pretty bad prices due to low volume and low volume as we had poor prices”, said Hülsewig. “This is why we partnered early on in the venture with someone who owns a construction industry and got them shares in the company. That helped us to get decent prices, by using an old industry player.”
As Andrew Chen mentions in his book, The Cold Start Problem, starting out in your atomic networks is key to building up a marketplace from scratch. Starting in the smallest possible units and connecting them with each other creates micro-network effects. This can be applied to marketplaces in traditional industries through focusing on niches of products, which are often flying under the radar, yet will give you valuable insights and ultimately customers to work with.
Diversifying your customer base on any side of the marketplace will lead to network effects in the long term. Failing to do so builds up a cluster risk and will get you in trouble if a few big suppliers or buyers drop out of your platform. You want to avoid this downward spiral at any cost. Obviously, this is only possible in markets or industries that have a high degree of fragmentation on, ideally both, the demand and supply side.
The transaction is not the (only) problem you are solving
While platforms have become known for cutting out intermediaries and increasing margins, the discovery aspect of platforms is one of the biggest advantages in traditional industries. Whether it’s price transparency or supply discovery, you’re giving time back to your customers, while at the same time enabling them to discover more business opportunities and strike more deals faster.
You want to become the easiest way for your customer to discover supply, prices, and availability. This can be done in different ways. Schüttflix discovered during interviews that customers sent locations and instructions to each other via Whatsapp.
The customer already used technology, yet not in a structured and professional way. This is why they offered a customer-facing app with Messenger and nudged the customers to spend more time on their platform while solving the problem of unstructured communication.
Add additional layers
Being able to digitize or facilitate parts of the usual processes gives potential customers a taste of what is possible. Eating into existing processes step by step not only creates lock-in effects and embedded defensibility for your platform but also shows measurable results to your customer.
Indeed, most B2B marketplaces are SaaS-enabled marketplaces in the beginning. This GTM strategy enables them to acquire users by offering them a tool. In the long term, the goal is to keep them on the platform by offering them a strong network and the ability to transact directly on the platform.
As sales teams are often deeply rooted in the existing organization and rely on existing processes, it's not enough to help them at the core of the process (a.k.a. finding customers). Processes at the end of the transaction (billing, in some cases logistics, inventory management, financing) should be supported by your platform in order to make sure customers love your offering.
The more you are able to help, the higher the chances of concluding a transaction and the easier it is to keep your customers on the platform and increase revenue potential and income streams. At the same time, embedding adjacent (third-party) services such as financing, insurance or logistics can also diversify your revenue streams and represent the opportunity to increase your take rate and margins without much effort.
Aim for Operational Excellence and Improvement
Rather than scaling too fast and trying to serve everyone at once, Schüttflix’s Christian Hülsewig says, “You should focus on operational excellence and operational excellence only!”
If the average bill gets paid in six weeks, do it the same day (if you have access to working capital facilities or if you are well funded) or improve it to three weeks to have an impact. If a delivery arrives too late, take responsibility and offer a discount or take up the damage. If a client needs help with onboarding its own sales team to the platform, visit them and showcase how to use the platform.
In general, look for small things that would never be accepted by today's standards but remain an issue because of a mentality that it’s “always been that way.” Incremental improvements will be noticed quickly and can make all the difference!
Hire from within and outside the industry
Employees in traditional industries have profound and deep knowledge of processes and know how the business runs on its own rules. Try to hire the best salespeople in the market.
You’d be surprised how much you can offer candidates: The opportunity to join a fresh, exciting brand in the market, with equity in your company (which 99 percent will never get in their old job), and a blank piece of paper, enabling them to shape something from scratch creates a dream job description for many candidates.
From our experience startups in old industries are definitely able to attract the brightest minds, even with low funding and not much to show besides vision and grid. While industry insiders are very valuable, we observed that teams, which consist of a mix between insiders and outsiders, often have an advantage in designing and executing innovative processes and products in these areas.
While knowing the industry well remains important, newbies in industries tend to have a fresh view and unbiased mindset. It’s like Einstein said, “Everyone knew it was impossible until a fool who didn't know came along and did it.”
Interrupt the network of your industry
“If it’s not broken, don’t fix it,” is a common belief in traditional industries.
“Industry players talk with each other and want to hear from each other that everyone is doing it the same way,” said James Currier, Founder at NfX VC. “If you manage to break up the mutual reinforcement, they will move towards your platform.”
If you focus on the “marginal nodes,” as James calls them, you enable participants who are not yet able to participate and create a new set of transactions. This is what we typically call unlocking show supply or demand. This can be a steel plant from Eastern Europe, which is too small to transact in a salable and efficient way with the big players, yet has the perfect product for a niche of your customers. Enabling them to transact e.g. by aggregating supply, vetting it and making it visible to the demand side increases the pressure on the big players to accept your marketplace as part of the game. B2B platforms often achieve this by becoming a kind of “vetted vendor” to the big players on the demand side. In doing so, they allow smaller suppliers that would usually be too small and insignificant to “deal with the big guys” to cater to these upmarket enterprise customers and compete with other larger suppliers in the market. Our portfolio companies CoachHub or Mercanis are great examples for such an approach.
Instead of asking you, “How can I digitize the existing transaction?” ask yourself, “Who isn’t making money at all? Who can go from 0 to x?”
Once a player transacts 30-50 percent of their volume through your platform, you should start analyzing their psychology. Your power is growing and you want to take the fear of your customers away that they are too dependent on you. Think about what you can do to show them that your intentions are good and that you won’t crush their margins.
Rome wasn’t built in a day
Volkan Özkan is the founder and CEO of Yolda, a digital freight forwarder from Istanbul. He advises that you won’t be able to change a 100-year-old industry in just a few months.
“Track your digitalization progresses month by month and focus on people,” he says. “In traditional industries, we believe that it’s important to not underestimate the old mindset, even if you believe it’s wrong.”
Prioritizing long-term value over short-term gains will help you as a founder to stick to your vision and actual value proposition. It might sound tempting to accept a bigger project or satisfy one specific problem for one of your customers. But it’s also the easiest way to distract you from your product road map.
It’s important to realize that even though you are building a platform, not everything has to happen online from the start. While lack of resources to build your product might impede your efforts, it’s much more important to grasp the vibe and working mode of your customers. Moving from a tech-enabled broker to a market network to a fully-fledged marketplace is the way to go.
Adapt to change
As mentioned above, your marketplace will move from being a tech-enabled broker to a fully-fledged marketplace over time. Do not be too rigid in your vision and adapt to changing markets quickly. Commodity prices will swing heavily and markets will change due to regulation.
Be relentless and patient. Change your business model and pricing if necessary and don’t hold on to ‘your legacy’ too much. Your marketplace will experience many seasons and eventually emerge into something you never imagined in the beginning.
Learn more about B2B marketplaces
This was only a short overview of recommendations. Of course, there’s a lot more to consider and there’s no one-size-fits-all solution. The stage of your company, available funds, and team setup can change significantly.
If you want to learn more about B2B marketplaces or would like to discuss your ideas and challenges, please reach out to us and we are more than happy to have a chat with you.
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