Tom Schröder is head of Germany, Austria and Switzerland (DACH) for CloudBlue. Views are the author's own.
Even before the pandemic fueled the adoption of online business-to-business (B2B) marketplaces, it was becoming apparent that marketplaces would be a key aspect of B2B sales in the years to come.
Forrester had earlier predicted that 17% of channel sales would flow through B2B marketplaces by 2023, but now the consultancy is predicting that figure to be hit this year because of the pandemic’s acceleration of marketplace adoption.
On the operational side, the advantages of marketplaces include an additional channel to market and sell products, new sources of revenue, reduced marketing costs and opportunities for overseas sales and new trading partnerships. From a customer-facing perspective, this translates to around-the-clock operation and a better and more transparent experience as they compare prices and products from a single source.
Some of the world’s leading software companies have adopted marketplace strategies to great success, starting with Salesforce, which in 2005 created AppExchange for third-party developers to create their own apps to sell to Salesforce customers.
GetApp and Capterra, both acquired by Gartner in 2015, are also among marketplaces that have proved highly successful. GetApp is a top online resource for businesses exploring software-as-a-service (SaaS) products, and Capterra serves as an intermediary between buyers and technology vendors within the software industry.
For CFOs looking to benefit from B2B marketplaces, it is important to have a sound strategy in place. A profitable strategy is based on the key economic principle of reaching economies of scale by increasing the units sold in relation to operating costs. In other words, the goal is to achieve what’s known as a fixed cost degression. Consequently, not all products, services and markets are a good fit for a scalable marketplace strategy, and often, CFOs who are considering one don’t know where and how to evaluate the investment opportunity.
There are three pivotal questions that CFOs and financial decision-makers should ask themselves when evaluating a digital B2B marketplace strategy.
Type of market to address
It may seem obvious, but businesses often overlook the step of identifying and defining the type of market they wish to address with a B2B marketplace. Forgetting to do this from the beginning can lead to detrimental mistakes down the road.
To best define the type of market to address, CFOs need to partner with marketing to determine the industry their company is hoping to target, the size of the industry and the total addressable market or TAM, which represents the total revenue opportunity available to a product or service.
The concept of TAM is crucial for companies as the estimates of the amount of effort and funding required enables them to prioritize specific products, customer segments and business opportunities.
CFOs should also establish how saturated the market is, who the competitors are and the weight those rivals have in the market. In addition, CFOs have to consider what size of companies and at which price they need to target with the B2B marketplace in order to outweigh the costs of goods sold and operating expenditures.
Potential growth opportunity
Once the target market is identified, the CFO must take steps to understand the potential growth opportunities for the company within that market via a marketplace strategy.
To do this, CFOs should estimate the total market potential and how much growth they can expect within a certain period of time (for example, five years) within this market.
To forecast the total market potential for a product, a business first needs to define its target customers, estimate the total number of target customers and determine a penetration rate for its product category or categories. It should also calculate the potential market size in terms of both volume and value and then modify its initial assumptions on a constant basis.
There are different processes through which a business can make a growth forecast, including customer surveys, expert opinions, estimates by salespeople, sales and trend analysis and market tests.
Some of the other key areas companies should focus on include the competitive density of the market, the cost per unit sold on the marketplace and the potential total revenue that can be made.
It is also important to note the average transaction size for product segments within the market. This means if a company is reselling subscriptions to Microsoft Office 365 on a marketplace, for example, it must understand the cost of selling the product as well as the potential revenue per product it resells on the marketplace. This accurately determines the quantity of Office 365 subscriptions it must sell to turn a profit.
In general, the sweet spot for marketplaces is high transaction volume with low transaction size.
Once the CFO understands their market and its growth opportunities, it is time for them to look at the products and services offered to see if these are scalable within a marketplace setting.
IT service providers, for instance, will often bundle software and services together to increase profitability that in turn provides more value to their end customers. To tap into this potential, CFOs must look at several key metrics to determine if the products and services are scalable to the marketplace.
They also need to determine the Full-Time Equivalent (FTE) to units sold ratio. The ratio reflects the actual full-time payroll of the company and is especially important when it wants to compare itself with industry standards or close competitors to determine whether it’s understaffed or overstaffed.
Furthermore, the company should ascertain whether the products and services it offers requires a high amount of liquidity or capital costs (e.g., hardware). It is also important to know if it can convert these costs and interests into an operating expense.
It is pivotal for CFOs to understand what resources they are using to sell, procure and manage the products and services being sold on a marketplace. The longevity of these resources also needs to be examined to know if they can hold strong to handle an increased amount of transactions. Finally, it is key to know whether the marketplace platform that the company is being paid on is based on units or if it claims parts of the businesses’ revenue.
The bottom line is that CFOs need to examine the components of their marketplace offerings and the underlying technology to make their products scalable. If they find the right way to build products, they can achieve tremendous economies of scale by boosting transaction volumes faster compared to the related operational costs — helping to consistently grow the company’s profit margin.