Key Considerations Before Implementing a B2B Marketplace Strategy

Before the pandemic accelerated the adoption of business-to-business (B2B) online marketplace platforms, marketplaces had already become one of the key trends in B2B sales for years to come. According to Forrester's earlier forecast, by 2023, channel sales through B2B marketplaces would account for 17% of total sales; however, the consulting firm now expects that this figure will be achieved earlier this year due to the pandemic accelerating marketplace adoption.

From an operational perspective, the advantages of marketplaces include: providing an additional sales channel, creating new revenue streams, reducing marketing costs, and expanding overseas sales and new trade partnerships. From a customer experience standpoint, this translates into 24/7 operations, as well as a more transparent and convenient process for price comparison and product selection.

Some of the world's leading software companies have successfully adopted marketplace strategies. For example, Salesforce launched AppExchange in 2005, allowing third-party developers to create applications and sell them to Salesforce customers. Additionally, GetApp and Capterra, acquired by Gartner in 2015, are also successful marketplace cases: GetApp is a top online resource helping businesses explore software-as-a-service (SaaS) products, while Capterra acts as an intermediary between buyers and sellers in the software industry.

For chief financial officers (CFOs) looking to benefit from B2B marketplaces, developing a robust strategy is crucial. A profitable strategy is based on a key economic principle: achieving economies of scale by increasing unit sales relative to operating costs, known as 'fixed cost degression.' Therefore, not all products, services, and markets are suitable for a scalable marketplace strategy, and CFOs considering this strategy often do not know how to evaluate investment opportunities.

When evaluating a digital B2B marketplace strategy, CFOs and financial decision-makers should ask themselves three key questions.

Target market type

This may seem obvious, but companies often overlook clearly defining the type of market they wish to enter through a B2B marketplace. If this step is ignored from the start, it can lead to significant mistakes later. To accurately define the target market, CFOs need to collaborate with the marketing department to determine the industries the company aims to target, the size of those industries, and the total addressable market (TAM), which is the total potential revenue opportunity for a product or service. The TAM concept is crucial for a company because it helps estimate the required investment and funding, thereby prioritizing specific products, customer segments, and business opportunities.

CFOs should also assess market saturation, competitors, and their market influence. Additionally, they need to consider the size and pricing of target companies to ensure that revenue covers sales costs and operating expenses.

Potential growth opportunities

After defining the target market, CFOs need to further understand the potential growth opportunities within that market through a marketplace strategy. To do this, they should estimate the total market potential and forecast the growth achievable over a specific period, such as five years. Forecasting total market potential requires first defining target customers, estimating their number, and determining the penetration rate for the product category. At the same time, the potential market size should be calculated in both volume and value terms, and initial assumptions should be continuously revised.

Companies can use various methods for growth forecasting, including customer surveys, expert opinions, sales force estimates, sales and trend analysis, and market testing. Other key areas include market competitive density, unit sales costs on the marketplace, and potential total revenue. Additionally, attention should be paid to the average transaction size for product segments within the market. For example, if a company resells Microsoft Office 365 subscriptions on a marketplace, it must understand the cost of sales and the potential revenue per unit resold to accurately determine how many subscriptions need to be sold to be profitable. In general, the ideal state for a marketplace is high transaction volume with low transaction size.

Marketplace scalability

Once CFOs understand the market and its growth opportunities, they need to examine whether the products and services offered are suitable for scaling in a marketplace environment. For example, IT service providers often bundle software with services to increase profitability, thereby creating more value for customers. To tap into this potential, CFOs must focus on several key metrics to determine whether products and services can be scaled to a marketplace.

They also need to determine the ratio of full-time equivalents (FTE) to units sold. This ratio reflects the company's actual full-time staffing and, especially when compared to industry standards or competitors, can indicate whether staffing is insufficient or excessive. Additionally, companies should confirm whether their products and services require high liquidity or capital costs (such as hardware) and understand whether these costs and interest can be converted into operating expenses.

CFOs must be clear about the resources used to sell, procure, and manage marketplace products and services, and assess the durability of these resources to handle transaction volume growth. Finally, they need to clarify whether the marketplace platform's billing method is based on per-unit charges or revenue sharing.

In summary, CFOs need to examine the components and underlying technology of their marketplace offerings to achieve product scalability. If they can find the right way to structure products, they can achieve significant economies of scale by increasing transaction volume relative to operating costs, thereby continuously improving company profit margins.