At the time of the dot.com bubble, the very few thoughtful – yet the most adventurous – venture capitalists were betting on marketplaces whose function was to collect information and promote transparency in industries that had remained impenetrable for years. The assumption was that thousands of smaller players were making highly specialized products for larger businesses, yet the market reach of those minor companies was heavily limited by their dependency on a fuzzy sales structure based on conferences, personal connections, and word of mouth. The days of the dot.com bubble, however, were not exactly the best time to bet on any ideas.
Today the circumstances are entirely different. B2B marketplaces are flourishing. Companies like GoDirect Trade, GHX, and Flexport are achieving impressive stock market capitalizations. And similar marketplaces are exploding in popularity.
A recent study by Digital Commerce 360 estimates that B2B marketplaces will generate $3.6 trillion in sales by 2024. Vertical industry marketplaces, in particular, are becoming an increasing driver for B2B ecommerce companies, with VC’s largest funds making big bets on vertical players.
While niche marketplaces are making huge waves online, let’s take a look at how vertical markets operate and what’s behind their success.
Interesting in building your own vertical marketplace or connecting to a third-party vertical? Check out Virto Marketplace – a full-fledged standalone composable marketplace solution from Virto Commerce.
Marketplaces are uniquely positioned to aggregate demand by offering a wide selection of third-party products and services and reduce friction in the buying process, allowing vendors to sell significantly more products than if they choose to operate alone or launch their own siloed B2B ecommerce solutions.
While horizontal marketplaces offer a large selection of products across many categories, vertical or niche marketplaces concentrate on offering similar products and services from a variety of different sources. The audience of niche marketplaces has a unique focal point and is very specific.
Despite their growing popularity, they are not many vertical marketplaces just yet. Getting a national heavy machinery or gas industry to replace paper and phone order processing overnight is an unlikely task. And companies may be reluctant to disrupt the existing supply chains and distribution systems in which they have heavily invested. However, some are willing to take the risk.
Eventually, old and outdated order placement and processing will certainly give way to newer technologies and a full-fledged ecommerce experience. Looking at companies like GoDirect Trade or BigRentz, we are positive that the future is here.
The Difference between Horizontal and Vertical Marketplaces
In this section, we take a look at the differences between two marketplace models: horizontal and vertical.
What is a horizontal marketplace?
Definition, examples, pros, and cons
Online marketplaces that adopt horizontal models serve a large audience with varying needs, becoming a sort of “one-stop shop.”
One of the best-known examples of B2B service marketplaces is Upwork, an online platform where companies can find service providers ranging from designers to writers and marketers.
Horizontal marketplaces have many obvious advantages: lower market fluctuation, fewer supply and demand discrepancies, and decreased risk of a dishonest service provider or customer.
However, horizontal marketplaces have a high attrition rate and solely concentrate on matching clients with service providers (or suppliers) for a one-off deal, resulting in low-value relationships.
For example, on Upwork, service providers face high competition from their peers, a high commission from the platform, and low project rates. Clients, on the other hand, deal with overburdened and underpaid hires that are not very motivated to invest in their projects.
What is a vertical marketplace?
Definition, examples, pros, and cons
Vertical marketplaces are more specialized and tailored to a niche industry with a well-defined target audience.
Verticalization limits competition and creates more codependent, equal relationships based on trust, experience, and the ability to provide products and services on a continuous basis. Since the high degree of specialization implies more complex products and business scenarios, vertical marketplaces put the stakes on quality rather than speed and adequate pricing rather than low costs. The result is higher value on offered products and services, along with collaborative and mutually-beneficial relationships.
The unprecedented popularity of vertical marketplaces in recent years has been mainly driven by the desire to remove the friction from transactions and improve the overall customer experience.
Modern B2B buyers expect a comprehensive omnichannel experience and the convenience of B2C shopping with interactive catalogs, personalized offers, and price lists. B2B marketplaces provide exactly that – a streamlined shopping experience and automation of collaborative business processes between customers and suppliers.
By joining B2B exchanges, companies of varying calibers can receive manifold benefits and advantages, such as access to new markets and customers at minimal cost, diffusion of technological and marketing costs, and automation of business processes. Within the B2B marketplace, manufacturers and wholesalers can also complement in-house products and services from their partner ecosystems by adding other value-added services like installation or training.
Forward-Thinking Business Models for Vertical B2B Marketplaces
The gross merchandise value (GMV) is the predominant business model in a B2C marketplace. Based on the percentage of each transaction, it doesn’t translate well to the B2B environment. In most B2B verticals, a typical individual transaction is so large that charging a percentage on that transaction seems unreasonable.
There are, however, forward-thinking business models that emerge within B2B verticals that are worthy of a separate discussion.
The fee-per-sample model is based on charging manufacturers a sample fee every time their sample is shipped out. This model essentially aggregates sellers and buyers, who often prefer to sample supplies before committing to a purchase. This way, manufacturers receive leads without any effort and are content to outsource sample fulfillment. Some of the industries where sampling works very well include chemicals, packaging, apparel, and design materials.
Data and analytics
Those marketplaces that achieve scale can monetize insights from transactions. Companies rely on data for product development, marketing, strategy, and distribution, so having access to data and analytics that the marketplace offers can help them gain insight into product performance. Panjiva, a global trade company, has successfully monetized ecommerce data and now offers subscription services with import and export details on commercial shipments worldwide.
While in a B2C environment, the number of subscription-based marketplaces is incredibly low, in a B2B environment, paying for access to big-check, high-quality buyers, who are likely to order on a regular basis, makes perfect sense. Bamboo Rose, a global supply chain management platform, is among those B2B companies that have successfully implemented a subscription-based business model.
Deriving revenue from advertising is a monetizing strategy where marketplaces function as originators of email and direct mail campaigns that target qualified buyers. Suppliers can pay for sponsored listings that are returned along with the relevant search results, print advertisements, or other marketing materials that go into the packaging of goods delivered to customers.
When Amazon launched its first private-label brand of bulk toilet paper and tissues back in 2019, the company paved the way for other B2B marketplaces to consider adopting the model. By analyzing data on the platforms, B2B marketplaces can create private-label products based on products’ popularity or the demand/supply gaps.
Current Realities and the Future of B2B Marketplaces
Even though there are several pre-2010 success stories of apps making their way through the digital B2B landscape, the majority of B2B operations still remain offline. So why have these legacy apps never really caught up? There are several reasons:
Apps were mostly horizontal and didn’t address vertical-specific workflows.
They were expensive as well as hard to use and integrate, requiring a lengthy setup and onboarding.
They lacked comprehensive payment and lending solutions, which were rarely automated.
They focused on digitization rather than building mutually-beneficial relationships.
However, recent years have significantly altered the B2B landscape. The API-driven architecture of modern B2B ecommerce platforms has facilitated communication between applications across the supply chain and enabled companies to build more flexible, extensible solutions with real-time inventory, product catalogs, and pricing information.
Technology aside, B2B marketplaces have also become more vertical-specific. For example, we can now observe several types of wholesalers: those that facilitate smaller and more frequent transactions (high-friction marketplaces) and those that deal with less frequent but larger transactions (manufacturing). There is yet another type of B2B company that facilitates the cooperation between the previous two with payments, lending, invoice factoring, and various other connections through supply chain applications.
Examples of Vertical Marketplaces
Below are a few examples of vertical marketplaces if you want to do some additional research.
Chemnet, a subscription-based Chinese Chemical Trading platform