Vertical B2B Marketplaces: The Sky’s the Limit

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. With that said, the days of the dot.com bubble, and its subsequent crash, were not exactly the best time to bet on any precarious ideas.

Today, though, the situation and circumstances are entirely different. The B2B marketplaces are flourishing. Companies like GoDirect Trade, GHX, and Flexport are achieving impressive stock market capitalizations. Similar marketplaces are exploding in popularity, partly because of companies’ increasing need to continue their operations during the pandemic. 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.

The definition of vertical marketplaces

Marketplaces are uniquely positioned to aggregate demand by offering a wide selection of third-party products and services and to 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 platform.

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, however, they are not so numerous yet. Getting a national heavy machinery or gas industry to replace paper and phone order processing is probably an unlikely ask at the present time. Established industries like steel or chemicals don’t change overnight. Moreover, companies may be reluctant to disrupt or change the existing supply chains and distribution systems in which they have previously invested heavily. Nevertheless, some are willing to take the risk.

We are confident that old and outdated order placement and processing will 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

B2B marketplaces that adopt horizontal models serve a large audience with varying needs, sort of providing a “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, less supply and demand discrepancies, and decreased risk of a dishonest service provider or an insoluble customer. However, horizontal marketplaces have a high attrition rate; they solely concentrate on matching clients with service providers (or suppliers) for a one-off deal, resulting in low-value relationships. In the case of Upwork, service providers face high competition from their peers, a high commission from the platform, and low project rates. At the same time, clients deal with overburdened and underpaid hires that are not very motivated to invest in their projects.

Vertical marketplaces, on the other hand, 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 of operating an individual ecommerce store, and automation of some of their business processes. Moreover, within the B2B marketplace, manufacturers and wholesalers can complement their in-house products and services from their partner ecosystems, while adding other services like installation or training.

Forward-thinking business models for B2B marketplaces

The gross merchandise value (GMV), the predominant business model in a B2C marketplace, based on the percentage of each transaction taken, 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 and will ultimately drive customers away. There are, however, new forward-thinking business models that emerge within B2B verticals that are worthy of a separate discussion.

Sampling fees

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 those of 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 B2B marketplace offers can help gain insight into how products perform relative to their peers. Panjiva, a global trade company, has successfully monetized ecommerce data and now offers subscription services with import and export details on commercial shipments worldwide.

Financial services

Embedding financial services and broadening the scope of the final offering has worked really well for companies such as Shopify and Toast. The former now offers Shopify Capital, a small business financing program, while the latter specializes in lending and payroll management.

Subscriptions

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.

Advertising

Deriving revenue from advertising is yet another monetizing strategy in which 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.

Private labels

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 why:

  • 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; and
  • 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.

Chemical industry

  • Chemnet, a subscription-based Chinese Chemical Trading platform
  • CheMondis, a European marketplace for chemicals

Transport and logistics

  • Flexport, a digital freight forwarder and customs broker that combines technology, data analytics, logistics infrastructure, and financial services
  • uShip, an online marketplace for shipping services, where transportation providers place competing bids for the right to handle a customer’s shipment

Automotive industries

  • PartCycle, a marketplace for the quality used OEM auto parts from trusted professional auto recyclers
  • Parts Market, a comprehensive marketplace for used car parts with a U.S. nationwide network of facilities
  • Mobase, a marketplace for professional railway products and solutions (the former Easy Spares Marketplace and RailMail from Siemens)

Aviation and aerospace industry

  • ePlane, an online trading and insights platform for aerospace parts and repair services
  • GoDirect Trade, a subscription-based B2B marketplace for new and used aerospace parts
  • AirbusWorld, a collaborative customer portal and marketplace for better collaboration with operators of Airbus Helicopters' global network
  • Thales Industrial Marketplace (IVEN), a digital marketplace for aerospace and defense professionals and their main suppliers of consumables

Building and construction materials

  • Brickhunter, a brick-buying marketplace from the UK
  • SupplyHog, a marketplace for hardware and building supplies

Electronics

  • Arrow, a marketplace for technology manufacturers of electronic components and enterprise computing solutions and service providers

Industrial heavy machinery

  • Kitmondo, an online marketplace and auction for trading used industrial machinery
  • Machinio, an online marketplace for buying and selling machinery and equipment
  • BigRentz, the largest equipment rental network in the U.S.
  • IronPlanet, a marketplace for used construction equipment, agricultural machinery, trucks, and more.

Manufacturing parts and equipment

  • Asseta, a marketplace for semiconductor parts from suppliers around the world

Marketplace infrastructure

  • Resolve, a complete net terms and credit management solution, in which sellers get up-front payment and buyers pay Resolve in 30, 60, or 90 days
  • FINIX, Payments Infrastructure-as-a-Service for SaaS businesses, ISVs, and marketplaces that provide a payment facilitator program and push-to-cart disbursements, among other financial services
  • MIRAKL, a marketplace SaaS platform that empowers both B2B and B2C organizations to launch and grow an enterprise marketplace
  • Fundbox, an AI-powered financial platform for small businesses that offers fast and intuitive access to business credit
  • Wholesail, a full payment portal for restaurant and retail customers
  • Convictional, a SaaS platform with powerful infrastructure to launch and scale digital marketplaces

Thinking of building your own vertical B2B marketplace or connecting to an existing niche market? Virto Commerce is an ideal solution for you! Our extensible, composable, and API-driven B2B ecommerce platform can accommodate any type of business logic and integrate with any third-party system. Schedule a demo now to learn more about how Virto Commerce can help your business grow.

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Marina Vorontsova
Technical author and eCommerce advocate