Designing the Right Business Model as a B2B Marketplace
Some thoughts and some learnings from Faire
The B2B marketplace field remains relatively nascent and many playbooks still need to be written. Finding the right monetization strategy remains a big open topic, which I’d like to shed some light on here, based on some discussions and learnings having worked with B2B marketplaces in the P9 family.
A simple framework
We can usually split the value proposition of B2B marketplaces into three parts:
1. Discovery: a seller finds a new buyer on the platform or vice versa (i.e. a marketplace value proposition)
2. Process automation: the transactional process is streamlined thanks to software (a SaaS offering). It can be a CRM, order fulfilment software, or an invoice generation software for example.
3. Value-added services: the marketplace provides value-added services on top of the transaction, like financial services (e.g. payment, credit) or shipping services.
In theoretical terms, the business model should converge toward a price that’s proportional to the value being created (according to the value-based based pricing methodology). Therefore, a simplistic framework is shown in the following:
Eventually, there’s a good chance that a typical B2B marketplace’s business model will consist of a combination of these three models. Interestingly, we can play with each to foster one part or another part of the business depending on what has the higher probability of being a significant revenue source.
Incentivizing buyers and sellers to bring their existing counterparts into the broader marketplace while not charging for process automation will help the creation of new business relationships on the platform, which could then be monetized with a take rate.
Similarly, providing value-added services at attractive prices will incentivize buyers and sellers to bring their transactions online to the platform. Let’s now have a look at a concrete example.
The Faire example
Faire’s business model, as advertised on their website (see here), is a combination of the three models above.
Faire charges for discovery but offers SaaS for free
Faire incentivizes sellers to bring their existing buyers online and doesn’t take any SaaS fees. They also reduces the commission for any repeating orders from customers brought online by the marketplace.
Faire uses the SaaS offering and attractive value-added services for sellers as a buyer acquisition strategy
In the US, Faire’s main buyer acquisition strategy is actually to focus on acquiring sellers (brands) and incentivizing them to bring their existing buyers (retailers) on a SaaS platform called Faire Direct while not charging for process automation. They then monetize by bringing new buyers to the sellers and taking a transaction fee on these new business relationships. In the US, Faire Direct referrals (i.e., when a seller onboards a buyer) actually contributed a very significant part of retail growth.
In terms of value-added services, Faire focuses on shipping (Ship with Faire) …
To increase the attractiveness of their platform, Faire has added a financing and a shipping value proposition to their offering.
Ship with Faire (SwF) is an offer for Faire’s buyers to get access to pre-negotiated shipping rates if they bring their transactions online. Faire actually offers unlimited free shipping to buyers for $20 per month, which, on top of being one of Faire’s main revenue sources (over 50%!) incentivizes people to ship more through the platform for access to more attractive shipping prices. This creates an interesting growth loop (and network effects): more sellers > Faire can negotiate better shipping rates > attracts more sellers.
…and financing facilities (net 60 payment terms and Open with Faire)
From a financing standpoint, Faire usually pays brands (sellers) after 30 days, but they also offer a 30-day credit facility for 3% of the order value.
On the buyer side, retailers enter their business information at sign-up to assess their risk profile before assigning net 60 payment terms (N60) up to a certain dollar limit. Anything spent above that limit isn’t eligible for N60 terms.
Faire prevents channel conflicts by reducing the commission to zero if reps are already working on the buyer.
Conclusion
The field is too nascent to get to definitive conclusions but my intuition based on a few data points is that business models will eventually always be a combination of these three models. Faire is just one example but we also observe that at several other B2B marketplaces that have reached an escape velocity, like Alibaba and ACV auction.
From a company alignment standpoint, conventional wisdom says that mixing take rates and transaction fees can lead to the company not being able to juggle between two or three different north stars. This might be true but it also overlooks the fact that customers paying usage-based SaaS fees to automate processes might be more bought-in, and therefore, keener to engage in the marketplace than if they weren’t…
Good luck juggling between them and if you want to discuss yours, reach out here!
A big thank you to the founders of the P9 Fam that are working and iterating on this topic and were the spark for this post. A special one to Ronen at REKKI who helped bring context and ideas on several aspect of it.
