7 things we learned in conversation with B2B marketplaces expert Sameer Singh
Needless to say, when marketplaces expert Sameer Singh agreed to be a part of Hokodo’s Ultimate B2B Marketplaces Knowledge Hub, we were pretty thrilled. As a Venture Partner at Speedinvest, an instructor at Reforge and network effects author at Breadcrumb.vc, Sameer is a certified marketplaces guru.
Suffice to say, when Hokodo Co-founder and President, Louis Carbonnier, sat down for a discussion with Sameer, we learned a hell of a lot. It was tricky to distil into just a handful of points, but here are seven of the key things we learned from Sameer.
1. The digital demands of Millennial and Gen Z buyers aren’t being met by traditional sales channels
Kicking things off, Louis contemplated the recent explosion of growth in the B2B marketplaces space and asked Sameer what he attributed the surge in popularity of these platforms to.
For Sameer, it’s all about the fact that the digital demands of younger buyers simply aren’t being met by the traditional sales channels available to them.
“A big driver behind this is just that more and more people going into the workforce right now have grown up on a smartphone, right? So for most of their day-to-day experiences or needs, there's an app for that,” explains Sameer. “There's a marketplace or there's a network where they get those things done. You want to order food, you get delivery. You want a ride, you go to Uber. You want to book a stay, you go to Airbnb.”
Sameer goes on to explain that Millennials and Gen Zers are so used to having great online experiences that when they enter legacy industries where the tech is like being “back in the 80s”, it creates a lot of frustration.
“I think that might be the impetus for a lot of the activity in this space.”
2. One of the biggest challenges faced by early stage B2B marketplaces is attaining critical mass
In his chapter of Behind the scenes of winning B2B marketplaces, Hokodo’s industry defining research report, Sameer points to the fact that one of the earliest challenges faced by B2B marketplaces is reaching critical mass. But what exactly does that mean?
“The basic issue that most marketplaces have on day zero is that you have no supply,” Sameer explains. “You can't get a buyer because you have no supply, you can't get a supplier because you don't have a buyer, right? You have the chicken and egg problem, so you have to hack your way to a minimum viable marketplace to be able to break out of this, to have both enough buyers and sellers. That point is called critical mass.”
Check out the report for Sameer’s detailed advice on how B2B marketplaces can accelerate their path to critical mass.
3. To avoid disintermediation, marketplaces have to offer something that is “better than anywhere else”
One of if not the biggest challenge faced by B2B marketplaces is disintermediation. Put simply, this is the phenomenon whereby a buyer and seller meet on a marketplace, but after the first transaction they decide to take their business off-platform in order to avoid marketplace fees. Obviously, this is very damaging to the marketplace’s revenue.
The scale of disintermediation is difficult to measure, but some marketplace founders think they might be losing up to 80% of their customers this way. Disintermediation is serious business, and preventing it requires careful consideration and execution. But it boils down to one thing: offering value that buyers and sellers can’t find elsewhere.
“You really have to ensure that either the workflow, the payment terms, the experience [...] is better on your marketplace than it is anywhere else, so [buyers and sellers] will pay the fee just to avoid the inconvenience of doing it elsewhere.”
4. The benefits of offering payment terms on your marketplace are many
When asked about the role of the checkout and payments in preventing disintermediation, there was no hesitation in Sameer’s answer: “If you don’t control the payment flow, it’s a whole lot harder to avoid disintermediation. That’s a basic rule.”
“Owning the payment flow is a hygiene factor,” Sameer continues. “It has to be there if you want to have a functional marketplace. Without it, things are going to be challenging.”
But the most important part of payments for B2B marketplaces in Sameer’s eyes? Payment terms (we promise we didn’t ask or bribe him to say that).
“[Payment terms] tends to be the big factor and a card that you can play against disintermediation. Often for a lot of these smaller SMEs, financing terms are hard. They're usually disadvantaged, either the buyer or seller, depending on the marketplace. So either they're waiting forever to get their payments or they have to pay upfront, and then they have a working capital issue. So if you can provide payment terms on the marketplace, that tends to be a big incentive for [buyers and sellers] to stay on.”
5. Sameer has a four step process for determining which marketplaces to invest in
Probed about how he assesses marketplaces in which he wants to invest – and those he avoids – Sameer revealed a four step process. Marketplace founders take note, this is what you need to demonstrate to impress an investor like Sameer.
“The first is kind of the founders themselves. What's their personal relationship with the problem? And building a company is a tough emotional challenge [...] so we're trying to get a sense of their personal commitment to this problem.
“Second is a question: are they building a unique structured multiplayer interaction? Because that's what creates a network effect. The product needs to enable two or more users of the product to interact, whether that's buyers and sellers or just two other sorts of users.
“The third is, does that interaction have the properties of a particularly strong network effect?
“And the last question, if all of that looks good: are there early metrics to suggest that the interaction is working?
Sameer acknowledges that this fourth point can be difficult to show for early and pre-seed marketplaces, but he stresses the importance of seeing some early data.
“They don't need to be growing, but I need to have a reasonable sample size where the data makes sense. So, typically I'm looking at, depending on the product: retention, engagement, or liquidity metrics, or some combination of those.”
6. Marketplace founders need to pay attention to critical mass, network effects and liquidity
Critical mass. Network effects. Liquidity. When it comes to marketplace success, there’s quite a lot of jargon to get used to. Luckily, Sameer is on hand to explain the relationship between these three crucial concepts.
“A network effect exists when adding a user increases the value of the product for all users. So, by definition, if you have a functioning marketplace, you have a network effect. If you have a functioning social network, you have a network effect. Liquidity is the point, after you have critical mass, right? And that basically is the point when network effects are a reality and not just a concept.”
Still with us? If not, maybe this real-world example will clear things up.
“Say I'm starting a B2B marketplace today. I have no buyers, no sellers. In theory, I would have a network effect down the line but I don't have one today. And let's say I go and manage to onboard 10 buyers, 10 sellers, and they're transacting with each other every single day. And as I add a new seller after that, it makes it easier to attract buyers and vice versa. At that point, liquidity has kicked in. I've got critical mass. Network effects have kicked in. So they're all sort of interrelated concepts.”
7. Marketplaces must carefully consider the metrics they measure
We’ve established that customer retention or stickiness is a key metric for many marketplaces to measure, as it lets you gauge how many customers you might be losing to disintermediation. But marketplace founders beware: it’s not the *only* metric that you should be looking at.
“You need to be a bit careful with retention because it tends to vary widely by value proposition, even within B2B marketplaces.”
Sameer then uses the example of a marketplace selling fresh produce.
“If you're measuring retention of, let's say buyers who buy apples, and quarter-on-quarter retention is low, you need to figure out if the last quarter was in apple season or not. It's possible that you have two apple seasons in a year. So you would look at retention over a period of two quarters or annual retention instead of over a period of a month. But if it's a high frequency marketplace where people are transacting twice a month or twice a week, then you could look at monthly retention or weekly retention.
“The frequency of it depends on the value proposition,” Sameer adds. “So that's where people tend to mix it up quite a bit because if you're using a frequency that doesn't fit the marketplace, you're not getting the right tool. You're not measuring what you think you're measuring.”
If you’d like more exclusive insights from Sameer, don’t forget to check out the full recording of his fireside chat with Hokodo.
