Online marketplaces are huge. Amazon, Etsy, and Uber prove that C2C and B2C marketplaces have overcome the chicken and egg problem — attracting buyers before there are enough sellers or attracting sellers before there are buyers.
By contrast B2B marketplaces have struggled. The annals of startup history are littered with failed attempts like Commerce One and Pepmarket, since it has been far too challenging for these companies to pull in sellers and buyers simultaneously. This has left the lucrative B2B shopping space — which represents 80% of the world economy — relatively manual.
But a new sophisticated strategy is emerging that promises to help B2B marketplaces get off the ground.
The SaaS-enabled marketplace
If a marketplace can’t pull in enough buyers to convince B2B sellers that there’s value in joining the platform, why not provide another form of value until buyers can be onboarded? According to Sangeet Paul Choudary, author of Platform Revolution, providing B2B tools to attract sellers or buyers before launching a marketplace is a popular emerging solution:
“Increasingly I see the approach of tools-first. Launch a SaaS application that allows businesses to interact with each other and provides single user utility. From there, expand to platform.”
The proposition is simple:
Create a SaaS tool that appeals to potential marketplace sellers
Onboard sellers using the SaaS value proposition
Create the marketplace leveraging your existing pool of sellers
Onboard buyers using the marketplace value proposition
Leverage the critical mass of buyers and sellers to scale the marketplace exponentially.
Despite recent kinks, Zenefits is a great example of a SaaS-enabled marketplace. CEO Parker Conrad decided that the best way to create a marketplace for small business services like insurance was to create a free SaaS platform that HR managers at small companies could use to automate processes like hiring, benefit management, and timesheet management. Once it had that captive user base of marketplace buyers, the company was free to gradually scale to include marketplace sellers — insurance companies that would offer services to the HR managers. The result? In 2015, Zenefits raised $500 million at a $4.5 billion dollar valuation.
This is also the approach we’re using at Freightos to build a marketplace for international shipping, helping logistics providers automate freight pricing with a SaaS application that also functions as a gateway for marketplace sales to importers and exporters.
The SEM advantage
Adopting the one-two punch of a SaaS application as an onboarding tool for a marketplace introduces some key advantages:
New marketplace opportunities: At the peak of the dotcom bubble, Gartner predicted we’d have 100,000 B2B marketplaces by 2001. By 2002, it was clear that the actual number wasn’t even close. Many marketplaces failed because sellers lacked motivation to go through a lengthy onboarding process before buyers were online, while buyers would never join without sellers. The SEM approach can help with native digital platforms, but a bigger opportunity lies in its ability to automate sellers in manual industries with a SaaS tool, creating a base of sellers to launch a marketplace.
Sticky SaaS sellers: Using a SaaS application to onboard sellers means they get value before marketplace launch. Once the marketplace is launched, online sales are a net gain, alleviating the pressure to immediately drive buyers or risk seller abandonment.
Marketplace seller validation: SaaS platform usage can function as a filter, ensuring only qualified sellers or buyers are on the marketplace. For example, Zenefits reduces the cost of sale for insurance companies, as companies large enough to require an internal HR management platform are likely prequalified as potential sales targets.
Variable marketplace buyer offerings: A major complaint from B2B marketplace buyers before the dotcom bust was that in the B2B sector, size and relationship matter. In other words, there must be some way to adjust pricing for large or prized customers. A SaaS application used to automate internal operations for a seller would need to be able to accommodate sophisticated pricing, which means that an online marketplace relying on the same SaaS platform could as well.
Marketplaces can improve SaaS: SEMs don’t need to launch with the initial goal of creating a marketplace. When SaaS applications require additional internal resources to get full value, marketplaces can help them work better. Venture capitalist Josh Breinlinger explains this with a hypothetical example where companies A/B testing websites with Optimizely need to design test templates. A marketplace for testing templates could improve the SaaS platform experience.
The SEM drawbacks
While SEMs can solve some significant challenges, they do introduce their own set of problems:
Juggling multiple products: Paul Graham says startups are all about focus. His advice: “Start a small, intense fire.” SEMs mean creating both a SaaS platform and a marketplace, which can be incredibly challenging. If there is also a SaaS for buyers, it gets even more complex. At Freightos we find ourselves with four different product offerings, each of which includes multiple sub-KPIs.
Capital: Marketplaces are challenging enough. When creating multiple products, headcount demands spike, as does capital drain. Combined with the long B2B sales cycles for the SaaS product itself, SEMs require significant war chests. At Freightos we spent a full three years focusing on the SaaS application alone before even approaching the marketplace.
Making the jump: The most dangerous disadvantage lies in making the SaaS-marketplace leap. No matter how well SaaS sells, a successful transition isn’t guaranteed. This can be particularly dangerous to SaaS-enabled marketplaces where the SaaS is free, as no revenue stream exists from the SaaS platform.
The bottom line
SaaS applications have taken over the business world. Marketplaces permeate consumer commerce. Now the SaaS-enabled marketplace business model can herald a new generation of business automation, powering transparent marketplaces in business-to-business interactions.
Zvi Schreiber is the CEO of Freightos, a logistics startup handling international freight. He has founded and led multiple tech companies, some of which have been acquired by companies like IBM, GE and VerticalNet.