Online marketplaces and network effects: B2B business disruptors

In recent years, marketplaces have continued to grow in popularity. What was once reserved for buying and selling goods on the street, has evolved into one of the top ways to sell digitally.

Businesses soon recognized that they could take traditional e-commerce a step further by not just selling online, but recreating these marketplaces digitally. Giants like Amazon, eBay and Alibaba have capitalized on the ease and ability to connect buyers and sellers across the globe.

An online marketplace is a website that aggregates sellers and facilitates shopping from many different sources. The operator of the marketplace itself does not own any inventory, and their business is to act as the middleman by connecting buyers and sellers to facilitate sales.

The impact that online marketplaces have had on e-commerce is significant. According to Internet Retailer Research’s 2018 Online Marketplace report, marketplaces accounted for 50% of global online retail sales in 2017. In fact, transactions on marketplaces as a percentage of e-commerce sales is now nearly equal to sales on traditional e-retail sites. And 97% of “avid” online shoppers (defined as customers who made at least seven online purchases in a three-month period) purchased from e-commerce marketplaces in the past year.

“Network Effects” are fueling the success of today’s marketplaces.

Network Effect is the term commonly used to describe the phenomenon that as the user base of a product or service grows, the value and utility increase for current and future users. In other words, a product’s value and utility increases as its user base grows.

In the past, companies were simply concerned with how they would compete with marketplaces like Amazon.

But today, online marketplaces and network effects are completely disrupting prominent industries, and changing the way business is done.

Here are 3 ways online marketplaces and network effects are disrupting B2B businesses today:

Companies will prioritize the extension of their product catalog to existing, successful marketplaces like Amazon, Walmart, and eBay.

Participation in dominating marketplaces, like Amazon, is inevitable for many businesses. And while it might seem like “one more channel” you have to manage, it opens up unique opportunities that traditional retail can’t. Sellers have instant access to an established market of consumers, in addition to access to analytics and data.

Managing inventory, sales, and fulfillment across multiple channels brings its own set of challenges. Placing APIs at the core of the e-commerce strategy will allow companies to eliminate some of the friction and challenge that it brings. Having  APIs make it easier to connect and integrate with online marketplaces in a very efficient way.

Marketplaces focused on aggregating B2B demand will disrupt more and more industries.

As leaders realize the power of network effects and start to understand the possibilities that come with modern technology, we’ll see  online marketplaces focused on aggregating demand continue to disrupt various industries.

Houzz, a successful marketplace in the home remodeling space, is a great example on the B2C side. Houzz founders realized there was an opportunity to create a central online hub for home furnishings inspiration. But as they started publishing content, readers wanted to know how to buy the featured furnishings. Houzz now consists of a marketplace of over 10 million products and 20,000 sellers, completely changing the way consumers find and purchase home furnishings.

A couple years back, one of our customers, CUPS, a technology company dedicated to rethinking independent coffee shops operations, realized a major challenge was hitting the independent coffee shop space: it’s hard to procure goods at affordable rates if you’re not part of a larger chain of coffee shops. The team at CUPS took this opportunity and decided to create a network effect within the coffee shop industry. They are now using technology to aggregate a community of independent coffee shops to provide them with the ability to use their combined might to get access to the suppliers they need to order from at fair market prices.

Some, like experts at VC firm, NFX Guild, which only invests in companies that benefit from network effects, believe that industries like healthcare, travel, and business consulting will be the first to be disrupted.

Companies will become marketplaces themselves, automating the relationship between their customers or buyers and the suppliers they work with.

In addition to extending your product line into a marketplace, or developing an online marketplace as a new business concept, forward-thinking businesses are realizing they can use the network effect and marketplace technology to their advantage to streamline operations and offer a more modern buying experience to their customers.

In the past, franchise businesses, for example, have had to manage multiple relationships with suppliers and distributors for their franchise owners, and facilitate orders between the two parties. Now they can use technology to connect the franchise owners and staff directly with the suppliers, while still maintaining control over the experience of both sides of the network.

Signs of where industry and consumer preferences are headed show the growth of online marketplaces isn’t slowing down. We believe this will continue to become an even bigger part of B2B businesses’ digital strategies over the next several years.