Enterprise Tech and Marketplaces Enliven China's Industry Internet
Going digital requires a complete rethink for established to-business players, founders and investors: deploying digital technologies to drive new innovations, especially vertical innovation and reimagining of value chains.
In the previous article, EqualOcean introduced and dissected the concept of Industry Internet. Among many other business innovations, we will see mainstream use of enterprise tech and marketplace-enabled e-commerce enlivening the landscape.
It takes more time for B2B marketplaces to generate success
For a SaaS business, the founders should consider rethinking their model if there are no signs of traction after six to nine months; however such a timetable can be way too rapid for ‘marketplace’ type companies. While it may be easy for giants to acquire a SaaS company it is not for marketplaces. Marketplaces have two ways to go: dying out or growing into a standalone company that can go public.
In this matrix, the upper left (high price) and the lower right (high frequency) are better served by vertical marketplaces rather than by horizontal marketplaces; the lower-left square is better served by horizontal marketplaces. For instance, in the high price vertical, homes and new/second-hand cars are infrequent purchases with high average ticket prices. Consumers care about product quality, brand and service over price here. Some prominent players are Beike and Dasouche, to name a few.
In the high frequency vertical, taxi businesses are dominated by vertical players like Uber, Lyft, and DiDi Chuxing. What makes these players successful is that they’ve chosen to get involved in consumers’ high repetitive daily use of cars.
It is interesting to look at the horizontal part. Consumers have some infrequent needs (i.e. locksmithing, home cleaning and plumbing) with a low-ticket price.
The infrequent usage means that ‘Uber for plumbing’ cannot work here. In those marketplaces, buyers tend to use one supplier every time, which decreases the value of marketplaces. Once buyers are comfortable with a certain provider, there is no need to visit that searching site again. We can call this monogamy. A better solution for these needs is to build a horizontal marketplace that provides different types of services for consumers to increase the organic growth of the platform. 58 Daojia, for instance, provides information on and access to high-quality offline services such as cleaning, moving, babysitting and beauty care.
B2B marketplace opportunities lie in the upper-right square. Healthcare, on the consumer side, can be high in price and high frequency as well. Unlike B2C/C2C marketplaces, most B2B marketplaces are vertical-focused.
Vertical creates incredible power
Focusing on an industry vertical gives the marketplace a unique standpoint at the very beginning from a pricing and competition point of view. In 2010, Spark Capital’s Andrew Parker looked into a marketplace that carves out a niche from Craigslist. Craigslist’s broad and horizontal approach to creating a marketplace was a success. In the well-known piece “unbundling the Craigslist,” updated by David Haber in 2012, there are 82 companies on the list that can disrupt Craigslist and pick off a tiny piece from it. Eight years later, Lending Club, Care.com, Chegg and Castlight Health, Uber and Lyft went public, to name a few.
The vertical is not the only solution; it does not always work, as we see dozens of companies in that list died in the past few years. Transaction frequency and size matter when looking at whether a horizontal or vertical marketplace makes sense. A marketplace with a tiny size of transaction and a lower frequency of purchase can be better served by a horizontal marketplace. Markets with either a high frequency or high price can be served by vertical marketplaces. Most B2B marketplaces have a high frequency and high price per transaction – for instance, commodities, metal & steel products, oil & gas and industrial products. The value of an average transaction volume can be extremely high and repeat sales can be frequently compared to a B2C marketplace. Contrary to that, only a few B2C marketplaces (e.g. healthcare, as mentioned previously) find themselves with high frequency and high price transactions at the same time.
The market size of the vertical should be large enough
Studies from KPMG indicated the Golden Iceberg opportunity: the B2B information services market is only a small fraction of the size of the industry that it targets. The information market for metals and mining, for example, is worth about USD 200 million, but the total metals and mining industry is estimated to be close to USD 1.3 trillion. That gave us a hint about what defines a good business that a B2B transaction player can get involved in: the end-market should be large enough like commodities, metals, and oil and gas. The players also need to consider the penetration rate of the online alternative they can target.
Another criterion is concentration
A highly concentrated supplier (or purchaser) can harm a marketplace as this kind of supply/demand base will be reluctant to allow an intermediary in the market. B2B marketplaces need to carve into a segmented market where there are tons of upstream suppliers (sellers) and downstream buyers (buyers); It is likely to grow in markets where buyers or sellers face high price volatility and unstable purchasing volume. In certain industries, both upstream and downstream have a strong controlling power. It makes it harder for B2B companies to generate value in the supply chain.
Marketplaces should find more value-added than one-time matchmaking
B2B marketplaces charge participants depending on the type of services they provide, which can be divided into four basic segments as shown below. Matchmaking, among others, is the single biggest variable in the take rates function. B2B marketplaces charge a take rate ranging from 50 bps to 1000 bps (0.5%-10%) of the matchmaking services normally. The range varies according to the essence of the product the marketplace sells and bargaining power of upstream and downstream.
Founders care about frequency and price but supplier variability also matters. B2B marketplaces are designed to eliminate the effect of supplier variability. A B2B marketplace’s value proposition is to involve the search for new businesses (leads) and better sales and marketing processes for suppliers. The most value is added in markets where a frequent search for suppliers is necessary, or:
the supply base is fragmented
products or services required are custom
inventory is perishable or supplier turnover is high
Think about it. If a supplier and buyer meet each other on a marketplace platform, there is a tendency for them to cut out the middleman and leave the platform because they don’t have to rely on it anymore (some investors call it a ‘breakage’). The marketplace becomes a cross-platform rather than a true marketplace in this case.
SaaS: Find the North Star to measure the value you deliver
The majority of SaaS founders and investors adopt a set of metrics to learn the fundamentals of a SaaS company. While the ‘constant measurement’ metric used by a workflow SaaS company may mean nothing to a security SaaS company, there is a set of regular metrics frameworks out there. In this chapter, we introduced four principles/metrics that are essential for assessing a SaaS company.
Growth/traction is the most important indicator that attracts investors and determines the company valuation multiple. Executives in startups and VCs have expressed to EqualOcean that there is no other specific factor as important as growth. If you want to grow your company to a 100-million-revenue firm, which is commonly considered a precursor to going public, in seven years, your growth curve should follow the pattern, in most cases: Get USD 1 million revenue in the first year of your business and triple that number in the next year, followed by another triple to USD 9 million by the end of year three. In the year four, you double the revenue in the next coming three years and register USD 18 million, USD 36 million, USD 72 million, respectively. In the year seven, 50% of growth will get you USD 108 million revenue.
Relying on the viral loop, a SaaS company can add new users each month without paying more S&M expense. The company builds a baked-in viral product so that a user is encouraged to share to non-users who then become users. It’s a closed-loop, which brings exponential growth for the firm naturally. When K>1, it’s an exponential growth. When you have 1 user, after 100 cycles, you will get 1.1^100=13780 users. Activation, defined as “the key action that a new user needs to do to be deriving utility from your product”, shows how useful your products are. Exposure, defined as “the number of people exposed each activated user brings to your platform during a specific time period”, is correlative with User case figures and number of channels. You have to broaden the two. Conversion relies on concepts that incentivizing people to create their own version of the product and stay as a new user.