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Supplier Extensions Part 2: Supplier Offerings & Marketplace

AUTHORS:

Dave Yuan

Founder and General Partner, Tidemark

Bob Solomon

Former SVP/ GM of Supplier Network and Financial Services, Ariba


Extending through the value chain is the frontier – it is something that has only been successfully executed by a select few. However, we believe that extending is the long-term future of vertical software. Pushing beyond being a simple tool to a multi-stakeholder platform is the way a Vertical SaaS vendor (“VSV”) can go from being a good company to a once-in-a-generation organization. Extending towards the supplier is the best place to try it.

In Part 1, we introduced the topic and walked through the merchant side offerings in our extension framework. We covered finding the correct product offering for merchants and how to look for merchant side network effects.

In Part 2, we discuss building out a footprint with suppliers through:

  • Supplier wedge offerings 
  • Overcoming resistance to behavior change, understanding incumbent behavior, and adding value to the transaction
  • The opportunity to build a two-sided network 

Wedge Offering to Supplier

The wedge offering to suppliers for each of these extensions is a natural extension of the workflow process the VSV has enabled for the merchant. Some examples include:

The supplier wedge offering provides a way of extending the workflow from the merchant offering. In each case, the wedge offering can be the start of a more complete single player offering on the supplier side. For instance, the accounts payable automation wedge offering can turn into a more complete accounts receivable offering. The procure-to-pay offering may turn into a complete order-to-cash offering for suppliers. Supplier credentialing services can turn into complete quality management systems or into insurance or credit products.

Incumbent Behavior

Behavior change can be hard, so it’s important to understand the current methods that a merchant uses to engage with a supplier. Despite many workflow and efficiency benefits, suppliers may resist digitization for a number of idiosyncratic reasons. A classic example is freight forwarders. It would greatly improve efficiency if all parties of a supply chain were on the same visibility software; however, freight forwarder’s business relies on arbitrage, so they would resist such efforts vehemently. If you are attempting to disrupt the steady state of an industry, you can expect profit-protecting incumbents to do all they can to resist the change.

In other situations, price discovery and negotiation of terms are subject to historical business roles, highly relationship based, or regulated by government or industry bodies. In many industries, commerce between buyers and sellers has been a repeated game for many decades. 

Being aware of incumbent behaviors and context, while simultaneously building key traditional nuances (industry specific definitions, conventions and precedent) in digital, will speed adoption. 

Adding Value

To overcome this hurdle, it’s important that the VSV adds value to the transaction, the supplier, and the end consumers, rather than just exerting buyer power. Further, the VSV should pursue lighthouse suppliers to espouse the value of their new offerings. When a VSV utilizes an extension strategy, the mindset needs to shift from merely being an industry participant to an industry platform. The more hardcore competitive moves that would serve an earlier stage company will backfire as it makes the jump to platform.

Supplier value propositions typically revolve around:

  • Driving incremental demand for the supplier 
  • Expanding transaction size and/or profitability
  • Automating the business processes or communication 
  • Ensuring product or service quality
  • Reducing risk and improving payment flows
Representative Offerings

The Big Leap to Two-sided Marketplaces

Supplier extensions to two-sided marketplaces are certainly more common than consumer or employee extensions, but they are still the exception rather than the rule. 

First some background on B2B marketplaces, which are less well understood than their B2C counterparts:

Why are B2B marketplaces so damn hard?

In many markets, the merchants may be fragmented but the supply base may not. In industries where one (or worse, both) sides of the marketplace are consolidated, a marketplace’s traditional value propositions of supplier discovery or buyer outreach are not needed. This dynamic rules out a bunch of industries, or portions of industries: aerospace, autos, much of oil and gas, medical-surgical, food distribution, and more.

In addition, there can be a high cost, friction, and risk associated with using a new supplier. Average transaction sizes can be high, products may require testing and verification before use, and the buying process might involve multiple parties and bureaucracies. 

Ok sounds tough, so where do B2B marketplaces actually work?
  • Wholesale marketplaces connecting small retailers with brands and wholesalers of unique products: Fragmentation exists on both sides of this market and retailers are constantly looking for a unique item that is not on Amazon! For this reason, a battle royale is being pitched between Faire, Ankorstore, and many others.
  • Freight marketplaces: There are millions of shippers and almost a million carriers. There’s lots of excess capacity in the form of backhaul – and on top of all that, there is supply chain disruption. No wonder this is such a vibrant sector! DAT, Uber Freight/Transplace, Convoy, Transfix and many others are fighting over this enormous market.
  • Surplus equipment is, by definition, all about fragmentation and excess supply: Liquidity Services, Moov, and others are building marketplaces in this area.
  • In several markets such as aerospace (ILS, now CAMP), auto (CCC, where Dave invested at his former firm and served on the board for many years), foodservice equipment (PartsTown) and custom parts (e.g., Xometry), the range of parts is staggering and the options between OEM, aftermarket, and refurbished are difficult to search and compare. These marketplaces have built very good businesses.

VSV to Marketplace

In the right industry structure, VSVs are positioned to expand into GPOs or marketplaces. By capturing the merchant side of a market, the VSV has solved the cold-start (or “chicken and egg”) problem that plagues so many marketplaces and GPOs. And they have done so on the hard side of the market! B2B buyers tend to spend 1% or less of revenue on procurement, while suppliers spend much more than that on sales and marketing. Every supplier is continuously looking for new merchants but not every merchant continuously seeks new suppliers. Remember the Golden Rule: “She with the gold rules.” 

Only a few VSVs have added a marketplace, but more are coming. CCC leveraged its footprint in auto body repair shop systems to build a successful online parts marketplace (case study to come). Cvent offers a registration tool for event organizers and a marketplace for matching hotels and event planners. Ariba has dabbled with marketplace-like concepts. Autodesk acquired Building Connected. We think these companies are only the beginning. Nearly every VSV that dreams big will start to build a marketplace.

On the opposite side of the spectrum, marketplaces are using their position between buyers and suppliers (and their transactional data) to move towards becoming VSVs. Marketplaces and GPOs of all types are trying to figure out how to offer software and data products to both sides of the market by introducing procurement, planning, and design tools to buyers; creating merchandising or order-to-cash tools for suppliers; and offering financing and payments to both parties. The GPOs Avendra and Premier have both added procure-to-pay solutions. Transfix added TMS and FMS software. Upwork has offered enterprise procurement applications.

If VSVs aren’t yet coming for marketplaces, it’s pretty clear marketplaces will be coming for them! Get busy innovating or get busy dying.

Supplier offerings can be some of the most powerful extensions of a VSV. A VSV naturally benefits from buyer power, but when it is strategic about the sequencing of its offering from single to multiplayer, from merchant to supplier; when it is thoughtful about incumbent patterns and behaviors of buyers and sellers; when it tangibly and materially adds value to both the buyer and seller in the transaction: VSV supplier extension can exceed the original VSV offering itself. The journey is one worth taking. 


Share your thoughts

We love the idea of bringing together a community to explore the boundaries of Vertical SaaS and are excited by what we can learn from each other. If you have thoughts or comments or want to get involved, reach out to us at knowledge@tidemarkcap.com.

The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.

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Supplier Extensions Pt 2: Supplier Offerings & Marketplace
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This chapter is part of:

Extend through the Value Chain

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