Tom SchrÃ¶der is responsible for Germany, Austria and Switzerland (DACH) for CloudBlue. Views are those of the author.
Even before the pandemic fueled the adoption of business-to-business (B2B) online marketplaces, it was becoming clear that marketplaces would be a key aspect of B2B sales in the years to come.
Forrester had previously predicted that 17% of channel sales would pass through B2B markets by 2023, but now the consulting firm predicts that figure will be reached this year due to the accelerating market adoption by the pandemic.
Operationally, the benefits of marketplaces include an additional channel to market and sell products, new sources of revenue, reduced marketing costs, and overseas sales opportunities and new business partnerships. From the customer’s perspective, this translates to 24 hour operation and a better and more transparent experience as they compare prices and products from one source.
Some of the world’s largest software companies have adopted market strategies with great success, starting with Salesforce, which in 2005 created AppExchange for third-party developers to create their own applications to sell to Salesforce customers.
GetApp and Capterra, both acquired by Gartner in 2015, are also some of the proven marketplaces. GetApp is a leading online resource for companies exploring Software as a Service (SaaS) products, and Capterra serves as a conduit between buyers and providers of technology within the software industry.
For CFOs looking to take advantage of B2B marketplaces, it’s important to have a solid strategy in place. A profitable strategy rests on the key economic principle of achieving economies of scale by increasing units sold relative to operating costs. In other words, the goal is to achieve what is called a degression of fixed costs. Therefore, not all products, services, and markets are suitable for an evolving market strategy, and often CFOs considering a market are unsure of where and how to assess the investment opportunity.
CFOs and CFOs should ask themselves three essential questions when evaluating a digital B2B market strategy.
Type of market to approach
It might seem obvious, but companies often overlook the step of identifying and defining the type of market they want to address with a B2B marketplace. Forgetting to do this early on can lead to damaging mistakes down the road.
To best define the type of market to approach, CFOs should partner with marketing to determine the industry their company hopes to target, the industry size and the location. total addressable market or TAM, which represents the total revenue opportunity available for a product or service.
The concept of TAM is crucial for businesses because estimates of the amount of effort and funding required allow prioritize them on specific products, customer segments and business opportunities.
CFOs also need to determine how saturated the market is, who the competition is and how much weight these rivals have in the market. In addition, CFOs must consider the size of the companies and the price they should target with the B2B market in order to outweigh the cost of goods sold and operating expenses.
Potential growth opportunity
Once the target market has been identified, the CFO must take action to understand the potential growth opportunities for the company in that market through a market strategy.
To do this, CFOs need to estimate the total market potential and the growth they can expect over a certain period (eg, five years) in that market.
To predict the total market potential for a product, a company must first define its target customers, estimate the total number of target customers and determine a penetration rate for its product category (s). He should also calculate the potential market size in volume and value, and then change his initial assumptions steadily.
There are different processes by which a business can forecast growth, including customer surveys, expert opinions, seller estimates, sales and trend analysis, and market testing.
Some of the other key areas that companies should focus on include competitive market density, cost per unit sold in the market and the total potential income that can be realized.
It is also important to note the average transaction size for product segments within the market. This means that if a business is reselling Microsoft Office 365 subscriptions on a marketplace, for example, it needs to understand the cost of selling the product as well as the potential revenue per product it is reselling in the marketplace. This accurately determines how much Office 365 subscriptions it needs to sell to generate profit.
In general, the sweet spot for marketplaces is high transaction volume with low transaction size.
Once the CFO understands their market and their growth opportunities, it is time for them to examine the products and services offered to see if they are scalable in a market environment.
IT service providers, for example, often bundle software and services together to increase profitability, which in turn delivers more value to their end customers. To harness this potential, CFOs need to look at several key metrics to determine if products and services are scalable in the market.
They must also determine the Full-time equivalent (FTE) ratio of units sold. The ratio reflects the actual full-time payroll of the business and is especially important when it wants to benchmark itself against industry standards or close competitors to determine whether it is understaffed or overstaffed.
In addition, the company should check whether the products and services it offers require a high amount of cash or capital costs (for example, hardware). It is also important to know whether it can convert these fees and interest into operating expenses.
Understanding what resources they are using to sell, buy, and manage the products and services sold in a market are essential for CFOs. The longevity of these resources should also be examined to see if they can withstand an increased number of transactions. Finally, it is essential to know whether the market platform the company is paid on is unit-based or if it claims a portion of the companies’ income.
The bottom line is that CFOs need to look at the components of their market offerings and the underlying technology to make their products scalable. If they find the right way to create products, they can realize huge economies of scale by increasing transaction volumes faster relative to the associated operational costs, which helps to consistently increase the company’s profit margin. .