At Alter, our conviction about the potential of B2B marketplace ventures is strong, and we are confident the teams building these companies will play a pivotal role in every emerging tech city around the world. As we think about what’s next for the space, an interesting trend we’re starting to see is horizontal B2B e-commerce marketplaces giving way to vertical B2B e-commerce marketplaces for particular industries.
Here, we’ll define the individuality of and differences between horizontal and vertical marketplaces, elaborate on what might contribute to this shift, and explain why this deserves our attention. If you are operating or investing in this area, please write to us — we’d love to hear your thoughts.
What is Horizontal B2B E-commerce?
Horizontal B2B e-commerce ventures are marketplaces for products across many industries that own the supply chain from manufacturing to distribution, from accessing raw materials to owning the machinery and disseminating the final product among retailers. A great example is Udaan, the Indian platform offering products in Food, Apparel, Electronics, Packaging, Pharma and other categories. Udaan has been phenomenally successful since its launch in 2016, with 30,000 sellers on the platform and 3 million buyers across 900 cities in India. Udaan is a category creator that reached ‘unicorn’ status faster than any other Indian startup when it raised $225 million in 2018 (now valued at $3 billion).
Here, a full-stack approach undertaken by a horizontal B2B e-commerce marketplace captures efficiency across the value chain with logistics and working capital financing as the two major value adds created.
Which Categories Would First Activate Vertical Play?
Vertical B2B e-commerce marketplaces are marketplaces that are focused on specific sectors and serve a niche product category to a highly targeted audience. For instance, Infra.market operates in the construction industry, Zetwerk in manufacturing, Resha Mandi in sericulture, Captain Fresh in fisheries, Moglix for industrial goods, DeHaat for agricultural products/services, etc.
Below, we show a map of similar players around the world to drive home the definition of a vertical B2B E-commerce marketplace.
When Does Horizontal B2B E-commerce Become verticalized?
We are starting to see horizontal B2B e-commerce companies undergo verticalization transformations in select industries, and believe this will only continue to grow for a set of reasons. For example, SMBs have traditionally been expensive and difficult to reach. However, since vertical marketplaces are more specialized, these emerging or below-the-radar businesses (niche companies, new suppliers, first-time buyers) can now be aggregated into one platform.
Specifically a vertical shift allows for more optimized core metrics of commerce, namely:
1. Assortment — As a marketplace, enlisting as many SKUs as possible is a constant objective. Focusing on one industry allows for an exhaustive coverage of categories and captures the long tail.
For example, DeHaat provides farmers with access to over 4,000 agricultural inputs.
2. Pickup/delivery SLAs — Generally, one of marketplaces ventures’ core value propositions revolves around level setting stakeholder expectations for order fulfillment. Whereas typically supply chains are unique to every industry, vertical B2B players own the full supply chain and reduce wastage by focusing on a particular category.
For example, Zetwerk promises globally competitive lead times — with a capacity of 15,000+ MT per month and 1000+ network facilities, offering delivery in as early as 7 days.
3. Buyer/seller experience — Each industry has certain peculiarities governing a successful transaction. Again, here focusing on a single industry ensures a more nuanced understanding of the buyer-seller transaction workflows and monetization schemes.
For example, AgroStar has enabled farmers to procure an entire range of agricultural goods by simply giving a missed call on the company’s 1800 number. Another example would be Infra. Market offering construction material manufacturers offering instant quotes on various products including cement, steel, chemicals etc.
Beyond this, several other strong business fundamentals that show the value of verticalization include:
1. Unit Economics — Aggregating supply that is concentrated into one industry makes for better gross margins through volume play. First, a conducive payment gateway partnership, curated offers from affiliate industry partners, and superior customer services ensure a favorable Contribution Margin 1. Then, sales and marketing efforts to a sharper target audience drives Contribution Margin 2 in the right direction as well.
2. Partnerships—As domain specialization helps develop deeper expertise, affiliate networks become more robust with better category-specific offerings, and the platform accordingly becomes increasingly flexible to roll out unique product offerings for its customers.
For example, AgroStar has partnered with several leading national and multinational agriculture brands to sell their products through the AgroStar platform.
3. Community — Finally, a shared industry sets the foundation for stronger network effects to kick in, meaning that the value of the participants in the marketplace increases as the network grows. This brings in higher switching costs and assists in acquiring higher quality customers.
Eventually, the core metrics and business fundamentals would also need sound differentiators along the following tracks to establish a clear leadership as a verticalized B2B marketplace player:
1. Data — A verticalized approach promises to be a more comprehensive read on the consumer because it develops a deeper understanding in one specific area of need from the customer. This automatically translates into an improved conversion funnel and a more sound embedded lending offering.
2. Repeated need — When supply and demand originate from the same industry, the need is typically recurring and targeted. These are characteristics that indicate high stickiness among users, contributing to a greater customer lifetime value rather than a one-off promotion driven onboarding.
3. Customer Acquisition Cost — With a single industry scope, a vertical player might find it longer and more expensive to drive awareness/adoption among a customer base when compared to a horizontal player targeting a wider pool because of multiple industry coverage. However, this sharper business focus offers a verticalized player the opportunity to freely expand geographically since industry-specific competition is lower and more replicable market entry playbook can be achieved.
For example, Zetwerk has been creating a global network of suppliers for customers around the world.
Why is Verticalized B2B E-commerce Here to Stay?
Establishing a vertical B2B marketplace focusing on a particular category requires alignment along four major tracks — large market, category defining metrics, deep moats, and a particular mastery of the vertical.
1. Market — A large standalone market ensures the requisite depth needed to build a solution for a large supplier and buyer base. The existing fragmentation of the market and the prevalent unorganized state of the sector are indicators that the industry is ripe for disruption.
For example, the construction material market in India is $200B, top 10 construction players in other emerging markets such as Brazil hold ~9% market share, and agriculture makes for more than half of India’s unorganized sector.
2. Metrics — For a more sustainable value proposition by a vertical B2B marketplace, there ought to be an emphasis on reliability of the offerings, better quality of its products or services provided, and predictable delivery. To add to this, the cost effectiveness of this solution, captured by building a customized supply chain for the industry, and an effort to minimize the number of customer touch points from origination to destination are other metrics worth focusing on.
3. Moat — The defensibility of such a business could come from a combination of industry specific partnerships/alliances, which are preferably exclusive to the platform, a supplier and buyer side software offering which helps the respective stakeholders run their business better, and finally, a strong community of users actively maintaining a thriving referral network.
4. Master — A more robust lending play with provisions for embedded finance and an effective line of credit for working capital financing will be long-term value adds as well. There’s also an opportunity to standardize transaction parameters by introducing frameworks for comparability of SKUs and their varied list of suppliers. Lastly, supply variability could be greatly reduced to match demand.
How is Alter Looking at Vertical B2B E-commerce Players in Emerging Markets?
Looking specifically at emerging markets, which include Southeast Asia with Indonesia, Vietnam, Philippines etc., Latin America with Brazil, Colombia, Mexico etc., and Africa with Nigeria, Egypt etc., we are categorizing a set of B2B verticalization players along the axis of different supply chain segments. We are specifically looking closely at the ones that are operating end to end, solving for both manufacturing and market linkage problems in an industry.
B2B commerce continues to excite us as a business model, and we would love to hear from those interested about or invested in its evolution. As we develop our thinking on the space, please feel free to reach out to us:
Sidd @siddharth@alter.global, and Yash @yash@alter.global. Thank you!
