B2B Marketplaces: Their Failure in the Dotcom Era and Why This Time is Different

B2B marketplaces are here to stay. According to Forrester Research, B2B eCommerce in the US is slated to hit $1.8 trillion in sales by 2023, and more than 60% of B2B companies start their hunt for product information online.

If there are any doubts, look no further than the current growth of Amazon Business. It made $1 billion in sales within 12 months after it launched and is now at $10 billion just 2 years later. Given the market size of B2B distribution, Amazon’s B2B operations could one day eclipse the sales of its consumer eCommerce business.

View our latest landscape analysis of B2B marketplace startups across all verticals in B2B distribution.

Amazon isn’t alone in its B2B success. Specialized B2B markets are also set to thrive; particularly in verticals like chemicals, metals, industrial supplies and electrical.

However, this isn’t the first time many have heard this message. The frenzied speculation surrounding B2B eCommerce in the dot-com era and the utter disappointment that followed might give analysts and investors pause, but conditions were different back then. A lot of speculation was based on perceived first-mover advantage, instead of viable, proven business models. Multi-trillion dollar sales volume projections were frustrated as the new, generously-funded startups failed to live up to the hype.

Why B2B Marketplace Struggled in the Late 90’s

In B2B, as in most things, hindsight is 20/20. The factors are varied and complex, but there are a few obvious reasons why early hype around B2B marketplaces was destined to fall flat.

1. Consumer behavior and prevalent trends. In the late 90’s – early 00’s, the internet as a medium of transactional exchange was still a new idea. Growing masses of consumers had access to the web, but this predated the real “boom” in internet usage that arrived with mobile smartphones.

There simply weren’t enough people online, and for many consumers, buying products online was going to take some getting used to. And besides the huge consumer behavior shifts still in waiting, user experience (UX) was barely thought of in the way it is now.

Even Amazon only opened its Marketplace, the “platform” aspect of their business, in 2000, three full years after the company went public. By the first couple of years into the new millennium, buy-in for the idea of online purchases was increasing. Growing acceptance of the consumer trend would eventually make eCommerce much more feasible. But in many ways, the dot-com era was simply too early for big things to happen online in the B2B arena.

2. Supply and demand issues. The supply side presented even more challenges. Many suppliers were reluctant to join online exchanges. The reasons were manifold.

For one, in consolidated industries, there were already established ways for businesses to transact with suppliers. Many suppliers didn’t want to engage in competition that would drive down prices, or just could not see the added value of contributing inventory to a marketplace.

Also, online payment infrastructure did not exist as it does now. The notion of taking credit card orders or invoicing online was still in its infancy. Smaller startups with fewer resources could not readily create their own systems around it, if they even had a website.

3. Complexity of B2B fulfillment. B2B fulfillment often involves many more moving parts than in B2C. Distribution and logistics are more complex, sales cycles can be much longer and involve multiple touch points spread out over time, and sales can be slowed down by regulations and legal hurdles, especially in international transactions.

Amazon’s fulfillment and logistics, itself, is a multi-billion dollar exercise. It’s not hard to imagine the corresponding burdens on startups and midsize companies, even well-resourced ones, looking to break through in their respective verticals.

The side effects of all these issues were numerous, including a lack of liquidity, transparency, or sustainable network effects. Looking back, it’s not hard to explain the early demise of many B2B exchanges, billions of dollars in lost value, and tons of disappointed investors and customers.

Why B2B eCommerce Is a Much Different Scene Now

The internet is no longer “new.” The web and the cloud are woven into everyday life, especially when it comes to making purchases. Some sort of digital component is seen as a necessity in virtually every market. And payment infrastructures, better fulfillment methods, and more generally, blueprints for what it takes to successfully maintain a balanced B2B exchange, are now available.

Opportunities are plentiful for B2B distributors. Some industries, such as electrical, are not yet thoroughly savvy about digital eCommerce outlets. There are still fragmented markets to be served, and many B2B verticals in which a simplified online exchange does not yet exist.

Additionally, even though Amazon Business dominates the conversation in B2B eCommerce, and is set to capture 10% of the US and 5% of the global B2B market according to some analyst estimates, there are some lower-performing verticals on the site, such as raw materials, where other distributors can move in and establish an advantage.

B2B eCommerce businesses built on platform marketplace models are free of many of the barriers that stood in the way in the late 90’s. And with the many systems and third party services making business easier on both suppliers and consumers these days, forward-thinking B2B startups and niche industry leaders alike can grow exponentially with a well-positioned eCommerce marketplace.

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