In this week’s Friday 15, Andy & Brian talk about the role marketplaces play in alleviating (or causing) channel conflict.

The big takeaway is that manufacturers need to accept that they simply need to be where their buyers buy, and that they can no longer push buyers into the channels that the manufacturer wants to use.

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Brian Beck: Andy Hoar, welcome to Friday 15 with “Master B2B.” Brian Beck here with Andy Hoar, my partner in this leadership’ series. And we’re rocking it out this Friday, March 8th for this topic today. Andy, we’ve got some cool stuff going on. Welcome. Hope you’re ready for the weekend. 

Andy Hoar: It’s good to be here and we’ve got a good topic today about channel conflict and it’s a perennial topic. So it’ll be fun to discuss.

Brian Beck: his is a huge topic again. I continue to hear buzz in the industry about concerns about it, fears about it, preventing action all over the place. So we’re going to tackle this one head on and we’re going to talk about it in the context of marketplaces. So even our breaking news today, Andy, is all about marketplaces. So, this is our topic today is do marketplaces resolve or complicate channel conflict. And this weekend here, I guess it was last week, I had an opportunity to catch up with one of the big VCs that focuses on this space called Bowery Capital. Now, I check in with these guys every so often, you and I both do just to find out, now kind of what’s going on in this world? We hear today all about AI and the whole buzz is all about how to use AI for your business and B2B. Well, we rewind maybe 12, 18, 24 months. It was all about marketplaces. Should I create a company on a marketplace? Should I, that sort of thing? And some of the news we’re seeing, and some of the things I heard from Bowery is that these investment cycles are sort of cyclical. They go up and down and folks invest in things when they’re hot and all the rest, AI is that today. But in the marketplace sector, look at these valuations, those on the podcast, or those seeing on podcast, I’m showing a slide here that shows series A marketplace valuations of marketplaces versus other sectors. And marketplaces have plummeted back in 2021, $100 million valuations, pre-money valuations on average, is what the value which companies invest in these business models, it’s followed by two thirds, they’re not down about 33 million. And this is a, in the world of what’s coming next, this is a big deal, right? Andy, I mean, companies are not getting the same values. 

Andy Hoar: I think there’s a lot going on here. There could be other reasons for these valuations falling, which is just a general downdraft and investment in all things technology, except for AI, we’ve seen a lot of software vendors and SIs, et cetera, the valuations have come down from peaks in the 2021 time and the on the heels of the pandemic. So that could be exploiting some of this. But I do think in the United States that there’s something else going on here as well, there was maybe a bit of froth and exuberance around the idea of vertical marketplaces. But let’s be clear on this, when we say marketplaces, there really are kind of at least three different types of marketplaces and sometimes they get conflated. One is the horizontal market place where they sell everything across all different verticals. That’s the Amazon’s of the world.  Then there’s the vertical specific marketplace, like a ChemDirect, which sells things in the chemical industry. That’s kind of what we’re talking about here. There’s also a third one, which is kind of a company owned marketplace. And this is technology powered by companies like Mirakl and VTEX and Oro and others. Everybody seems to have kind of a market place capability. That’s where you can be a brand manufacturer and bring your channel over to your website. Take the money for an order and then distribute the order based on geography or preference of some sort. Those are the three types in general. I think what we’re talking about here is kind of these vertical marketplaces, which I think there’s something that’s become kind of clear about them. And I think you’ll agree on this, that they do require scale to be effective because in my opinion, they’re the best of both worlds when it comes to selling and the worst of both worlds. They’re the best of both worlds and that they don’t have the legacy infrastructure that a lot of companies do with branches and longstanding delivery, promises, etc. that distributors have. And they don’t have the disintermediation that brand manufacturers have. But on the other hand, they also don’t have the legacy of customer interaction and they aren’t selling anything, direct themselves. They don’t make anything. So what we’ve seen, just like with the horizontal marketplaces, they’ll really be successful here is they have tremendous scale and be able to deliver very specific domain expertise and monetize it. That’s a lot of ifs. 

Brian Beck: That’s right. And it’s interesting Andy, you have an example here. It’s a fellow named Brad Jacobs, who started the United Waste and XPO logistics, which were both kind of roll ups, massive roll ups, and they have marketplace elements to them. Well, he just announced recently that he’s getting into the building supply industry with something called QXO. And to your point about scale, Andy, a billion dollars, right? Is what is being invested. He raised some money, he’s putting some of his own capital into this. So to your point about scale, I think you’re right. I think we’ve realized that, these vertical marketplace models in particular are actually difficult to execute. Your worst of both worlds is true in some ways. And we follow the sector. We know that companies, we talk to the people building these marketplaces and we know how hard it is. 

Andy Hoar: It’s a tremendous opportunity, it’s very alluring because it’s fractured. Both sides of the equation don’t do it particularly well. There’s opportunity there. But they think it’s a bit like founding a software company. I think sometimes – we see an opportunity here. Let’s go do a new CRM. Let’s just launch it and everybody will use it. You’re also, you know, interfering with longstanding customer relationships and how do you monetize this? You can’t just be the place everybody goes and does research and says, oh, this is great. Now, we go back to my distributor and make the purchase. So you can be web-roomed as well. 

Brian Beck: Well, that, see there, then now this is the heart of our conversations today is channel conflict and how do we define it? You know, I go to the authority of all things Wikipedia, right, Andy? So I pulled this definition from Wikipedia and I think when we think about channel conflict, it’s really about the manufacturers in many ways, right? That’s where a lot of it centers. And this definition I think captures it. “Channel conflict occurs when manufacturers, brands, disintermediate their channel partners such as distributors, retailers, dealers, sales reps, by selling their products directly to buyers through general marketing methods or over the internet.” Now, if you look at the math, Andy if a manufacturer is selling its products, directly just to an end buyer, they’ve got a lot of margin to work with. They can be scary for the distributor, you know, and but the manufacturers, you know, they’re terrified of channel conflict. They hear it every single day from the bid market and large manufacturers out there. We don’t want to disrupt our channel, you know? This question is a big one. 

Andy Hoar: But here’s the news for all those folks. And I don’t mean this in kind of a cute way, but the channel conflict predated you. Right. And the channel conflict will post-date you as well. You’re not going to be able to change the channel conflict because it’s inherent in the business model. The question is, how do you grapple with it? And you can resign yourself to saying, well, we’re not going to change anything about our traditional selling models internally and externally because you make a great point about sales reps who are also an internal kind of channel that you have to manage. But you can either do nothing and just let the chips fall where they may or you can actually re-prioritize your strategy around “where are your customers?” That should be what’s driving all this stuff. And I’ve said this many times, I feel like a broken record on this one, I joke that I don’t think I’ve ever met a customer who wakes up in the morning and says, I’m going to go to this channel and make my purchase. Channels are a discussion that take place with companies internally because they’ve aligned around these different resources, they allocate budget. And there’s only one problem with that. In the end, customers don’t care about it. 

Brian Beck: Yeah, now I agree with you. Where I see the discussion often focused around the company’s price. It’s the dollars, it’s the concern about the undercutting of price, but even beyond price, it’s also about, think about what is the fear generated from? It’s the relationship also. You talk about the sales team. You talk about the relationship with the distributor. You talk about the relationship with the end customer, disrupting that whole sort of flow. You did this marvelous thing years ago at Forrester where you laid out all the channels and how they’re changing. And I think that’s really true. Today, the end buyer, we saw this in consumer, the end buyer in B2B has more power than they ever had in the past to make channel choices. And I argue that manufacturers at the end of the day need to understand that end buyer’s choice and why they’re making it the channel choice, but they can’t necessarily control it. So to your point, channel conflict will persist. Manufacturers shouldn’t try to- you’re not in the channel business. The channels are the channels, and the customer will make their decision. So how do you manage this in this world of marketplaces? You had some interesting data here that we’re showing on the screen about– this is some stuff you did, I think, back at Forrester, right, Andy? So we’ll grab this for us. 

Andy Hoar: I call this the wheel diagram. And essentially what it says, it seemed controversial for some reason. And I still don’t understand that, too, this day. Except that I think all the things we mentioned around companies being aligned a certain way, having a traditional– but basically, what this said was, for those who can’t see this, there’s basically three concentric circles with the brand in the middle, the channels in the next concentric circle, and then the outermost concentric circle where the customers are. And what you can see is, for example, I call them B2B traditionalist customers. They don’t want to buy things online. They used to buying things through a sales wrap or a will-call window in a branch. They’re going to go through your traditional distribution channel or traditional wholesale. Or let’s say they buy through Granger – the off-line version. Then there’s a group of people who I call digital-first traditionalists. They might buy through Granger.com to get that product that 3M sells. So that’s great. That accounts for a 30, 40% of the different options there. But then there’s all this other stuff now that emerged in the last 10 to 15 years around people want to buy directly from you. And there’s a lot of research that shows that people want to buy from a brand. Research I did showed that 40% of B2B buyers would prefer to buy directly from a brand manufacturer, all things being equal. There’s kind of a halo effect around it. You know you’re buying directly from the people who made it, it’s being handled by various people or diverted inventory in the worst-case scenario. But then half of those people– so 20% of all B2B buyers are willing to not only buy directly from them, but even pay a premium to do so. So if you’re not selling directly through your website, then you’re missing those people leaving money on the table and more importantly avoiding important channels. And then there’s horizontal and vertical channels and of course Amazon. The next slide here shows that you’ve got to pay attention to each one of these slices of the pie. Because guess what? It’s where customers are. It doesn’t matter about all the stuff in the middle, and the second concentric circle is all the channel conflict that customers don’t care about, but that companies for legitimate reasons – I don’t want to begrudge them that – focus way too much on. And at the end of the day, you’ve got to be focused on where the buyers are. 

Brian Beck: It raises the next piece of data I’m showing here, Andy. We’re seeing this. Buyers are now in many cases becoming more loyal to channel than they are to brand. This is a question that was posed in some research a couple of years back said, on Amazon, would you buy from brands or sellers you’ve never heard of? Almost 65% said, yes, they trust the channel. So this loyalty has really shifted. And we’ve seen that, in fact, at scale to your point earlier, looking at Amazon Business, it can really work. The buyers are there. $83 billion projected next year, 2025, by Bank of America. Incredible volumes and not being their risks, in my opinion, the relevance of the manufacturer brand to that buyer, because the buyer’s going to buy something else. 

Andy Hoar: You know what scale gets you, too? Scale actually establishes as you as a viable channel. You put the Amazon stuff up there. If you’d asked this question 15 years ago of Amazon, the number would not look like that. And the reason why is because at that point in time, nobody in B2B trusted Amazon as a place to buy stuff. Now they do. And a lot of people, it’s just because they can return things easily. But they can buy things easily, they can return things easily. And I think vertical marketplaces that achieve scale and have some kind of lasting business model are going to get the same benefit as this. Because when you’re buying stuff in B2B, your job’s on the line. You’re not going to risk it over saving a few bucks, which is why sometimes price isn’t the biggest issue. 

Brian Beck: Well, that’s a good point. Trust, I would agree with you, and the relationship to some degree, but it’s really about the trust. And you have to look, I think– this is good to our earlier point– why do customers buy in these channels? And understanding that is important. And then you can build your channel conflicts management strategy around that. Here’s some data that says more than 1/2 of B2B buyers are now completing 25% of their purchases or more on online marketplaces. OK, why? This is vertical, horizontal, all of them. Number one reason: discovering new products. It’s about assortment. It’s about getting greater vendor choice, faster purchasing, versus traditional channels, things like that. So one of the things that when we think about the use of a marketplace by a manufacturer to ameliorate channel conflict, quite frankly, these reasons don’t actually apply, I don’t think, as much to a manufacturer. And as we look at when we look at some of the highest volume marketplaces in vertical marketplaces, manufacturers are not among them. I’m showing some data here that shows where the– it’s about two years old, but it’s still relevant. We’re showing the biggest marketplaces in B2B are in other verticals– they’re not launched and operated by manufacturers. These are vertical and horizontal marketplaces, equipment, chair, Indigo AG, others that are– some of them are shipping-related marketplaces, but all these different– the product-related ones are verticals. And I don’t personally think that the manufacturer has as much of a reason to have a marketplace itself. I think it sits better with distributors. I don’t know if you fully agree with me. You did some research a couple years ago. It said, you think this is a good model for manufacturers. I’m not sure it’s as applicable. 

Andy Hoar: You know what’s funny about this is that distributors are marketplaces. They are. They’re just cross-manufactured marketplaces. And that’s great if your customers are going to that particular distributor. But it’s also this challenge of if you’re a manufacturer and you’re selling through a distributor, then how do you maintain loyalty? I mean, the distributor might spiff you out with another brand manufacturer or their private label product, right? So there’s channel conflict everywhere. And for people who just trust the distribution channel is the single best and only channel with which to sell, they forget that, wait a minute, I’m competing against a bunch of other manufacturers. And that just distributor’s not loyal to me. We’re going to go and sometimes they’re loyal to the lowest price they have. And did we forget about private labels? So there’s a bunch of like dimensions here. But again, you’re not going to control any of this. And a brand or distributor. At the end of the day, you’ve got to follow the customers. And I think your point in the last slide about why people use marketplaces really does reinforce the point about scale, discovering new products, 72% of the reason why, well, how do you– people go in there and discover new products. You better have new products. Right. You’re having new products. You’re going to have to have scale. So you can be a tiny, vertical marketplace or a very niche-y horizontal marketplace for very long, because if you’re not constantly giving people new products, and by the way, that can be the long tail. It doesn’t have to necessarily be the short tail. So you can compete with the long tail, but that requires scale. 

Brian Beck: Even in specific niches, Andy, we’ve followed some marketplaces like Julie at Chamf and others that are very nichey, very specific. Even in that niche, she still has to have tens of thousands of products to meet the need of the reason the buyer buys there. So I think this model fits much better with distribution than it does with manufacturing, because I think it’s a natural extension of their business model. So we asked our community, Andy, do first party, or company owned e-commerce marketplaces complicate or resolve channel conflict. We put a poll in LinkedIn. And 57%, the majority said “complicate,” because it just adds another channel to the mix that you have to think about, right? So it’s not a solution to channel conflict. I think that’s the verdict we’ve come to, and the community has as well. Any comments on this? 

Andy Hoar: Yeah. I come back to what I said earlier. All that matters is where customers are. You’re not going to resolve or change anything. That’s like saying, I don’t like the weather outside. So I’m going to change the weather. No, you don’t get to change the weather. You can just change your approach. You can put a coat on. You can avoid certain things. But you can’t change it. This will be on ad infinitum forever, there will be channel conflict. The question is, how do you grapple with it? And I think you’re going to start with – I’ve got to be where my customers are. 

Brian Beck: Amen. I’ll say, I agree with you completely. You’re a manufacturer. You need to be in front of the customer wherever they want to buy. You’re not going to control the channel choice. So you can help the channel do a better job. But you can’t close your ears and go, la, la, la, and ignore where the customer is. 

Andy Hoar: And also, you’re not going to be able to control your channels that you don’t control, by the way. You’re not going to be able to say, well, we’ve been selling through this distributor for 30 years. And we’ve got a great relationship with them. They will drop you like a hot rock. There’s a better alternative because they’re running what’s called “a business.” And so this idea, not that you should be disloyal to your channel partners. I’m not suggesting that. But this idea that they’re loyal to you because your loyal to them is bunk. In this day and age, nobody’s loyal to anything anymore. And so the only thing they’re loyal to is a great customer experience, which means you’ve got to produce that on your own site for the home games, also the away games. And you’ve got to be everywhere that, again, your buyers are going to be.