Why Amazon is the almost perfect marketplace for the Fortune 100

Why Amazon is the almost perfect marketplace for the Fortune 100
Christian Lanng is co-founder and CEO at Tradeshift.

Chief procurement officers (CPOs), key people who decide where and how to spend a company’s budget, have a front row seat to the unnerving trend of employees flocking to Amazon to buy what they need for work with little or no regard to policy. The allure is just too great compared to the alternative – corporate purchasing software with comparatively terrible UX.

While some company spending on Amazon is today a reality viewed with trepidation, not all categories make sense. Many Fortune 500s compete with the eCommerce giant on the front end. Would any really want to share with Amazon what they’re paying for materials that go into their products? Or where they’re buying and sourcing? They don't. Nevertheless, Amazon will conceivably put together a marketplace buying experience for companies with greater controls. One of China’s largest tech companies, Alibaba, is also in the running. But neither is harmonising the marketplace experience for both enterprise buyers and sellers. Only a managed version of an Amazon-like shopping experience where Fortune 500s can build and manage their own marketplaces, can do that.

Consider Alibaba. It can’t survive without its many small business suppliers. Amazon’s race to zero mentality generally sees suppliers as hurting customer margins. Who is the first customer for their respective platforms? To Jack Ma’s Alibaba, the first customer is the supplier. To Amazon’s Jeff Bezos, it’s the end-consumer. This difference in perspective shapes their strategies. Amazon wants to build the “everything store” while Alibaba wants to build an economy, a global ecosystem for small business.

A B2B marketplace that creates value for all players requires a different mindset. The first step is to offer value to enterprise buyers based on the simple idea that suppliers' needs come first. Alibaba has a seller-first approach. However, enterprise buyers are not “consumers,” which is how Alibaba thinks of them. Enterprises have different needs as defined by procurement and sourcing. In other words, in eCommerce, the design principle is to sell to consumers, whereas e-procurement helps businesses to buy.

A seller-centric, open, and decentralised B2B marketplace is also different than what traditional e-procurement providers, such as Coupa and Ariba, deliver, which are single-player solutions. In a real decentralised network (not just hub and spoke), the more sellers connected, the greater the honeypot for enterprise demand. Enterprise requisitioners have more options to complete their buying activities, versus not finding what's needed from a limited vendor pool. A decentralised network allows for dynamic marketplaces. With a platform supporting it, the more enterprise spend transacted the more value routed to the sellers. (Real-time collaboration, mobility, and simple UX across the marketplace is a given prerequisite, but worth noting as an important piece.) The flywheel starts with the seller, therefore creating value for them is critical.

Amazon’s primary customer is the buyer. Its goal is to reduce margins by eliminating small supplier access to extract scale and better pricing for the client. If the seller is the primary customer, the main concern is to enable demand to flow with less friction from the buyers to more sellers. Demand from enterprises is boosted to more sellers and new categories, not the opposite. When sellers are the primary customer, the easier it is for them to compete on the terms that better align with their value delivery model. More spend is under management because more buyers are driving that added volume to those sellers.

In one-dimensional, centralised marketplaces like Amazon or Alibaba all sellers tend to be grouped together with a predefined set of criteria controlled by the marketplace which flattens all value criteria with little possible value-extraction from other differentiators, such as innovation capability, quality, on-demand delivery or other facets of value.

Seller-centric solutions allow for compartmentalisation of demand by segmenting suppliers and buyers through the relationships of the network. This can be done through one-to-one connections, private marketplaces, or by providers that market themselves on alternative criteria such as quality, innovation, and trustworthiness such as through storefront badges and trust seals.

Private marketplaces work for both buyers and sellers by allowing discrete pockets of differentiated value to exist. It is the best of all worlds. Procurement can shape marketplaces on their terms, not Amazon's. With a closed ecosystem, all the control and visibility comes standard, without leaking commercial terms for value differentiation to the broader marketplace. Buyers can leverage contracts in procurement or do specialised marketplaces for unique needs, reduce cost of sourcing by having pool of available suppliers that fulfill baseline criteria.

For example, a marketplace can be created for IT services in China consisting of vendors that do business with other Fortune 500 companies and are REACH-certified. Chinese sellers that join this marketplace means they’ve accepted its terms, greatly minimising overhead by virtually eliminating contracts and other seller onboarding processes. This is the advantage of the one-to-many seller relationship model instead of one-to-one.  

Private marketplaces also allow buyers to segment parts of their supply chain with differentiated pricing for higher quality without having that pricing signal bleed into the seller base distorting prices and value mixes. In contrast, the commercial terms in a one-dimensional marketplace are driving a destructive race to zero for the participating sellers.

The B2B marketplace of the future is one that helps sellers grow their business by showcasing and delivering better value to all their customers. Taking a page out of software-defined networking, a similar abstraction of marketplaces will allow for a variety of custom-defined marketplace instances (such as the one described above) segmented by vertical, category, region, and CSR, alongside private, and public marketplaces, as demanded by enterprise organisations.

No doubt Amazon and Alibaba will capture a good slice of indirect long-tail spend corporate spending. But because they are not seller-centric and designed for enterprise buyers, online decentralised marketplaces built on open platforms are well positioned to earn a large piece of gross merchandise volume given that B2B eCommerce will reach $1.2 trillion and account for 13.1% of all B2B sales in the US by 2021, according to Forrester.


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