The Power of Vertical SaaS Marketplaces

Marketplaces are a powerful lever for B2B SaaS companies to increase revenue by bringing third party vendors onto their platform to sell their goods and services to customers. By connecting buyers and sellers in a single online location, these marketplaces reduce the friction in interbusiness commerce while creating an opportunity for the platform’s host to tap into the transaction revenue of their customers’ customers. Marketplaces are by nature high margin services because they don’t require the operator to hold inventory and they benefit significantly from strong network effects.

In the past B2B marketplaces have been dominated by horizontal providers like Amazon Business or Alibaba that provide goods for businesses across a range of different industries. Yet over the past few years, there has been a significant increase in verticalized B2B marketplaces that connect buyers and sellers in a particular industry. As B2B marketplaces grow into a?$3.6 trillion?sector in the coming years, we can expect to see vertical platforms dominate the space due to several inherent advantages over horizontal solutions. These include:

Overcoming the Cold Start Problem

The challenge for any new marketplace is attracting buyers and sellers to the platform. Neither party has much of an incentive to participate in the marketplace in the absence of the other. Thus the pressing question for any new B2B marketplace provider is?how to overcome this “chicken-and-egg” problem?and get businesses to start transacting on the platform. Vertical SaaS businesses have a unique advantage here because their customer base represents an industry-specific cohort of buyers. If a vertical SaaS business bolts a marketplace onto their core workflow product, sellers have a strong incentive to participate in this marketplace to access those buyers. This creates a strong feedback loop because as more sellers come to the marketplace, existing vertical SaaS customers have an even stronger incentive to continue using the core software product and new customers are incentivized to join the platform. It’s a prime example of “come for the tool, stay for the network” in practice.

Embedded fintech digitizes B2B commerce

Incredibly, nearly?a quarter of all B2B payments?are still made using paper checks. While this is down significantly from 2018 — the first year that the number of B2B payments made using checks?dropped below 50%?— it still presents a lucrative opportunity for vertical SaaS businesses to improve their customers’ experience by making it easier to accept and send payments for goods and services. Embedded payments are an?important tool for expanding the TAM of a vertical SaaS business?and the revenue from this service can be compounded by folding it into a vertical marketplace. Furthermore, the marketplace can offer vertical SaaS companies a pathway for expanding into other financial services like lending by offering their customers a line of credit to purchase goods on their platform.

Function-specific marketplaces

A number of vertical SaaS companies have launched their own marketplaces in industries such as logistics (Flexport), trucking (Convoy), specialized grocery (Mable), and medical clinics (OpenLoop). What we can see from these examples is that the pathways to a vertical SaaS marketplace are highly variable and specific to the needs of a particular industry. Flexport, for example, is fundamentally a comprehensive system of record for shipping and logistics companies that has a marketplace component for booking space on carriers. OpenLoop, on the other hand, is a dedicated labor market for the medical industry that is not part of a broader SaaS platform. And some standalone marketplaces, like Mable, focus entirely on wholesale goods while others, like Convoy, are service marketplaces that connect shippers and carriers. The ability to tailor a marketplace to the unique needs of an industry give vertical SaaS companies a unique advantage over horizontal marketplaces.

These qualities make marketplaces an attractive “second act” for many vertical SaaS companies that already provide their customers with a core workflow solution. Their unique access to a sticky and industry-specific customer base lowers the barriers to creating a thriving marketplace that further entrenches the “winner-take-most” dynamics of vertical SaaS businesses. First movers have a significant advantage over their peers, but successfully launching a marketplace requires a vertical SaaS company to hit a critical mass within their industry such that they have enough customers to attract sellers.

The bottom line, however, is that it is still early days for vertical marketplaces, which offers new vertical SaaS companies an incredible opportunity to expand their revenue while providing a new source of value for their customers. We expect to see a lot more vertical marketplaces crop up in the next few years as expansions of core workflow products and experimentation in what a marketplace can offer customers in a particular industry.

This post originally appeared in Fractal’s weekly?vertical SaaS newsletter. Subscribe today to get future articles in your inbox every Thursday.