Private labels + Credit - the silver bullet for saving B2B commerce

If some of the most talented startup entrepreneurs I know didn’t pursue their calling, I like to think they’d make terrific first responders. Running a successful company in such a competitive climate isn’t unlike being the first on the scene of an emergency - it is crucial to detach oneself from the consternation and act with clear objectivity.

This is not to minimise the catastrophes that first responders deal with; the market conditions are not so garish yet. But the last year has thrown them enough curveballs to set them up for failure. One of the biggest upsets to new age technology companies has been the lack of funding. As investors hunt for profitability, players, too, are focusing on scaling down and conserving capital.

B2B’s big shift towards private labels

B2B marketplaces, like many other players, have been a casualty of this funding winter we’re having. They can no longer continue to experience high cash burn to scale up. As a result, cutting corners across functions has become the norm. Layoffs, shelving of new initiatives that require infusion of capital or whose immediate profitability cannot be justified, these are some of the measures being taken by these companies to rein in costs and conserve capital.

Apart from taking these austerity measures, B2B marketplaces are also taking a page out of the B2C playbook to expand and improve margins - by creating private labels.?

A report from Blume Ventures found that marketplaces across categories like apparel, furniture, groceries, and wellness are increasingly relying on private label brands to shift their product mix and expand margins. The trend has now been gaining traction among B2B ecommerce as well.

The reason is simple - in-house private labels offer higher sales growth and better margins. As per a KPMG and RAI?report , private labels offer 40% to 175% higher margins compared to others. In the apparel segment, the sales margins were 60-65% for private labels compared to 30-45% in branded labels. For groceries, the sales margins for private labels were 10% to 14% in contrast with the 7% to 10% of branded labels.?

In addition to higher margins, private labels offer a range of other benefits –

1. Since these products are distributed directly from the manufacturer to the consumer, the benefits of discounted pricing are passed on to the customers
2. The entire supply chain is controlled in-house, allowing manufacturers to keep external uncertainties at bay
3. The manufacturers have complete control over the quality and procurement of the products
4. The retailers need no investment in distribution channels to reach customers
5. They can generate a better return on investment.?

Several B2B players have now expanded into B2B marketplaces. For instance, the building materials platform infra.market now has 50% to 60% private labels.

Private labels have an impact on brand creation with direct business dividends

Why does this strategy, suited for B2C ecommerce, work so well with B2B marketplaces? The answer is simple. In addition to having implications on cost, quality and speed of distribution, private labels also have an impact on soft concerns like reliability, reputation and image.

Private labelling allows B2B players to create exclusive brands that become renowned for the quality of the product, and therefore have an impact on the customer’s store loyalty. Private labels also have the ability to become premium brands in their own right, which has benefits for both manufacturers and distributors.

Moreover, branding becomes even more crucial in the B2B context where the search for an ideal supplier is more targeted and niche. In fact, in matters of company valuation, the product often becomes secondary to the brand. As a result, purchase transactions are sometimes concluded due to the brand value, and not necessarily the product itself.

Let’s have a look at what Philip Kotler and Waldemar Pfoertsch have to say in?B2B Brand Management?(2006) –?

“In business-to-business (B2B), things are different – branding is not meant to be relevant. Many managers are convinced that it is a phenomenon confined only to consumers’ products and markets. Their justification often relies on the fact that they are in a commodity business or specialty market and that customers naturally know a great deal about their products as well as their competitors’ products. To them, brand loyalty is a non-rational behaviour that applies to breakfast cereals and favourite jeans – it doesn’t apply in the more “rational” world of business-to- business products.?

“Products such as electric motors, crystal components, industrial lubricants or high-tech components are chosen through an objective decision-making process that only accounts for the so-called hard-facts like features/functionality, benefits, price, service, quality, etc.. Soft-facts like the reputation of the business, whether it is well known, is not of interest. Is it true? Does anybody really believe that people can turn themselves into unemotional and utterly rational machines when at work? We don’t think so”.

What’s still missing??

In addition to their efforts to reduce cash burn by cutting corners and the willingness to pursue new avenues like private labels, B2B marketplaces must explore beyond their core capabilities and monetise ancillary services provided by them - such as financing.?

B2B e-commerce companies have a largely untapped opportunity for extending credit along all dimensions of the supply chain. For instance –

1. Invoice financing for suppliers on the platform ensures they receive timely payments
2. Purchase order financing that allows suppliers access to an advance and fulfill orders
3. Buy-now, pay-later for retailers on the platform allows them to defer the payment of their bills to a later date

The beauty of offering financing solutions on a B2B marketplace platform is that it opens up the player to alternate revenue streams and aids in the conservation of capital in several ways.?

First, in-platform financing has proved to be a terrific retention strategy for B2B marketplaces. The ease of in-platform credit allows B2B marketplaces to improve average order value and gross merchandise value, in addition to ensuring customer retention. This helps improve customer lifetime value (CLTV), while parallelly reducing the cost of customer acquisition.

Second, proprietary data allows the platform to underwrite customers for contextual credit products, reducing dependencies on external credit profile insights and subsequently improving margins on the financial products offered.?

Finally, there are a number of revenue-sharing partnership opportunities available to these marketplaces. For instance, enabling pass-through financial services allows the platform to charge the bank or lender for access to its customers. Alternatively, lenders and platforms can build a whitelabelled financing solution embedded into the customer journey for which the platform may charge a fee or arrive at other revenue sharing agreements.

Conclusion

One of the shaping trends of 2023 for businesses will be self-preservation over cash burn. But scaling down in one respect doesn’t mean closing oneself off from uncharted courses. Innovation and resilience - whether through technology or business strategy - has been a mainstay among tech companies in India. The example of B2B marketplaces proves that when thrown in the deep end due to a difficult external uncertainty, thinking outside the box can help you not only float, but swim.

Written by Rajat Deshpande