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The more we know about successful e-commerce in B2B markets, the more we are amazed that successes happen at all. Why? Consider that B2B relationships are complex, responsible for lots of material flowing from manufacturer to distributor to customer and lots of different types of transactions involving significant sums.
It has taken a significant amount of people with years of experience to make this happen, especially in sales and fulfillment. The manufacturer-distributor channels have evolved over some 150 years as the earliest distributor functions started in the Gilded Age. In the last 20 years, however, we’ve seen this model undergo substantial changes due to e-commerce. These changes are not prominent in all distribution firms as there are significant gaps in firm capability and investment. Our observation, across the gamut of distribution markets, finds that there are stages of e-commerce development. Rightly cataloged and reviewed, the stages can be helpful for guidance in transitioning the distribution firm toward successful online commerce.
Stages of e-commerce development
First Stage e-commerce firms (Exhibit 1) are those that represent the vast majority of distributors. Currently, this group sells less than 5 percent of all demand online and makes up 60 percent of all firms. These firms are typically smaller and mid-size players. Most have a proprietary programmed e-commerce platform, and their online offering is not competitive and, most likely, not growing. Our research finds that many of the firm’s online sales have begun to decrease as more competitive offerings become available.
Next are Second Stage e-commerce distributors. These firms are notable for two reasons: they sell from 5 to 12 percent of demand online, and have recognized the need for off the shelf technology. In the early days of e-commerce, there was not suitable software for e-commerce and distributors had transaction platforms that were proprietary programmed. Today, the software is good and price is coming down with Saas models appearing. Second Stage firms have begun to incorporate new software in their online platform and, typically, their sales increase. However, these firms have few IT and e-commerce specialists and, despite better software, their online efforts may have stagnated. Why? Our research shows that, at this Stage, management has to make a choice to invest more in online efforts or not. Too many firms rationalize away the investment and their sales stagnate.
The overall average for online sales in B2B distribution is 12 percent of demand. However, only 20 percent of total firms reach this. Third Stage firms sell between 12 percent of total demand online to 25 percent. They are, typically, mid-size and larger firms with most over $200 million in sales. However, we do find smaller firms in the mix. They are characterized by a solid core of e-commerce technology including Transaction Platform, PIM, Search, Punch-Out and Mobile App. These firms have begun to invest in e-commerce specialists and often see their online sales rise as their offering is competitive. These firms have begun to change their organization to capitalize on the technology including some reductions in the sales effort and brick and mortar locations. It is during this stage that critical decisions await management namely, the need to significantly reduce brick and mortar outlets and the sales complement and the opportunity to create new business models using the technology.
Fourth Stage firms sell 25 percent to half of demand online. They are, typically, well-versed in the technology and its usage and have increasing budgets for investment in software and people. Additionally, these firms have made many of the painful cultural changes to personnel and assets to allow e-commerce to flourish. As branch locations are reduced, sales territories and inside sales and customer service positions are reduced and consolidated. The role of the outside sales force changes to a specific service or technical/application expert. The firm’s software suite is built-out with the best in class software and we see the use of Fintech software (online software that offers varying credit options) along with online quotation software.
Fifth Stage firms are the most advanced in distribution markets and sell 50 percent or more of their demand online. They often were catalog distributors before moving online or are new Internet based models of distribution. They are characterized by the best technology and often have proprietary technology that leads the industry. These firms make liberal use of advanced analytics to understand online buyers, and they’ve long ago reduced brick and mortar and sales efforts. The competitive advantage of Fifth Stage firms is that they have developed unique models of business specific to e-commerce. An example would be Grainger where a handful of “single-channel” models (Zoro Tool, Cromwell, and MonotaRo) comprise a billion in sales and are forecast to reach two billion by 2019. These models grew 35 percent in the previous year, while core Grainger’s bundled product/service model is struggling to grow in very low single digits.
Using the stages concept
The usage of the Stages of e-commerce can help distributors understand how B2B e-commerce is unfolding and which firms are winning the battle to move online. As slightly over 12 percent of demand is online today, there is a long way to go for many firms to get to Third Stage, where e-commerce is a valuable part of the firm’s go to market solution and gets funding to grow. The Stages are similar to lifecycle stages, with Fourth and Fifth Stage firms representing the maturation of the market, but also what leading firms and eventually all firms will be expected to offer.
We expect the stages to morph over time and compress. The time between Stages will be reduced as software costs come down and wholesalers selling less than the industry average scramble their efforts.
In our next installment, we’ll review the challenges for First and Second Stage firms to grow online and why many, we believe, will take the opportunity to sell.
Scott Benfield is a consultant to B2B firms in digital marketing and digital transformation. He is the author of six books on B2B marketing and his firm’s offerings can be seen at BenfieldConsulting.com. Scott can be reached at 630- 428-9311 or Scott@BenfieldConsulting.com.