Digital marketplaces were a major theme at the recent NAW Executive Summit, and for good reason; B2B marketplaces are predicted to be a $3.6 trillion boon for distributors in the next few years. This new opportunity is certainly good for distributors, but it does make action even harder. How can AI, e-commerce and marketplaces all be multi-trillion dollar opportunities? Further, which one should distributors pursue first?
The answer is that e-commerce, marketplaces and AI are not competing innovations. They are related concepts that work synergistically. To succeed in the modern environment, distributors don’t need to choose whether to invest in AI or marketplaces. They need to create a digital system that uses all of the above. In this post, I’ll explain how AI enhances B2B marketplaces, and what distributors can do to secure some of those not-so-overhyped trillions.
E-Commerce, Marketplaces and AI
Before getting into the specifics of an AI-enabled digital marketplace, I want to sketch out working definitions of those concepts. E-Commerce is a way of conducting electronic transactions online. A marketplace in an open space where vendors can connect with customers. Finally, AI is any intelligence demonstrated by an electronic system. In a sales setting, that intelligence is typically a tool that predicts what customers want to buy.
Each of these innovations has succeeded because they improve the buying experience. With e-commerce, for example, customers are able to shop from the comfort of their home or office and can compare multiple products. In a marketplace, customers can access more SKUs through a single platform. And with personalizing AI, customers can easily find the items most relevant to them.
The most profitable B2C businesses have already found ways to bundle these services together. Amazon, for example, is all three at once. It is an online shopping destination (e-commerce) with a vast array of products from multiple vendors (marketplace) and an AI sales assistant to help you find what you’re looking for.
If commercial history tells us anything, it’s that the modern shopper prefers to buy from one supplier instead of multiple. From early supermarkets to Walmart-style superstores to online “everything” stores like Amazon, the unmistakable trend is toward fewer stores with bigger inventories. A trend which is great for the big stores and not so great for the little guys. As this customer-driven trend makes landfall in B2B, the right technology stack could be the difference-maker between winning big or losing out.
The B2B Marketplace
Digital marketplaces in B2B settings solve the same problem for end customers as in B2C settings. They offer customers a convenient one-stop-shop. The good news for distributors is that they are already well-versed in the logic of the marketplace. Distributors have always been de-facto marketplaces, sourcing SKUs from countless manufacturers to give customers everything they want, and more, in one place.
For decades, distributors have slowly been building up their marketplace potential through rollups, acquisitions and inventory expansions. However, the advent of e-commerce and personalizing AI have accelerated that pace of change greatly.
E-Commerce and AI were the perfect catalysts to spark this change, because they solve the two fundamental problems of the marketplace: scale and navigability. E-commerce platforms have increased the scale of marketplaces by eliminating barriers to entry. With online platforms, suppliers don’t have to deal with complicated logistical questions about inventory space and stock. Instead, third-party vendors can just upload their products and deal with the picking, packing and shipping when purchases are made.
Last year, Walmart added 10 million SKUs to its online marketplace, but only half a million of those SKUs are sold directly by the company. The napkin math here is striking. It suggests that online capabilities and third-party vendors allowed Walmart to increase new SKU numbers by 20x. In an all or nothing world where customers only shop at the companies with the largest product selections, having 20x more SKUs is a winning formula.
AI and The Smart Marketplace
However, all the SKUs in the world are meaningless if customers can’t find the products they’re looking for. And, as marketplaces become larger, it becomes harder and harder for retailers to put the right products in front of the right customers. That’s where AI comes in.
AI can analyze customer data in real time to predict the exact product, out of millions of potential options, that each shopper is most likely to want. It’s no surprise that AI drives 35% of Amazon’s online revenue. With AI, customers can actually realize the value of large catalogs, which means that distributors can cash in on them too. If you’re going to put in the work of adding SKUs, AI is a no-brainer. After all, what is the value of a big catalog if it only makes it harder for customers to find what they want.
There’s another reason that AI-enabled marketplaces are particularly useful for distributors. Unlike online-only players like Amazon and Alibaba, distributors have multiple sales channels that can benefit from marketplace data. Omnichannel AI can interpret marketplace data to make predictions about customer behavior within the marketplace and beyond. That means that when an AI-equipped distributor makes a sale online, that distributor can also collect the data that helps them make a traditional sale through a rep.
The marketplace is not the future of distribution. However, it is a key part of a future in which distributors are able to provide customers with whatever they want and however they want to buy it.
The Profitable Trinity
Far from being competing options, AI, e-commerce and marketplaces are the three interdependent components of a profitable 21st-century distribution sales strategy. Each has some value alone, but what those multi-trillion-dollar valuations really count on is that these three innovations be enacted synergistically. The race to create dominant B2B marketplaces is on, and while some are backing outsiders, my money is firmly on distributors.
Stocking the products that customers want and helping them find them has always been the MO of distribution. Even if the means are changing quickly today, the end goal remains the same. Distributors will make the jump to modern marketplaces; in fact, some distributors already have. If you’re going to pursue doing the same, remember this: the winning formula is not AI or digital marketplaces. It’s AI and digital marketplaces.
Originally published at https://www.naw.org/which-multi-trillion-dollar-opportunity-should-you-pursue-leveraging-the-power-of-ai-13/ on March 12, 2020.