B2B business models can vary widely depending on the sector, the marketing strategy, and the position of the company on the value chain. To set up a successful enterprise, it is important to develop strong relationships with clients and suppliers. However, understanding how to best organize your business structure can be challenging, especially for first-time entrepreneurs.
In this article, we’ll discuss the various B2B business models to help you choose the strategy that will best suit your product or service. After looking into what business-to-business actually means and how it compares to a B2C enterprise, we’ll address the differences between horizontal and vertical business models.
What is a B2B business model?
If you’re reading this you are probably well aware of what B2B means, but just to set definitions straight: B2B is the acronym for “business-to-business,”used to describe transactions between industrial, commercial or service enterprises. The expression refers to all those businesses that rely on commercial exchanges with other companies, rather than directly with consumers.
From this perspective, business-to-business exchanges include all transactions established between a company and its suppliers or between a company and other companies in the same sector. What is a B2B company example?
A B2B business is anything from a company producing machinery for the production of food products to an agency offering marketing services to brands. It involves the sale of physical tools such as medical devices or consultancies for e-commerce websites.
Vertical vs. horizontal: what is the best B2B business model?
When we talk about B2B business models we refer to two main categories, vertical and horizontal. A vertical B2B model is adopted by companies that sell products or services to businesses positioned on another level of the supply chain. Depending on the relationship between buyer and seller, a vertical model can be either downstream or upstream.
A downstream model occurs when a company relies on a raw materials supplier to keep the production going. An example could be a clothing company buying wool to make its jumpers. An upstream model functions in the opposite direction, when a company develops a relationship with a business in need of its product. An example could be a producer of buttons selling to a shirt manufacturer. As you can guess, a vertical B2B business model applies mostly to manufacturing enterprises.
A horizontal B2B model doesn’t affect the production of the final good directly, but involves transactions between companies that are either on the same level of the supply chain or operating in different sectors. A classic example would be maintenance operations or the sale of staff uniforms to a restaurant.
Advantages and disadvantages of a B2B business model
There are many advantages to choosing a B2B business model over a B2C strategy. The key difference between the two, on an operational level, is that ideally with a B2B model you’ll be selling in higher volumes to a smaller number of customers. While negotiating with another company may take more time than with the final consumer, relationships last longer and transactions are less likely to fluctuate.
B2B business models usually require an initial investment in marketing, however it is easier to target potential clients when your product or service is directed to a specific sector. While acquiring new customers can take some effort, if well executed, a B2B business model will produce a flow of constant revenue over time coming from a loyal client base.
There are, of course, some downsides to B2B business models as well. The first thing to consider when setting up a B2B company is the size of the market. While it is possible to sell bigger amounts of products to each client, businesses are less than final consumers and require more attention than the casual buyer.
In B2B business relationships, there is always a group of people involved in decision making, rather than a single individual. Because of this, sealing a deal can be much more complicated. While in B2C businesses a single interaction between seller and buyer can lead to the purchase, signing a contract in B2B can involve multiple meetings, consultations, and weeks of negotiation.
It becomes fundamental, therefore, to have a clear idea of all the parties involved and gain an understanding of how the different company roles may affect the contracting. Knowing the expectations of the owner, the consultants, the people in charge of budgets and quality control is essential to closing a transaction.
The process of selling B2B is much slower than the immediate exchange that happens with B2C, so it is important to plan ahead and build a solid strategy that will be sustainable over time.
Go downstream: how to turn your B2B business strategy in a competitive advantage
When deciding where to position yourself with your B2B business it will be a good idea to look at the available data. The most successful B2B businesses appear to be positioned downstream on the value chain. As reported by the Harvard Business Review, while U.S. economic growth has steadily decreased over the past three decades, the installed base of products has increased in a variety of sectors, thanks to both the accumulation of past purchases and the longer life spans of products.
What this means is that while manufacturing has lost economic value over the years, the demand for maintenance services has grown greatly, creating opportunities for B2B companies based on the lower end of the value chain.
In the past, entering the manufacturing sector presented some obstacles that were difficult to overcome. In order to compete in the market, your product needed to be both superior in terms of quality and scalable in terms of quantity. In recent years, these dynamics have changed: thanks to the growth of venture funding scaling has become simpler for young startups and technological progress has allowed companies to produce better products in a shorter amount of time. Additionally, outsourcing and remote working have become a standard for many B2B businesses, helping to reduce physical assets and gain competitive advantage thanks to lower management costs.
Branding, communication, and advertising through content and events are all still essential ingredients for a successful downstream marketing strategy. An initial investment in getting your name out there will motivate other businesses to look into your product and seek a better deal than the competition.
How do B2B business models apply to e-commerce?
After reading all of this you’re probably thinking how a B2B business model applies to online businesses and e-commerce websites. These days web-based businesses are thriving and e-commerce sales have been soaring in the past years. Statista reports that the global B2B e-commerce market was valued at US$12.2 trillion in 2019, over six times that of the B2C market. The lead players in the B2B digital market are Amazon and Alibaba, who provide solutions for both large distributors and small-scale dropshippers.
Many companies have realized that there are many benefits in relying on digital solutions to support the business, starting from the immediate connection to a global audience to the ease of ordering online. There are, however, key differences to keep in mind when running an online B2B company that will impact how you set up your business model.
Examples of web-based B2B businesses vary widely and your marketing strategy will depend on the sector you are involved in. B2B business models for e-commerce companies go from dropshipping services to wholesaling and warehousing, to white labeling and the offering of subscription systems.
Setting up your B2B business model: let us help!
As we’ve seen in this article, downstream B2B companies have grown massively in recent years. With B2B e-commerce platforms taking up more and more market share, shifting to a digital business model appears like a worthy investment. Here at Mowgli we’ve been helping small and large enterprises structuring their B2B activities, developing powerful strategies to reach the audience their products deserve. Get in touch for a chat or head to our blog to learn more about digital marketing best practices.