Market fragmentation for B2B marketplaces

Annelies Gamble
3 min readMar 10, 2022

Fragmentation is one of the defining characteristics of a market for any B2B marketplace. By fragmentation, that is to say that the existing market has many individual buyers and sellers and no single seller is making up more than 5–10% of the market. The main purpose of a marketplace, at least initially, is to aggregate this supply and demand into a single platform, which has benefits for both sides.

Sellers, or the supply side, benefit from reduced fragmentation by more cost efficient customer acquisition. Marketplaces aggregate demand from a large and often geographically-diverse buyer base, which means sellers gain new customers while lowering sales and marketing spend. This model improves customer acquisition costs and seller margins over time. In addition to aggregating net new buyers for sellers, B2B marketplaces also aggregate repeat, high-quality buyers. For example, Xometry (NASDAQ: XMTR), an AI-enabled B2B marketplace for on-demand manufacturing, offers the same seller the exclusive opportunity to accept the next repeat order. The marketplace’s ability to attract repeat buyers helps stabilize demand for sellers so they can operate their businesses more efficiently.

Buyers, or the demand side, benefit from consolidation through a B2B marketplace by gaining access to a larger network of sellers, and thus a broader suite of products and services. For example, ACV Auction (NASDAQ: ACVA), which is a digital B2B marketplace for buying and selling used cars that went public in March 2021, said in its S-1 that “66% of [our] dealers noted they buy and sell more vehicles using our online auction than they would have otherwise been able to at traditional physical auctions. Our online auctions provide […] buyers with immediate access to an extensive inventory of thousands of vehicles — all at the touch of a button.” Because buyers have access to a larger network of sellers, marketplaces also ensure buyers are getting the most competitively priced deal.

If you look at the first few pages of the S-1 of any public B2B marketplace, you’ll see that the company highlights the fragmentation of its market and how it has helped with consolidation. For example, in the opening summary of Xometry’s S-1, it describes its market as “highly fragmented, and regionalized […] largely composed of small- to medium-sized manufacturers and we believe that there are significant barriers to entry for these businesses, who have to compete with scaled, better-resourced manufacturers.” At the time of going public, Xometry had connected over 43,000 unique buyers, including nearly 30% of the Fortune 500, with nearly 5,000 unique sellers of all sizes, translating to $141M in 2020 revenue. Also in the opening summary of ACV Auction’s S-1, the company describes its market as “highly fragmented with over 50,000 independent and franchise dealers who sell used vehicles. The top 100 used vehicle dealers make up less than 10% of the used automotive market and the largest used vehicle dealer has less than 2% of the market.” At the time of going public, ACV Auction had over 391,000 SKUs and over 16,000 participants on its marketplace, translating to $208M in 2020 revenue.

As an investor wanting to invest in more B2B marketplaces, the level of fragmentation in the existing market is an important characteristic I look for.

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