Making B2B Marketplaces Sticky
Truth: Lots of small businesses — restaurants, bakeries, wineries, manufacturers, you name it — need specialized equipment, machinery or supplies to do what they’re in the business of doing.
Truth: Finding those suppliers — and buying from them — is archaic and typically the domain of paper trade directories and word of mouth.
Truth: Finding those suppliers is often the easiest part. Procuring from them — preparing the RFQs, getting quotes, evaluating them and then creating a payments process to pay for it all — is where the time-consuming nightmares begin.
But that’s the problem that Kinnek set out to solve in 2012 after seeing how much trouble enterprise customers had managing the same process. If it was that hard for the big guys with big-guy resources, Karthik Sridharan, CEO of Kinnek, remarked, then SMBs couldn’t stand a fighting chance.
But the Kinnek marketplace not only brings together SMBs with suppliers, but it also helps to facilitate the entire purchasing process from beginning to end.
“A lot of our technology and data science over time has been poured into making that matchmaking process very accurate,” Sridharan explained.
In this week’s episode of The Matchmaker Is In series, hosts Karen Webster and David Evans, economist and author of “Matchmakers: The New Economics of Multisided Platforms,” were joined by Sridharan to take a look at the challenges and opportunities that lie in bringing small business owners together with the suppliers they need most.
How Kinnek Connects
Though Sridharan admitted that Kinnek may seem like a random business for a couple guys in the tech world to start, the idea actually came about when realizing how little help small businesses have when it comes to procuring specialized supplies, machinery and equipment.
Sridharan said the original impetus for starting Kinnek actually came from his cofounder, who was a consultant that helped large enterprises to improve their supply chain and vendor management processes. He would help them find the right suppliers and manage their complex purchasing processes. These big companies could afford to spend money on consultants and use sophisticated eProcurement platforms, but Sridharan and his cofounder often wondered what option SMBs had when it came to finding and paying their suppliers.
“We started doing a bit more research and talking to small business owners, and we saw that they are stuck in this awkward no man’s land,” Sridharan explained.
“They are buying pretty customized equipment and machinery or buying things in bulk quantities so they can’t really do what consumers do to find what they’re looking for. On the flip side, they don’t have the money or the resources that Fortune 500 companies do to manage their complex purchasing in that way,” he continued.
With that, the idea for Kinnek was born to help SMBs out of the no man’s land of resorting to ad hoc and old school processes.
From there, Sridharan, Evans and Webster discussed how Kinnek got off the ground and what’s next for this matchmaker.
DE: But then you narrowed that down from all SMBs that face this problem to a particular group of them. How did you make that decision?
KS: Several years ago, there was always this question of this being a huge structural problem in the economy and a massive space to tackle. That’s what got us excited, being able to help all SMBs with all of their purchasing — that’s kind of the North Star of the business. But you’re right, from an operational perspective, we needed to find the right beachhead there.
Initially, we started looking at a lot of verticals that were growing fast but also had a lot of equipment and machinery purchases, a lot of capital expenses and physical good components to their cost of goods sold. Those are the kind of businesses we found are our sweet spot. We ended up settling on the food and beverage sector more broadly, but the initial vertical was breweries, and we’ve since expanded from there.
DE: It’s always good to start with beer.
KS: That’s right! Even within the food and beverage space, I think we actually did a good job of choosing verticals that allowed us to build a product that’s very generally applicable even though we are targeting the sector more broadly right now. We have wineries, which are driven more by agriculture seasonality. There’s breweries, which have to adhere to local and state regulations. With restaurants and food processors, those operate differently for their own specific reasons. That’s helped us to make sure that our product is a marketplace that’s actually pretty broadly applicable to all types of small businesses, despite our initial beachhead being more specific.
KW: What are the services that your marketplace provides these small business owners? Let’s say I wanted to start a microbrewery. What kind of capabilities would the Kinnek platform offer me to make the process easier?
KS: We basically offer services across the entire lifecycle of the purchasing processes — everything from the genesis of the purchase idea through to the payment. If you’re starting a microbrewery, we help you to figure out: What products do you need? How do you find out what other SMBs in your space are buying? What suppliers are the most popular? We also do research on different products and find information about different products before you even get quotes on anything. We help buyers with that education and research process, and once you’re ready to actually get quotes and start considering suppliers, we help create those request for quotes (RFQs). From there, we help the buyer get custom quotes from the most hyper-relevant suppliers for all of those purchases all in one place, and we also help compare the quotes they receive.
We then help you evaluate the quotes, negotiate with suppliers and finally make purchase decisions by choosing suppliers and paying them all through the single platform. The idea is that we can help any small business with everything in dealing with those vendors.
DE: When you guys started out, did you have to go get the suppliers to join the platform, or did you simply serve as an intermediary by acting on behalf of the buyers? How did you deal with the supplier side of the platform in terms of getting things off the ground?
KS: That’s a great question, and it goes to that classic chicken-or-egg problem that people talk about when it comes to marketplaces. When we first started out, we found that it was actually a lot more important to get engagement on the buyer side. Once we got small businesses, which we call buyers, who were looking to make a purchase on Kinnek, they created that RFQ, and because they are SMBs, the dollar value of those RFQs are pretty large. It was not as difficult, at least in the early days, to have suppliers interested in checking out the RFQs and potentially submitting a quote.
There was not as much friction initially to get suppliers to at least check out our platform, but obviously, when you want to talk about long-term engagement with suppliers and really getting them to build their entire business and sales process on top of Kinnek, that’s a whole different story.
KW: When you talk about making these paper trade directories digital, did you actually do that? How did that part of your process happen?
KS: We did actually do that. Acquisition of users on each side of our marketplace is very different. We realized from a pretty early point in the lifecycle of the company that acquisition of buyers needed to be a lot more scalable for us, so we tended to use more marketing techniques there. Word-of-mouth buzz is really important to us, as well as organic search traffic and more scalable methods of buyer acquisition.
On the supplier side, we tend to be a little bit more hands-on with our acquisition because the suppliers actually spend more time on the site on average. If they are engaged with the platform, they tend to be really engaged, and they’re using us for hours a day sometimes. We can afford to be a little bit more high-touch with them, so it tends to be more of a sales and account management process for the acquisition on the supplier side. Early on, when we were entering into these verticals, the process ended up being a manual sales process on the supplier side. But like I was saying, it’s not like a typical enterprise sales type process to get suppliers to sign up because their sales people are willing to check it out. If you think about the pain suppliers are dealing with in trying to find SMBs, it’s pretty palpable. For the salespeople who are targeting small businesses, it’s a nightmare to get in touch with small business owners because they are so busy. Also, when they’re cold calling these SMBs from trade directories, who’s to say they are going to want to buy what you’re selling at any given time — the hit rate is pretty low, and there’s a lot of inefficiency there.
KW: It sounds like you vet the suppliers. Is that correct?
KS: That’s right. We tend to vet the suppliers quite heavily when they join. A lot of suppliers do want to join Kinnek, but we have a vetting process there to protect the buyer experience and because we want buyers to trust Kinnek. That’s always been our driving mission, to be a champion for these SMBs. While we do vet suppliers, there is an element of computational trust that we’ve built in. It’s not just that we vet suppliers, and then, that’s it. There’s a lot of information that we provide to buyers so that they can also make informed decisions even among the vetted suppliers that we have on our site. We have an entire reputational ecosystem with ratings and reviews, fully built-out supplier profiles, trade references, as well as a proprietary matrix for how responsive and engaged suppliers are and how good of an actor they are on the platform.
DE: Does the opposite work as well? Do you also provide information on the buyers so that the suppliers can trust that they are going to get paid?
KS: Yes, exactly. We don’t do anything as explicit as what Uber does with rider ratings, but we do provide a lot of information about the buyer to the supplier that the buyers volunteer themselves. Our general mantra here is let’s be transparent about things. We are trying to make sure that the buyers understand what they are getting into when they deal with a supplier and the same goes for the supplier. We understand that it’s not the easiest thing to deal with a lot of small businesses in different parts of the country that they’ve never met before, so they want to have information about those buyers that can not only help to figure out who is shady and who’s not but also just help cater to the buyers better. If a supplier understands more context about where a small business owner is coming from, it actually helps them to provide a better quote and experience to the buyer.
We try to get as much information from buyers that we think will be helpful for the suppliers in providing accurate quotes to them, and I think that’s one of the most core parts of our platform, which is that matching process.
DE: I would imagine the other big problem for you guys is creating a thick enough market for each of the areas you’re getting into. That must have been a tough challenge to get enough demand and supply to make it interesting for either group to want to be engaged.
KS: Absolutely! I always tell our team that liquidity is the king here — it’s the crux of the health of any marketplace. One of our early investors gave us a lot of advice about marketplace dynamics, and he told us that people use a marketplace because they want access to liquidity. That’s first and foremost the function of a marketplace. You can add all the bells and whistles that you want, but if you don’t have that liquidity, you’re not doing anything for the buyers.
We’ve always been focused on how to manage the liquidity on our marketplace and continually refine the definition of liquidity so that we can be providing buyers with a great experience. From our perspective, our definition of liquidity is centered around the quotes that buyers are receiving. When a buyer creates an RFQ on the platform, we tell ourselves that we need to provide great liquidity here — the right amount of quotes from the exact relevant suppliers, all within a timely manner and with the right information in order for the buyer to make an informed decision. That’s always been the driving force for us here, and everything else flows from that.
Obviously, there’s a sweet spot there. You don’t want to provide the buyer with 50 quotes and drown them in too much choice, but you also don’t want to just give them one quote because they should be able to compare. It’s a continual process of improvement for us and refinement that we go through.
KW: What’s to stop a buyer from going to a supplier you connected them with directly? Is there something about the portfolio of offerings that you provide that make them go back to Kinnek versus that particular supplier to do business?
KS: Now, we’re getting to the real interesting questions. I love it! That’s a great question! This generally goes to the question of disintermediation. For any marketplace, you have to worry about preventing people from going around you, while also explicitly doing things to make sure that buyers and suppliers want to stay on the platform. What we always think about for our platform is that, even in the case of a buyer that has a supplier they would never switch from, we need that buyer to want to use Kinnek for managing that relationship.
It’s a tricky product challenge, but I think we’ve made it work by doing several things. One is that suppliers really care about the reputational ecosystem, so if the Kinnek marketplace is an increasingly important source of business for a supplier, then they want those interactions to be through Kinnek. Also, there’s a lot of workflow benefits for the buyers and suppliers to keep these interactions on a single platform. Once you start talking about managing multiple purchases through Kinnek, all of the information and interactions there include the requests, quotes, negotiations, message chains, invoices, payments, payment information, reordering capabilities, etc.
DE: So, the stickiness is coming from the procurement software that you’re developing on the buyer side?
KS: Yes, from the buyer’s perspective, all of the procurement information and operations are managed in one place, and it’s making those interactions more trustworthy because Kinnek provides things like a buyer guarantee to the buyers for payments made to suppliers through the platform. From the supplier’s perspective, they’re thinking that, if 70–80 percent of their existing customer base is already using Kinnek, then it actually becomes a full-fledged CRM system to manage all reorders and relationships with buyers, not just the initial quote. On both sides of the platform, there’s a data stickiness that comes into play as buyers and suppliers are doing more of their interactions through the platform.
KW: How do you make money?
KS: We charge the supplier side and keep the platform totally free for small businesses because they have enough to worry about. We charge suppliers on a hybrid model of part subscription fee every month plus a commission on their successful transactions. It’s easier for the suppliers to quantify the benefit they’re getting from Kinnek because we are helping them make sales and get orders. That’s why it makes sense.
KW: Are you looking at other segments where the nature of procurement is custom quotes?
KS: Absolutely, we’ve started to organically get pulled into adjacent verticals, which has been exciting. As we’ve built the platform, we’ve seen a lot of small businesses sign up in verticals that we haven’t explicitly made a push into, and that’s helped to inform where we want to make moves into next. There’s a lot that are on our radar. One that comes top of mind is hotels and lodging. We’ve also had a lot of fascinating businesses sign up, including small manufacturers, chemical manufacturers, pharmaceutical and nutrition companies, agricultural companies, etc. The exciting thing is we are helping a lot of these small business owners out in a diverse group of industries that really are quite neglected a lot of the time by typical tech firms and startups. For us, it’s been exciting to provide these solutions to people that really don’t feel like they have any other outlet or that they are catered to well by mainstream technology solutions.