It's not as flashy as autonomous vehicles or as visible as social media, but the market for B2B distribution is massive and under an existential platform threat.

The B2B space is projected to reach $8 trillion by 2020 and Amazon Business is aiming to be the top dog by the time the meta-industry reaches that milestone. Incumbent distributors are flailing to produce a winning strategy against the e-commerce giant and it's costing them money because no one is pursuing real digital transformation.

Last month, Grainger, the market leader in industrial supply, missed its earnings targets for the first quarter of 2017, largely due to deploying a price-cutting strategy for responding to the threat it won't name publicly: Amazon Business.

If Grainger keeps fighting a price war it is extremely unlikely to win, the company will probably lose half of its operating margins and EBITDA by 2020. My team did the math. Already, the company has seen an 18% drop in its market value since announcing the fumble.

Grainger is only the first domino to tip; eventually other companies in the MRO vertical will start missing earnings and spiraling downward in conjunction with Amazon's rise. Smart money says short or sell these industrial stocks while they're still strong.

While betting against the stumbling incumbents would likely yield some monetary gains, that's not really a helpful conversation. The real puzzle is how to to respond to and, hopefully, beat Amazon.

The simple answer is to build a platform business. However, the real answer is more complex that.

So, what is a platform for the $8 trillion B2B distribution market?

A Hard Fight Ahead

Whether its a startup or an enterprise, the playbook is essentially the same: copy Amazon's third-party marketplace model and try to leverage any incumbent advantage possible - they'll be absolutely necessary.

Some of these advantages include brand value, industry knowledge, existing relationships with buyers and other suppliers, and access to investment capital. Established distributors have access to most or all of these factors, while a scrappy startup will likely have access to but a couple.

At any rate, every viable competitive advantage needs to be seized and fully leveraged if an alternative B2B marketplace is to stand a chance against Amazon. Amazon Business already has a head start and a bottomless pile of cash to burn if it means it can dominate a new market.

Amazon's various units (Prime, Marketplace, Web Services) are all profitable to a huge degree, enough so that Amazon can afford to fight dirty in a price war or provide innovative added service if it means ultimate victory.

The Road to Platform Success

Building a successful marketplace requires the participation of two distinct groups: buyers and sellers. It won't function without either group, but amassing the two groups presents a chicken and egg problem - who should be pursued first?

In the case of a B2B marketplace, the first side of the market to build is the sellers. Buyers want price transparency and competitiveness, as well as fast shipping guarantees and quality assurance of the products, so they'll follow the best deals and offers.

Acquiring and retaining sellers is crucial to ensure there are products to sell. In order to be competitive with Amazon, it'll be essential to attract a variety of distributors to ensure the product catalog has a comparable depth and breadth as Amazon. If buyers can't find what they need, they'll look for it elsewhere, causing what is called platform leakage.

As well as product variety, the marketplace will need to attract sellers from all over the country to tackle that dreaded scourge of e-commerce: shipping costs. Having a wide geographic spread of sellers will help to reduce shipping time, which will help make the marketplace competitive to Amazon and consequently reduce the delivery costs.

The ideal sellers for a B2B marketplace are the small and midsize distributors. These companies are hungry to grow, but lack the capital and time to reach the top of their respective verticals.

Connecting those companies to a marketplace will offer them a relatively cheap path to growth. Participating sellers will drastically reduce their customer acquisition costs (and be appreciative for it), so their profit margins will grow healthily and they can expand operations more easily.

Once the marketplace has corralled enough sellers to get started, it's time to get some paying customers.

In today's economy, buyers are sensitive to price, convenience of delivery, and ease of access to information. It's essential that any B2B marketplace offering is competitive with Amazon in these factors and is substantially better than any of the incumbent firms' e-commerce efforts.

Buyers will need to be convinced that the new marketplace is better than Amazon Business, which is how those existing relationships and that industry knowledge can come in handy.

If an established distributor builds the marketplace, it understands more about B2B customers than Amazon does at this point, due to the longstanding transaction history between the company and the customers. Speaking the customer's language will really help with getting sales figures of the ground.

Digital Transformation Complete

By now, the buyers and sellers have been acquired and the marketplace is doing good business.

Mission accomplished? No!

Amazon is wily and incredibly spendthrift if it feels it's not winning an industry enough. Jeff Bezos has set his goal for the company to be "the everything store." He has a vision, investor confidence, nigh unparalleled access to capital, and an army to follow him to total domination.

In the spite of the behemoth's advantages, Amazon can be bested, or at least confined from conquering the majority of the B2B space. It's absolutely critical that any B2B marketplace invest heavily in innovation and listen to customer needs.

That platform leakage problem mentioned earlier? It's killing Snapchat and will invariably affect any platform business that doesn't pay attention to user behaviors and offer new benefits and features.

To all of the B2B distributors out there - get going! The opportunity will never get better than it is now.

Published on: May 6, 2017