Supplier Extensions Part 1: Merchant Side Offerings

This is Part 1 of our two-part series on Supplier Extensions. For Part 2 click here.

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Extending through the value chain is the frontier. It has been successfully executed only by a select few, but I believe it is the long-term future of vertical software. Pushing beyond being a simple tool to being a multi-stakeholder platform is the way a Vertical SaaS Vendor (“VSV”) can go from being a good company to a once-in-a-generation icon. 

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For most companies, the supplier extension is the best place to try it. 

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Extending to the supplier is a classic “Follow the Money” play, where you benefit from your merchant’s buying power. At Ariba, they used to say that “it’s always good to follow the golden rule: she with the gold rules!” There’s also an opportunity for the VSV to reduce friction, add value to the transaction, and sell to the supplier stakeholders.

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Supplier extensions can be lucrative for a VSV, with take rates from 0.5% to 3% of gross merchandise value (GMV). For those VSVs who successfully build a two-sided marketplace model, rewards are even greater, with a typical take rate of 3-15% on large GMVs. While still not commonplace, there are more examples of VSV extensions to two-sided marketplaces in supplier than in consumer or employee: Ariba (e-procurement), where my co-author Bob Solomon ran Supplier Enablement; GHX (healthcare); Avetta (supplier credentialing), where I am an investor through my prior firm; AvidXchange (AP Automation); and ACV Auctions (wholesale auto auctions). These companies derive revenue from both sides of a B2B transaction and have made their customers and shareholders quite happy. 

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As a special treat, I am joined in authoring this two-part essay by Bob Solomon, a longtime SaaS executive and friend whose mind I deeply admire. In Part 1, we will apply our extension framework to the supplier opportunity. We’ll walk through the merchant-side steps required to extend to the supplier, including:

• How to find the correct single-player offerings to merchants that set up success (solve the merchant’s key job-to-be-done with the supplier, and connect the merchant to a supplier’s control point). Included in this discussion will be procure-to-pay, accounts payable automation,  supplier credentialing, product safety and verification, and collaborative project management.
• How to look for merchant side network effects with multi player offerings. We’ll discuss benchmarking, industry analytics, and GPOs.

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In Part 2, we’ll walk through building out a footprint with suppliers:

• How to build a supplier wedge offering
• When to pounce on the opportunity to build a two-sided network

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With that, let’s dive in. 

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Single Player Merchant Offering 

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A merchant’s most important jobs to be done with its suppliers are: 

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1. Find the best suppliers 
2. Qualify and negotiate with these suppliers on prices and service levels 
3. Automate day-to-day transactions
4. Pay suppliers and optimize payment terms to preserve working capital 

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In the enterprise world, this is called the source-to-settle process. In markets where the merchants are small and the suppliers large (such as the relationship between restaurants and mainstream food distributors), the emphasis is usually on transactional efficiency, since negotiating power on price and payment terms may be limited. In other situations, the aggregate purchasing power of a VSV’s merchants can provide significant negotiation leverage.

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Generally, the best starting point is procurement. It is the direct transaction workflow, and its position at the beginning of the purchasing process allows a VSV the opportunity to move deeper into various aspects of the merchant and supplier relationship as they expand (see table below).

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Multiplayer Merchant Apps

Most supplier extensions become more compelling as the VSV gains scale in the merchant community. As scale increases, the group of merchants offers ever more network effects. VSVs can utilize these communities in multi-player offerings. A few quick examples include:

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Benchmarking 

A VSV often has a lot of data on an industry’s transactions—more than any other single participant—that could be used for benchmarking or industry analytics. 

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Benchmarking businesses are great companies that get stronger with scale. However, these companies are notoriously tough to build, because there is at least some resistance on both sides of the transaction that you’ll need to surmount. Merchants can be reluctant to share their information with other merchants whom they see as competitors, and suppliers hate to have their price and terms information with one buyer disclosed to another!

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These hurdles can be overcome through anonymization, aggregation, give-to-get schema (co-opt models), the sharing of non-price data (e.g., risk data), and consortia ownership models—or in industries where either merchants do not see themselves as competitors (e.g. hospitals and utilities) or the subject matter is non-strategic (e.g. compliance). Generally, we have also found it to be easier in verticals that are fragmented.

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Examples of companies that have built great benchmarking or data-sharing businesses are:

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• Avetta, in supplier information management. 
• PowerAdvocate, which analyzed the spend for much of the US utility industry. PowerAdvocate was bought by Verisk Analytics, which itself was an outgrowth of a non-profit data consortium for data risk sharing among property casualty insurers.
• Zelle. Today you would know them as the Venmo competitor; however, Zelle’s start was actually a bank consortium-owned company that began by sharing fraud and risk data. Once all the banks were onboard and benefiting, the company extended its platform into payments.
• Smith Travel built a data business (and industry analytics tools) around hotel performance. It was sold to CoStar, one of the great benchmarking and industry analytics businesses of all time. 
• eVestment built a database for institutional investors to compare performance data on asset managers, and was sold for $700 million to NASDAQ.

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Compliance and Credentialing Standards

A variant of benchmarking is compliance and credentialing. In some industries, a VSV can get large and credible enough to become a true industry standard. In such a case, the cross-side network effects are powerful. Merchants seek, and can rely on, the ratings the VSV has collected on suppliers, and suppliers can market themselves to new merchants using the VSV’s rating. eBay ratings, D&B, Moody’s, and Morningstar all come to mind as examples of this phenomena. These standards can become embedded in an industry and make supplier search or merchant credit worthiness much easier to evaluate, which will become crucial to a functioning marketplace. If you are looking for attributes to consider, some of the more popular ones include credit worthiness, beneficial ownership (e.g., KYC/AML), reputation, safety, ESG, cyber risk, and insurance. 

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Industry Analytics

Industry analytics is an extension of benchmarking, in that it tries to build a complete picture (or census) of an entire market. With scale, benchmarking companies accumulate enough data to become industry analytics companies. Once a complete picture of the market is built, these companies are incredibly difficult to replace.

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These businesses use all the same techniques benchmarking companies do to overcome the hurdles inherent in data-sharing. They may also leverage open data (from governments) or specialize in public sector businesses. Examples of industry analytics businesses include IRI and Nielsen in consumer packaged goods, Panjiva (acquired by S&P) in import/exports, and Moody’s Kompany (acquired by Moody’s) in KYC/AM.

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The difference between benchmarking and analytics companies is one of scale. If a company becomes the industry standard, its stickiness, market influence, and monetization opportunity is that much greater.

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Group Purchasing Organizations (GPOs)

In an industry where the merchants are small businesses and their suppliers are much larger, a group purchasing organization (GPO) can be an effective and natural multiplayer offering, leveraging collective buying power to buy at lower prices and better terms. If executed well, a VSV’s GPO can drive serious volume for suppliers and remove the cost of selling and negotiating with thousands of merchants individually. 

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GPOs are prevalent in healthcare (e.g., GHX), but also exist in public sector procurement (e.g., Omnia), hospitality/food services (e.g., Avendra, which was acquired by Aramark for $1.35 billion) and other industries. Even Coupa, a procure-to-pay player, has introduced a light GPO called Coupa Advantage. 

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GPOs often have net revenues of 1-2% of GMV. Both Avendra and Premier report 50% EBITDA margins. Adding 50 bps of an industry’s spend to EBITDA is obviously a very attractive opportunity to a VSV.

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The best GPOs do more than aggregate merchant demand for negotiation leverage. Superlative GPOs offer vertical-specific supply and add value to the transaction. In particular, a VSV that has launched a GPO is in a great position to offer the latter: they are well positioned to provide communication, collaboration, content, quality, certification, and pricing benchmarks to greatly improve a transaction. If a VSV also has payment capabilities, it can add even more value by accelerating funds, providing credit, or contingent payments.  

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This is the first step—solve your merchant customer’s most important job-to-be-done with its supplier. What comes next is the frontier and the payoff: landing a wedge offering with the supplier. You can then use that wedge to extend through the value chain and sell more broadly to the supplier.

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Case studies related to this chapter:

Ariba: Building a Supplier Network

Avetta: A Case Study in Supplier Networks

CCC: Extending to the Supplier

CCC: Extending to a Two-Sided Marketplace