At Bowery Capital, we've invested in many B2B marketplaces and one thing that we've noticed is, unlike B2B SaaS, the metrics that matter for B2B marketplaces are less commonly accepted or universally understood. After many board conversations around what metrics the business should be tracking, we've come up with this exhaustive list of key metrics to measure B2B marketplace success. We hope this list will help B2B marketplace founders track what matters but also B2B marketplace investors evaluate investment opportunities through the most relevant lens. We do not think every company needs to track every metric listed below, but rather, a B2B marketplace founder or investor should narrow the list below for the metrics that are the most pertinent and relevant for the business at hand.
1. Marketplace Liquidity
Liquidity is simply how easily and quickly buyers and sellers can find each other in the marketplace. A two-sided B2B marketplace should track both seller liquidity and buyer liquidity.
1.1 Key Seller Liquidity Metrics:
Seller liquidity metrics are an important indicator of seller satisfaction and marketplace efficiency. B2B marketplace sellers will compare their preexisting sales channels with what the marketplace can do for them (i.e. how fast the marketplace can sell their products and at what price). While marketplaces may be tempted to aggregate as much supply as possible, too much unused supply leads to a bad seller experience. It is therefore important for marketplaces to track seller liquidity by product category while noting seasonality.
Some B2B marketplace metrics to measure seller liquidity include:
Match/Utilization Rate: This is a measure of the probability of a successful transaction on the platform during a given time frame. The time frame during which you should measure this is industry specific. As an example, Marketplace ABC has 100 listings as of 12/31/2020 and 75 of those are sold by 1/30/2020; 30-day match rate is 75/100=75%.
Inventory Turnover Ratio: This is calculated as Sales / Average Inventory and gives you the number of times inventory is sold in a certain time period. Generally, the higher the ratio, the more efficient the marketplace. However, a high inventory turnover ratio could also mean insufficient inventory. It is therefore important to track inventory turnover ratio by product category. Benchmarking inventory turnover is highly industry specific. However, low-margin industries tend to have higher inventory turnover than high-margin industries because low margin industries need to offset lower per unit profits.
Days To Turn: This is the inverse of Inventory Turnover Ratio. In a marketplace where one side creates a listing and waits for the other side to respond, this metric would be compared by the seller with what they can achieve internally.
1.2. Key Buyer Liquidity Metrics:
Buyer liquidity can be defined as the probability of a visit leading to a transaction.
Fill Rate/Tender Acceptance Rate: One way to define this is the percentage of orders the marketplace is able to fulfill within the industry’s acceptable window. For example in a high-friction B2B marketplace which facilitates larger and less frequent transactions, the fill rate might be measured in days or weeks, while a B2C marketplace like Uber which might be measured in minutes. Again, marketplaces should track this metric against industry standard, i.e. without your technology.
It is also important to know if a marketplace is demand-constrained or supply-constrained. Based on this, founders should focus on the relevant metrics accordingly. E.g. in a demand-constrained marketplace, buyer liquidity metrics such as fill rate is much more important than seller liquidity metrics such as match rate.
1.3. Buyer to Supplier Ratio:
Another related ratio is Buyer to Supplier Ratio. This represents the number of buyers that one supplier can serve within a given time period. It is calculated as Listings per Seller divided by Bids per Buyer over the same time period. Some markets are supply-constrained and some are demand-constrained. Tracking the buyer to supply ratio can help inform marketplace decisions in terms of which side of the marketplace to focus on scaling. In a B2B marketplace, this ratio varies depending on the industry. Taking the high-friction marketplace example again, if bids per buyer is 10 per month, listings per seller is 50 per month, buyer to supplier ratio would be 50 / 10 = 5:1.
2. User Engagement
Active User: Depending on the industry, Active Users should be defined with the appropriate time period, whether monthly, quarterly or yearly. B2B marketplaces with high AOV and low frequency may define their Active Users over a longer period than the typical Monthly or Daily Active User metrics used by B2C marketplaces. Since there are two sides to the marketplace, both seller and buyer Active Users need to be defined.
- Average Order Value (AOV): This metric measures the average value of orders placed on the marketplace. From a marketplace’s perspective, this is equivalent to Total GMV / Total Number of Transactions. B2B marketplaces can increase AOV by deploying cross-selling and upselling techniques such as product recommendation and offering adjacent services like financing, workflow tools or services offerings.
A related metric to track is Wallet Share per Customer. An increase in wallet share indicates a deepening of customer relationships.
Another metric specific to B2B marketplaces is Spot Purchasing vs Contractual Purchasing. Spot purchasing refers to transactions negotiated on a one-time basis at a spot rate that is valid for a short period of time. Contractual Purchasing refers to transactions negotiated in advance at a predetermined contract rate. There are advantages to both depending on market fluctuation, but an increase in Contractual Purchasing, analogous to subscription revenue in B2C businesses, can indicate the deepening of customer relationships.
Frequency of Consumption: This can be the number of tenders in the freight industry or the order volume in the industrial metal industry. Different AOV and frequency call for different sales strategies (marketing vs. Inside sales vs. outside sales).
Retention by Cohort: Retention by Cohort measures retention of customers on the platform. Given DAU / MAU numbers can be highly distorted by growth, it is important to track retention by cohort. Retention rate is defined as the percentage of retained users over a period of time and is calculated as the Number of Remaining Users at the End of the Time Frame / the Number of Users at the Beginning of the Time Frame. For example, if on Jan 1 marketplace ABC had 100 users, and by Feb 1, 95 of those users remained on the platform, then retention rate over the one month period is 95 / 100 = 95%.
Net Dollar Retention (NDR): Net Dollar Retention measures retention of revenue generated from existing customers. NDR is calculated as (Beginning of Period Revenue + Upgrades — Downgrades — Churn) / Beginning of Period Revenue. For example, marketplace X started with $10,000 from existing customers, added $5,000 in upgrade revenue, had $1,000 downgrades and $2,000 in churn. NDR is calculated as ($10,000 + $5,000 – $1,000 – $2,000)/$10,000 = 120%. An NDR greater than 100% indicates that there is an increase in revenue generated from existing customers, i.e. the growth of revenue from existing customers more than offset any losses from that customer base.
4.1. Unit economics
Marketplace monetization models differ and can include charging for transactions (take rate), charging buyers for access (subscription), charging sellers for access (listing fee), charging third parties for advertising etc. Depending on the business model, profitability metrics will differ.
Take Rate: for marketplaces with a transaction fee model, this is defined as the percentage of GMV (Gross Merchandise Volume, total value of merchandise sold on the platform over a given period) collected by the marketplace.
Contribution Margin: revenue subtracting any other variable costs such as payment costs, customer service, onboarding, data etc.
4.2. LTV vs CAC
LTV:CAC ratio: this is calculated as Customer Lifetime Value (LTV) divided by Customer Acquisition Cost (CAC). It compares the value of a new customer over its lifetime relative to the cost of acquiring that customer and is an important signal of profitability and of sales and marketing efficiency. Generally speaking, the larger the ratio, the more efficient the company is at creating value by spending marketing dollars and acquiring customers. A ratio greater than 3 is considered good, but that may change depending on the industry.
Customer Lifetime Value (LTV): the expected economic value a buyer or supplier can generate on the platform over their lifetime. LTV is usually compared against Customer Acquisition Cost (CAC). It will depend on how long you are able to retain a customer, how many repeat purchases you expect them to make, and the average value of transactions on a contribution margin basis (but before acquisition cost). LTV is best calculated using net present value or by generating a LTV curve, but a simplified way to estimate LTV is Contribution Margin (before acquisition cost) * Average Number of Purchases Across Customer Lifespan. For example, assuming profit generated by the customer for each transaction on a contribution margin basis is $1,000, number of purchases they are expected to complete during their customer lifespan is 5, then the LTV of this customer would be $1,000 x 5 = $5,000.
Since there are two sides to the marketplace, both buyer and seller LTV need to be accounted for.
Customer Acquisition Cost (CAC): the total expenses required to acquire a new customer. Given B2B marketplaces often rely heavily on high-touch sales compared to B2C marketplaces, it is important to calculate fully loaded CAC, i.e. CAC including everything it took to get that customer – the cost of advertising, marketing, sales, support during the Free Trial, on-boarding costs, etc. Compared to metrics such as Cost Per Click (CPC), fully loaded CAC gives the full picture of the cost related to acquiring a customer.
Again, in a two-sided marketplace, bothboth It is also important to note that both buyer and seller LTV and CAC need to be accounted for. We have seen many founders including only buyer CAC in their LTV:CAC ratio, which is incomplete.
Burn Rate: the rate at which a company is spending its capital to finance operating expenses. It is usually quoted in terms of cash spent per month. For example, a company with a burn rate of $1 million would be spending $1 million per month.
Cash Runway: This is calculated as Current Cash Balance / Burn Rate. Keep in mind that it can take some startups 6-9 months to secure new funding so a minimum of 6–12 months of runway for early-stage startups is important.
The Bowery Capital team is embarking on a blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Adam Sandow, Founder & CEO of Material Bank, answers some of our questions. You can read all of the posts in our series by going here.