Two weeks ago we presented Applico’s Top 50 B2B Marketplace Ranking, which focuses exclusively on independent B2B product marketplaces that facilitate the exchange of goods between a business customer and an external distributor and / or supplier.
For the next part of our series we would like to introduce you to the top marketplace Faire, whose co-founder is Max Rhodes and whose Chief Data Officer Daniele Perito is.
Faire has beaten other top marketplace contenders for two main reasons: Not only does Faire have impressive GMV and sales growth, but it is also capable of generating a sizeable revenue rate from that GMV.
Other B2B marketplaces in the top 10 may have larger GMVs than Faire, but their ability to monetize these transactions is more limited. That may change in the future – a common platform strategy is to subsidize transactions earlier in the platform’s lifecycle and then increase the take rate later. However, Faire’s ability to increase GMV while maintaining a rate of material consumption is evidence of the value it creates for both sides of its market.
As Perito points out in this interview, 2020 was a very difficult year for many of Faire’s customers and producers, and Faire was an important partner in keeping the industry on its feet during such difficult times.
In addition to our Top 50 report, the interview offers an insight into the rapid scaling of B2B marketplaces and how distributors can take advantage of this opportunity. If distributors want a future in which Amazon does not dominate most of the B2B, then the support and partnership with these independent B2B marketplaces is key to making it happen.
Moazed: I’d love to get to know the business a little more and how you built such a great company.
Perito: I am one of the founders. I am currently the Chief Data Officer and oversee everything related to data and machine learning at Faire. I like to tell candidates that marketplace companies are in a unique position to be attacked with data science and machine learning techniques because they are so complex and have many participants acting in their own best interest. We founded the company four years ago. Before that we were all in the square. I was personally responsible for the risk and security of the CashApp, before that I worked in science.
Moazed: You are right about data and its importance, especially on B2B marketplaces. The product data in B2B is just so difficult. And in fact, we often find that it’s way more unstructured than many of your B2C marketplaces. In B2C, for example, there are often UPC codes, so there are much more structured ways to identify products.
In the B2B space, there are some large textile marketplaces that also have very large multi-billion dollar GMVs, but they don’t have any real take-rate. You’re more of a SaaS fee, right? What do you think of Faire’s business model and how does your positioning enable you to achieve an acceptance rate on the scale in which you operate?
Perito: Yes, absolutely. I think when we started the company we knew that retailers and brands were facing the difficult matching problem. What was solved back then thanks to trade fairs and sales representatives. The difficult matching problem, however, is that these retailers had to take inventory risk to decide what to buy because they buy some stuff, put it in their store, and see how their customers would react. And if they made too many bad purchases, they would eventually go out of business.
Simply by digitizing products and making them available online, you have not necessarily helped the retailer too much. They were always used to seeing a product in person at a trade fair and maybe even talking to the brand owner. Now online retailers were forced to just see a photo online and get a description. But this process wasn’t necessarily better from the retailer’s point of view. We knew we had to take risks on behalf of retailers and help them with their returns. We offer 60 net payment terms, which means that merchants do not have to pay anything up to 60 days after placing the order. That gives retailers a chance to try things out before they have to pay for them.
Retailers can put products on their shelves and see how customers react. And if something doesn’t work, the dealer can return it within 60 days – no questions asked. So we started a company knowing that we had to take some risk on behalf of our customers to make the exchanges easier. Because of this, it was a logical necessity to take a commission if that makes sense. We knew that we would incur variable costs due to this fact and therefore had to calculate a variable commission, such as a percentage commission.
And I think that over time we have been able to offer more and more value-added services. Like Insider, our equivalent to Amazon Prime where we offer free shipping. We’ve kept making better tools available to our brands, including CRM tools and email marketing tools. And by adding more and more value to the market, along with the original idea of giving 60 days of free returns, we’ve been able to add enough value to justify paying the commission to our customers.
Moazed: Well, to be clear – a retailer can buy products and not pay for them for 60 days. And can you also return the products within this 60-day period?
Perito: Yes, we made it match the net payment terms of 60 so you are effectively given the same window of time to pay or return.
Moazed: I love that because you are essentially telling the retailer, order this product. The trader doesn’t technically take it on their balance sheet, not for the first 60 days, it’s basically risk-free. You can easily return it.
That way, the retailer can get a taste of how well consumers actually want to buy this before the retailer really commits, or maybe the retailer could return part of the order, not the whole, because they’re not getting as much throughput as they are thought. And Faire reduces a lot of the balance sheet risk and the risk your retail customers would otherwise have to take. Do I understand this in the right manner?
Perito: Yeah. And then I think it does one more important thing. That said, it aligns incentives between us and offers the best possible recommendations and the best possible products and brands in the market for our retailers. And I think that’s one of the most important guiding principles in founding Faire, namely that we wanted to build a system, and then an incentive system that only makes us successful if we make our customers successful.
Moazed: I love that. That’s essentially what the big retailers, the big department stores, get a lot of that leverage when shopping, right? If you’re Macy’s, you can buy something and then return it when it doesn’t sell, and you get all of those backward commissions from the suppliers, but Macy’s has that buying power and leverage to command those smaller retailers don’t have until Faire showed up.
Perito: Yes, absolutely. And you know, another thing that was really important to us at Square was the idea of leveling the playing field and giving the smaller companies the same tools that the bigger players enjoyed. And I think the idea here is exactly that, as Nordstrom has always been able to negotiate net 60 or net 90 payment terms. And then they sometimes negotiate return regulations because of their size. But Faire as a platform can bring all of these retailers together and offer them the same kind of offers. This time not just through scaled negotiations, but because we can use the technology to offer them and the kinds of efficiencies we can get in terms of improvements and recommendations and choices that we can use to then offer those value propositions that these make small players more competitive against the larger players, which is an advance.
Moazed: Now you are adding additional services. What is the focus there? Is fulfillment part of this equation?
Perito: No, we don’t currently offer any fulfillment services ourselves. On the merchant side, we’ve focused on helping them cut costs with our Insider Program, which is effectively offered for a monthly fee. You can also order a wide range of products and brands with free shipping with Amazon Prime. Along with other incentives like exclusivity, they get short-term exclusivity to see products first, but the biggest value proposition is free shipping. And that’s just because we’ve found that retailers don’t really see free shipping as one of the primary costs their business incurs. And that’s why we wanted to help them ourselves and beyond the free shipping. And that in turn forces us to reduce shipping costs and to negotiate with large, national and local shipping service providers.
So on the retail side, we focused on the shipping component. On the brands side, we’ve found that brands want the most to reach the greatest number of potential buyers and that’s why we made CRM tools and email marketing tools available to them. We also offer a widget that brands can put on their website, where we actually subsidize a portion of retailer orders through the widget. We use it as a referral program that really helps the brand get their name known and attracts bigger customers.
Moazed: Interesting. So they put a widget on their website, and then what? How do retailers benefit from the promotion?
Perito: Brands usually put it on their ecommerce site, but when a retailer clicks on this widget, it takes them to a fair landing page and the retailer can shop with that brand.
Moazed: Faire raised over $ 400 million and you had a valuation of $ 2.5 billion as of the fall of 2020. You have 10x sales growth and 150,000 independent retailers in the market. My rough calculation would put most B2B marketplaces on an approximate 1-fold valuation of the GMV, a multiple. Am I far from it or any of those other numbers?
Perito: The numbers we want to share are 150,000+ retailers who have bought on Faire, and then the 15,000 brands available on Faire. We usually don’t share GMV numbers. I think you can do some rough math and probably won’t be off that much. But we’ve seen tremendous growth largely thanks to the fact that our retailers really like the product and order more every year if they stay with us and this is a great growth engine. And a great endorsement of what we are doing. Because it means that we offer them at least some value. And that’s great.