What Is Business-to-Business?
Business-to-business (B2B) is a business model where a business sells or purchases products or services to and from another business. This type of relationship is common among manufacturers, wholesalers, distributors, and retailers that will resell the products or services.
Generally, B2B transactions occur in the supply chain, where a specific company will purchase raw materials from another company for manufacturing purposes.
B2B products or services are also more valuable than those at the consumer level. This is because businesses that engage in B2B transactions are more likely to purchase more of the goods and services than consumers are.
For instance, a bicycle manufacturer will buy a truckload of bicycle tires compared to what a biking enthusiast will buy.
In B2B companies, their marketing campaigns target other businesses instead of consumers, which is B2C. Clients of B2C companies target individual consumers who are the end-users of the products or services.
Internet popularity yields a robust environment in which businesses can easily find out about products and services and lay the groundwork for future business-to-business transactions.
How Does B2B Work?
In the B2B business model, one business sells a set of products or services to another business.
There is usually a group or department in that particular company that uses the products and services. It could be a single user on the buyer side making a transaction in support of the business goals of the company.
Some B2B transactions also involve the company using the products, such as computers, merchandise products, furniture, and productivity software.
For more complex or larger service or product purchases, the selection process of B2B product or service is handled by a buying committee, including:
- a technical decision-maker or someone who assesses the capabilities of the prospective products or services
- a business decision-maker, such as those responsible for the finances and budgeting
- influencers, such as those individuals who present inputs on the decision.
Often, large purchases involve a request for proposal, in which the buyer invites possible vendors to submit proposals detailing their products or services, terms, and pricing.
Types of B2B Models
There are different types of B2B models, and they can be classified according to what products or services they provide.
Product-Based B2B Model
Product-Based B2B companies are those that sell physical products to other businesses. This type of business may act as a supplier and sell the products to various other businesses.
For example, auto manufacturers are B2B companies that sell vehicle parts and components. They supply car batteries, hoses, door locks, and electronics to various car distributors.
Businesses can call these B2B companies and ask for exactly what products they are selling, purchase them, and it gets delivered.
Note that product-based B2B companies are selling their products to other enterprises and companies, not to consumers or individuals who are the end-users.
Service-Based B2B Model
There are B2B companies that supply services too. Service-based B2B companies sell services instead of products.
For example, an accounting firm that provides various services such as bookkeeping, audit services, tax planning and preparation, and consultation.
Other examples of service-based B2B companies are advertising, telemarketing, law, graphic designing, and digital marketing.
Software-Based B2B Model
Software-based B2B companies are those that develop software applications and other tools that other businesses can use to increase their productivity or efficiency.
For example, a project management software company creates different applications and tools to help businesses in managing their projects better.
Invoicing software, accounting software, and databases are also examples of software-based B2B companies. These companies involve hosting, maintenance, security, and customer support.
Advantages of B2B
There are many advantages of B2B over other types of businesses.
Predictable and Stable Market
The B2B market consists of businesses serving other businesses. It is a predictable market since sales and purchases are based on rational decisions rather than impulse decisions.
B2B deals and contracts also tend to last longer, which could take a year more with guaranteed pricing and terms negotiated between the two businesses.
High Level of Customer Loyalty
Because of longer deals and contracts, there is a much better evolution of supply chain management in B2B. It provides a collaborative mindset in distribution channels, which helps develop a high level of customer loyalty between businesses.
Customer loyalty also drives B2C companies to achieve a consistent and reliable service to other businesses.
High Order and Sale
Since companies are involved in the sales transaction, the amount will be of big value compared to when consumers purchase the products or services. For instance, instead of selling furniture to 1000 customers, B2B companies sell 1000 furniture to a single company in a single sale transaction.
This is because buyers who engage with B2B companies often buy in bulk and have greater purchases.
Disadvantages of B2B
There are also some disadvantages to conducting B2B models.
Limited Target Market
From the name itself, B2B sales have a limited reach considering the transactions and deals occur solely between businesses, thus the customer pool is not as open compared to B2C.
That is why customer loyalty is much needed in order to generate long-lasting relationships between businesses. The loss of one long-standing partnership with a business could be detrimental to the revenue sheets of a B2B company.
Bargaining Power of Clients
It is common for long-term clients to seek preferential treatment like discounts on purchases or services, considering they are making bulk transactions. Clients have some bargaining power compared to end-users who purchase in small quantities.
Discounts or requests can be challenging to manage, and if not done carefully, they could hurt the bottom line of the company.
Longer Purchase Decision Time
The majority of the clients involve one or more decision-makers and the total time for a purchase decision usually runs on the short side.
A complicated set of factors, such as multiple stakeholders, are involved in the B2B sales cycle, with total decision times that can stretch out for several months.
B2B companies cannot depend on a fast turnaround with new clients for an influx of working capital. They also must maintain the financial solvency of their company to operate with long gaps between sales.
Examples of B2B Companies
There are many types of businesses that come under the B2B business model. Here are some of them:
Google owns up to 137 products that are focused on cloud content collaboration, surveying, digital analytics, document creation, video conferencing, and other areas.
Some of its most popular products are Google Drive, Google Forms, Google Docs, Google Analytics, and Google Hangouts Meet.
Slack Technologies, Inc.
Slack Technologies Inc. is known for its product, Slack, which is one of the most valuable Software as a Service (SaaS) companies in the world. It is one of the 15 most valuable B2B SaaS firms, with a market value of $26.22 billion.
Slack is a platform that facilitates internal instant messaging, video conferencing, and productivity bots that allow automation in redundant tasks.
Zoom Video Communications
Zoom is perhaps the biggest B2B player during the CoViD epidemic. This is a communication startup based in the United States that provides video calling and online chat services.
Zoom innovations improve the ability to interact and work with clients, colleagues, friends, and family members. It also provided an online cloud-based peer-to-peer platform for online chat, video telephony, and telephone systems.
Odoo is a series of warehouse and sales solutions divided into apps that cover sales, websites, operations, and productivity tools.
It has the capacity to integrate several businesses’ data sources and processes that allow corporate administration.
Organizations use the built-in website and eCommerce modules of Odoo for basic online shop and catalog requirements.
For over 10 years, HubSpot has been publishing content marketing and training others on how to do it effectively. They have constantly experimented with and broadened the scope of its content, making them a leader in marketing automation.
Lear Corporation is one of the global automotive technology leaders in seating and electrical systems.
It supplies seat systems, flooring, acoustic systems, door panels, headliners and electrical and electronic distribution systems, and instrument panels to various businesses globally.
B2B e-commerce is a significant sales channel in digital commerce. Changes in consumer behavior brought about by the pandemic will continue to drive adoption further beyond 2021.
Emails and phone calls will also continue to have their place in B2B business. However, there is no question that e-commerce pushes the boundaries of what B2B sales could be.
Almost 73% of millennials are now involved in the B2B buying process. These new buyers expect relevance and convenience more than their Baby Boomer and Generation X counterparts.
B2B platforms continue to pave the way for cost-effective and accessible selling opportunities with their personalized sales portals, mobile ordering, self-service functionality and augmented reality tours.
With B2B e-commerce, companies can reach a mass audience with fewer resources. They can also personalize relationships at scale, and their customers can now have the power to serve themselves.
The growth of B2B e-commerce is not only a pandemic trend. Buyers and sellers are directed toward digital commerce because it streamlines operations and boosts efficiency.
B2B vs. B2C – Comparative Table
The Bottom Line
Business-to-business (B2B) is a term that describes commerce transactions between businesses, such as between a manufacturer and a wholesaler or between a wholesaler and a retailer.
B2B companies typically deal with products and services that are used as inputs for other products and services that are sold to consumers or end-users.
For example, a company that makes tires may sell them to a car manufacturer, which in turn sells cars to consumers. The main types of B2B businesses are product-based, service-based, and software-based.
B2B has several advantages over other business models, including a predictable and stable market, a high level of customer loyalty, and high order and sales.
However, B2B also faces limitations, such as limited target market, longer purchase decision time, and bargaining power of clients.
There are several notable examples of B2B companies, including Google, Slack, Zoom, Odoo, and HubSpot.
Beneath the business-to-business definition lies an eCommerce opportunity. Browsing a company website and placing orders should be as easy for businesses as it is for consumers.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.