Business to Business (B2B): Definition & Meaning
Companies regularly purchase products and services from other companies. This is known as the B2B (business-to-business) model.
What Is B2B?
B2B refers to commercial transactions between businesses, rather than transactions between businesses and individual consumers. B2B can take many different forms, including the sale of goods, services, or information. A B2B company typically manufactures products for or provides solutions to other organizations.
For example, when a company supplies raw material to another company, it is a B2B transaction. Similarly, the exchange between wholesalers and retailers is B2B. When a company engages another company to advertise its products, design its website, or develop its content, that is B2B as well.
B2B contrasts with models where companies directly offer products or services to consumers – for instance, at a retail store (see B2C - business to consumer). B2B transactions can involve selling the same goods as B2C, but in larger quantities, often with a minimum order requirement, and to corporate customers.
How Does B2B Work?
The B2B model differs from other models in several ways:
- The dollar value of B2B transactions is usually higher than that of B2C.
- B2B involves larger volumes of goods or higher value services.
- B2B is often conducted through long-term contracts or ongoing relationships between businesses.
The scale of B2B transactions can vary. Some B2B transactions involve a single company department or user initiating a transaction. Other transactions could be more elaborate, where the entire company uses products or services offered by another business.
In large-scale exchanges, the selection of B2B products or services is complex and time-consuming. A company may set up a buying committee with business and technical decision-makers. Steps may include approving the budget and requesting vendor proposals. Such B2B transactions may further involve negotiations over pricing, delivery schedules, or other terms and conditions of the transaction.
B2B eCommerce involves businesses conducting transactions with each other on an electronic platform. A typical B2B eCommerce example is an online store that specializes in selling raw materials to industrial manufacturers or an online store that offers office supplies to corporate customers.
Companies active in the B2B eCommerce landscape follow either of the following models:
- Direct model: Here, a company sets up its own online platform on which it sells its products or services directly to buyers.
- Marketplace: A company goes to a platform where other companies are also present. It sells its products alongside its competitors.
Benefits of B2B
B2B offers numerous benefits, including:
- Cost-saving: B2B transactions operate on economies of scale, with orders sourced or produced in large quantities. This allows companies to save on costs.
- Higher revenue potential: The average size deals in B2B transactions tend to be larger, which translates into higher revenues. In turn, this boosts a company’s financial stability and growth.
- Customer loyalty: B2B exchanges are built on trust and reputation, often leading to long-term business relationships.
- Steady business: Long-term B2B relationships mean repeat business, leading to consistent revenue streams. Further opportunities through referrals are also not uncommon.
Challenges in B2B
The B2B model also comes with some challenges, including:
- Small market: Although they may conduct transactions with large organizations, B2B companies may find the market limited. Small and medium-sized B2B companies may struggle to secure clients.
- Higher competition: With a limited market, B2B companies may face stiff competition. With businesses looking for good deals, established vendors with the best pricing may dominate.
- Lengthy negotiations: Since companies purchase in bulk, they may negotiate for lower prices, request discounts, or demand additional services.
- Complex decision-making: B2B purchasing decisions tend to involve high-level decision making. Multiple stakeholders may have to be convinced to agree to a contract. Thus, the process is painstaking and slow.
What Is B2B? Key Takeaways
- B2B refers to the transaction of products or services between two businesses rather than a business and an individual customer.
- The order volume and dollar value of B2B transactions are higher than those of the B2C model.
- Businesses may conduct B2B transactions through the direct model or the marketplace model.
- B2B interactions often lead to long-term relationships between businesses, which can boost revenue and growth chances.
- B2B exchanges can be complicated, as multiple stakeholders may be involved and vendors may have to compete against each other to secure a contract.