Category: Strategy Page 1 of 2

Time is Money: Real-Time Rebates vs Supplier Reports

On March 4, 2021

Rebates are the lifeblood of your group.

The primary function of a buying group or purchasing cooperative is to maximize members’ rebates and lower the cost of goods sold (COGS) through selecting preferred vendors, negotiating effective programs, and accurately tracking rebates earned across all members.

Rebate “revenue” can make the difference between a profitable year or an unprofitable year for your members. Loyalty to your group is largely a factor of how successful a group’s rebate performance has been. Rebates also form the basis for operational budgets for a group as well as funding additional services the group provides for its members.

Given the importance of rebates, it would be fair to assume that buying groups and purchasing cooperatives would use software designed to increase the amount of rebates earned and decrease the level of (largely human) errors that steal money from your members’ pockets.

Unfortunately, that assumption is wrong.

The truth is that all too many groups rely on antiquated software, manual processes, and inaccurate data in order to manage rebates on behalf of their members.

Rebates are a best practice.

Rebates are a pricing best practice within a supply chain, and they should present a win-win-win scenario for a group, its members, and its suppliers.

Rebates allow suppliers to provide fair and accurate volume sales pricing to their customers. Without rebates, a supplier would base its volume discount on the past performance of a buyer combined with the promises of what that buyer will buy in the coming year. What happens when a buyer says they will buy $200M in product, but they only buy $75M? Or, what happens if a buyer promises to buy $200M in product, but they actually buy $300M? Rebates are used to price based on actual purchases rather than promised purchases.

Rebates also provide suppliers with a way to promote purchasing the products they want to sell more of. Does the supplier want to sell more items that have a large profit margin as opposed to lower profit items? Is the supplier introducing a new product line that they want to be successful? Does the supplier want to gain a stronger product mix within their customers’ stores? Each of these goals can be achieved through effective rebate programs.

In short, rebates are a best practice within a B2B supply chain to ensure that businesses receive the desired price, volume, and product mix. The role of buying groups and purchasing cooperatives is to maximize the rebate opportunity on behalf of their members.

Groups provide a way for individual businesses to leverage their purchasing power with other businesses within the same category in order to negotiate higher rebates. Using the example above, 100 buyers buying $200M each will have better success negotiating a higher rebate than one $200M buyer.

The “cost” of combining the purchasing power of independent businesses to increase rebate performance is having effective tools and systems in place to track and manage each program.

Most common rebate programs.

Purchase Percentage/Value per Units: This is perhaps the simplest and most common form of rebate program. These programs are not based on volume or growth, but apply to evenly to all purchases. For example, a 4% rebate on purchases would be calculated as total dollars purchased multiplied by 0.04. Or a $1.25 rebate per unit would be calculated as total units purchased multiplied by 1.25.
Volume Incentive/Plateau: This is one of the most effective programs for incentivizing higher purchasing amounts. Rebates increase as purchasing tiers are reached. For example, a program could have incentive targets of $100K, $500k, and $1M.

Purchases	Rebate %
$0-$100K	2%
$100K-$500K	4%
$500K-$1M	6%
>$1M	8%

Sample Volume Incentive/Plateau Program

So if a group purchased $200K of product, they would earn $8,000 in rebates.

Growth Incentives: As the name implies, growth incentives are based on achieving specific growth targets. Growth targets can be based on aggregate group growth or growth by specific members.

Growth over Previous Year	Rebate %
2%	2%
5%	4%
8%	6%
10%	8%

Sample Growth Incentive Program

Product Mix Incentive: This type of program provides an additional rebate on product X based on purchases of product Y. The intent is to provide an incentive to carry additional product lines from a supplier.

Purchases of Product Y	Additional Rebate on Product X
$0-$100K	2%
$100K-$500K	4%
$500K-$1M	6%
>$1M	8%

Sample Product Mix Incentive Program

In addition to the above standard types of programs, groups may choose to create rebate programs where the rebates earned go specifically to the group and not the member. The group may choose to pay their members at a lower rebate rate earned than the group earned. Or the group may pay the entire rebate earned to their membership.

Maximizing rebates.

The groups role is to analyze the purchasing patterns of their members and use this information to negotiate programs that result in the maximum amount of rebate revenue.

For example, most suppliers separate their product into “items that are eligible for a rebate” and “items that are not”. A simple purchase percentage is then applied to rebateable items – for example 4% rebate on all eligible purchases, regardless of volume or SKU.

This is simple to negotiate and simple to track. The problem is that it leaves a lot on the table.

Not all product is the same. One product line may have a higher profit margin for the supplier than another. Given that a supplier wants to incentivise purchasing high profit margin items, wouldn’t it make sense to offer a higher rebate percentage on high profit margin items and a lower rebate percentage on low profit margin items? The net result could be higher gross rebates for your members.

Focusing on volume or growth incentive programs should result in increased rebates – especially combined with effective preferred supplier programs and monitoring purchase volume real time.

Rebate management software makes supplier negotiations easier and more effective.

The key to negotiating effective rebate programs is data. Groups need accurate and detailed purchase data of what their members are buying, from whom, when they are buying it, and for how much.

Groups need accurate and timely purchase data in an easily digestible form, delivered automatically without reliance on suppliers or members. This data should be delivered seamlessly real-time by the rebate management software used by the group.

Effective rebate management software must allow you to analyze purchase data, determine what products are being purchased more than others, what plateau levels are realistic, and what opportunities exist for product mix incentives. The software should also identify similar items sold by different suppliers and make recommendations of reducing the number of suppliers in order to increase rebate dollars.

Imagine entering a supplier negotiation knowing more about what your members have purchased than your suppliers do. Proper rebate management software makes that a reality.

Tracking rebates should be strategic and not administrative.

How does your group track rebates? Too often, groups rely on receiving purchasing reports from their suppliers to tell them what their members have bought.

There are many problems with this approach:

Supplier reports come too late. Typically a supplier will deliver purchase reports to a group 8 to 12 weeks after the fact, much too late for a group to do anything. Missed reaching a plateau level by $10K? Nothing you can do about it now.
Supplier reports are inaccurate. Suppliers often don’t have the ability to view individual businesses as part of a single group. They end up manually piecing together information from several different spreadsheets from different people into one, resulting in inaccuracies. Suppliers often have not invested in accurate rebate tracking software themselves, resulting in further inaccuracies.
Members don’t provide accurate data. Realizing that supplier data may be inaccurate, some groups rely on members to verify supplier reports. This adds work load to members, often resulting in time wasted following up on requests, reconciling member reports with supplier reports, and potentially confusing the numbers even more.
Managing rebates become an administrative task. This is the most dangerous trap for groups. Given how time consuming the process is and how ineffective it has been historically to impact rebates during a rebate cycle, groups become administrative bodies. The focus is on manually dealing with a huge number of supplier and member spreadsheets, manually consolidating and verifying data in order to come up with a somewhat accurate rebate payout for members.

Spending time administering rebates rather than managing them is wasteful in terms of labor costs, lost rebates, and opportunity costs of other value added programs. What other services could the group be providing their members if they weren’t spending so much time buried in rebate spreadsheets?

Effective rebate management software will free up a group so that they can start thinking strategically rather than administratively. This level of data is only available with real-time rebate management.

The concept of real-time rebate management.

Real-time rebate management is based on electronically capturing all invoices, debits, and credits from suppliers and using that data to calculate rebates earned down to the penny. This real-time data can be used to analyze current and historical purchasing patterns as well as forecast new trends, providing powerful information for negotiating, tracking, optimizing, and reconciling member and group rebates.

Creating an EDI-based marketplace in which suppliers send electronic invoices to members and members send electronic claims to suppliers. The accuracy of rebate processing depends entirely on the extent to which suppliers and members commit to the electronic exchange of trading documents.

The good news is that most suppliers recognize the efficiencies involved with EDI ordering and invoicing. Major suppliers already send electronic invoices to their customers so it will not be a major challenge to add your group to their network.

Once your EDI network has been established, you can begin making the switch to real-time processing. With the right software, you can begin this transition immediately, combining both after-the-fact reporting with real-time rebates as suppliers are rolled onto your EDI platform.

The move to real-time processing of rebates is a journey, and one that provides significant value at each stage. The end result is the building of a foundation that achieves the key objectives of rebate management: accurate reporting and strategic use of data.

Benefits

The benefits of real time rebate processing are significant and provide groups with a significant ROI in both operational savings and strategic advantage. Groups that have adopted this approach have experienced the following benefits.

This approach means groups will know when they are getting close to a plateau rebate level, allowing them time to reach out to members to enable them to make additional purchases, driving increased rebates from suppliers.
Item level reporting provides the opportunity for the group and their members to understand the true net-net item cost after all rebates have been taken into consideration. This information can be particularly helpful in both special order and special bid situations.
The real-time approach allows the group and members to gain control over rebates and not depend exclusively on supplier reporting, which is often late and subject to error.
Capturing invoices and calculating rebates in real-time, reduces the number of non-reported purchases, increasing the overall payout to members.
Because the group can report on rebates at the invoice line-item level, there is additional scope for creative rebate development, advanced rebate reconciliation and more effective rebate negotiations with suppliers.
Real-time rebates eliminate the need for members to audit their purchases; often a task that is time consuming and prone to error.
This approach provides the opportunity to track more creative rebates. For example, suppliers may offer rebates for very specific product categories which they wish to strategically market to the members, or for categories that have higher gross profit margins and consequently there is the ability to provide greater rebates.
This information shifts the power of knowledge from the supplier to the group, in rebate program negotiations.

Groups need rebate management software designed specifically for a group environment.

Buying groups and purchasing cooperatives are unique and require unique software. LBMX understands these unique needs since they have been focusing on providing software, services, and other technology for over twenty years. In fact, through consulting with groups large and small around the globe, active participation in cooperative associations including the NCBA CLUSA, the Business Council of Co-operatives and Mutuals, Cooperative Business New Zealand, and through hosting the largest annual global conference on group purchasing, LBMX has had a hand in writing the best practices for group rebate management.

Not all rebate management software works within a group environment. Often they do not provide functionality for paying out rebates to members, taking deductions, creating accurate rebate statements, or prepaying rebates to key members.

Beware of rebate software that simply promises to simplify your after-the-fact supplier reporting processes. Without real-time invoice data, these types of solutions bring the same mistakes and misreporting as your old spreadsheet system does. They do not provide you with actionable data that can make a significant increase in your members’ rebates.

A second trap groups fall into is the belief that they need to create their own rebate management software. They believe that because of their uniqueness, they need custom software. This may work in the short term but has serious long-term disadvantages. Software needs constant updates, making it more expensive than you think. Custom software rarely solves the problem with after-the-fact reporting. Custom solutions typically create a dependency on a single person within the group to maintain and operate it, resulting in significant problems should this person ever leave.

Groups need a real-time rebate solution created specifically for buying groups and purchasing cooperatives by someone with expertise in creating an electronic data interchange (EDI) marketplace.

The key to success

The key ingredient for success in real-time rebate management is for groups to secure the cooperation and participation of their suppliers to send electronic invoices. If groups do not have the will to ensure suppliers provide electronic invoices, members will become islands in an ever-increasing connected world. It is challenging to understand why boards do not demand their suppliers provide the same service they are providing their corporate competitors. Groups that acquiesce on this responsibility are not providing the leadership their members need to survive.

Time is money, and when it comes to rebates, real-time is more money in your members’ pockets.

Monetizing Data Within Your Buying Group

By Steve_Seguin

On October 30, 2020

In Strategy

Your buying group is sitting on an oil field. In 2006, Clive Humby, architect of the Tesco Clubcard, a supermarket reward program, declared that “data is the new oil”. He went on to say, “it’s valuable, but if unrefined it cannot really be used.”

How valuable is it? According to one study by MarketsandMarkets, the global data monetization market is expected to grow from 2.3 billion USD in 2020 to 6.1 billion USD by 2025.

Data monetization strategies fall into two general categories. Direct revenue – selling direct access to your data to third parties – and indirect revenue – using refined data to improve supply chain performance, understand customer behaviour to drive sales, predict trends, and highlight how to save costs, avoid risk and streamline operations.

So what is your group’s data strategy? Do you even have one?

The first step in any buying group’s data strategy is accumulating the data. A centralized EDI program, such as the one offered by LBMX, allows groups to capture live supply chain data as electronic invoices, purchase orders, purchase order confirmations, and other documents flow through the group’s database. Nightly feeds from member POS systems can provide valuable sales data. Group-sponsored e-commerce sites can supplement sales data while also capturing customer information. Companies like CoMetrics provide tools to survey members on key metrics and provide benchmarking information across groups.

Admittedly, these approaches are simple, but they are not easy. Until they see the benefits, independent members may be reluctant to share their data. Clearly defining your group’s data strategy, including what data you are capturing and how you will use it, will go a long way in reducing member concerns. The key is to get started. As the proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.”

Keep in mind, though, that it isn’t just about collecting information. It’s the ability to do something with it that solves specific problems that is important. It’s critical to really understand the data in order to see potential new opportunities, how to achieve them, and if they’re sustainable and efficient.

Do you even need a data strategy? Organizations that aren’t maximizing the value from enriching data are missing out on opportunities to grow, optimize, and manage risk. Your savviest members will have their own data strategies and will be hungry for the additional data you can provide. Your suppliers are likely doing everything they can to accumulate data within your sector. Competing groups will be employing their own data strategies as a market advantage. Your corporate competitors have been doing this for years. If you don’t begin to make use of your data to help your members, you can guarantee there are others actively using their data against them.

What do you do with the data?

In order to make use of or monetize your data, groups must identify the biggest opportunities your data can provide. For example, a partial list of opportunities for your group include:

Refining and enriching your group’s data and providing it to your members, either free or as a paid service
Analyzing the performance of specific product categories and suppliers to increase rebate revenues
Identifying product demand and analyze supply chain documents to see which suppliers are out of stock in order to make sure members have the stock they need to drive sales
Implementing predictive analytics to make intelligent forecasts about geographic market trends, pricing, product demands, and customer behaviour.
Providing strategic marketing and loyalty programs within your group.
Boosting levels of cooperation between manufacturers, vendors, and your members, resulting in cost savings throughout the entire supply chain.
Selling data – with a keen eye towards data security and privacy rights – to other companies.

The data buying groups hold is uniquely valuable, as it provides a holistic view of the market that suppliers, members, and customers do not have. There are challenges around security, privacy, and competitive concerns that need to be addressed before data can be monetized. These challenges are surmountable and can be addressed by developing and communicating a transparent data strategy with your members.

If you don’t begin taking advantage of this growth opportunity, you can guarantee that someone else will.

Spend Analysis and Rebate Negotiations for Buying Groups

By Steve_Seguin

On July 9, 2020

In Strategy

Do you know how much, and how often, your members spend with a specific supplier? The answer to that question is key to negotiating a fair and realistic vendor buying agreement with your vendors. When it comes to supplier negotiations, the power balance in the supplier/group relationship has always favored the former. For groups looking to optimize their members’ rebates, vendor spend analysis data is key to the success in re-balancing that equation.

Most buying groups and purchasing cooperatives lack comprehensive real-time insights into what their members’ purchase. The same is often true of your suppliers – they often don’t recognize the full buying power of your group. That’s why accurately presenting spend analysis data is vital to improve buying groups’ negotiation of supplier contracts as well as improve their relationships with suppliers.

What is Spend Analysis?

Basically, spend analysis is the process of collecting, cleansing, classifying, and analyzing all available spending data that results in a better understanding of how money is spent in the procurement of products. It is considered to be the fundamental foundation of sourcing.

Spend analysis attempts to answer:

· What are members buying?

· Who are they buying it from?

· Which members are buying it?

· How often do they buy it?

· When did they buy it?

· How much did they pay?

· How much rebate did your members and your group earn?

· Is the group and its members getting what they were promised?

· How does the data compare to previous years?

Sources of Spend Analysis Data

Typically buying groups and purchasing cooperatives are reliant on after-the-fact reports submitted manually by either suppliers or members. This often results in missing or inaccurate data.

The best source of purchasing data is invoice data routed electronically through the group’s databases via EDI. Central bill groups have an advantage of having easier access to this data, but it is possible – and advisable – for direct bill groups to have invoice data routed through their system as well. Note that invoice data, not purchase order data, is key for accuracy.

While invoice information provides the most accurate information, claims, remittance advices, advance shipping notices, and other supply chain documents, when captured electronically are useful supplements.

Spend Categories

A spend category is the logical grouping of similar items. For example, “power tools” may be considered a spend category. To be effective in a buying group, spend categories must apply across members.

Once spend categories are set up, line items on invoices that flow through the group must be assigned to appropriate spend categories. Preferably, this task should be automated with the help of product inventory management (PIM) software.

Once invoice data has been collected, cleansed, and categorized at the line item level, procurement data may be sliced and diced based on a number of key performance indicators (KPIs). Some of the most common metrics include:

· Spend by category

· Number of suppliers by category

· Number of transactions by category

· Average purchase order value

· Spending distribution of key members

· Total expenditure by supplier

· Payment terms and conditions

· Rate of payment

· Number and dollar value of claims or returns

· Frequency of out of stocks

· Average delivery time by category

Using Spend Analysis

Successful, long-term negotiations and relationships must be strategic. Too often, I hear horror stories of groups enter less-than-favourable supplier contracts because they don’t realize how much their members are buying or they enter negotiations with a “hunch” rather that data-backed reasoning.

Using accurate spend analysis data buying groups can re-establish their leverage with suppliers. Done correctly, you may find that you have more information about your members’ buying habits than your suppliers do.

Crucially, spend analysis is most effective when comparing suppliers with competing suppliers within the same category. This is information your suppliers do not have, giving you a clear advantage. Understanding your alternatives, and strategically inserting them into the negotiation process adds more leverage to the buying group.

Managing supplier relationships and keeping them win-win is often key to a buying group’s success. Spend analysis is not just competitive, but collaborative. Sharing data where appropriate helps to establish your group’s credibility and trust.

In short, spend analysis should be a vital aspect of the negotiation of supplier contracts and the maintenance of positive and mutually beneficial vendor relationships. Buying groups need to overcome their lack of comprehensive data through the adoption of EDI as well as analytics tools such as the LBMX Solution Centre. With a proper, automated, and real-time supplier spend analysis process in place, buying groups can ensure that they have the best preferred vendors for each spend category with optimized terms and rebate programs for their members.

Six Ways your Members can Beat Amazon in Online B2B

By Steve_Seguin

On June 10, 2020

In Strategy

Amazon Business continues to disrupt distribution and is expected to reach $52 billion in sales by 2023. The Coronavirus pandemic has further shifted B2B traffic to Amazon and pointed out the shortcomings of many independent online distributors. Since selling their products directly on Amazon Business ultimately results in weak customer loyalty and fractionalized sales, independent distributors must form their own online marketplaces to succeed.

But how can independents compete against online B2B giants like Amazon Business, Alibaba, and eBay? Here are 6 ways your members can succeed in the B2B e-commerce marketplace:

1. Focus on a specific vertical.

Amazon Business is a multi-category marketplace, typically offering commodity products that are easy to store, pack, and ship. To compete, independents need to dominate a vertical-specific marketplace, rather than attempting to co-exist in a multi-category marketplace. Specializing in a specific vertical allows independents to offer a comprehensive selection of products, typically with lower prices and better price transparency.

However, if there can only be one or two dominant players in any given vertical, how can the majority of independents succeed? This is where buying groups can step in. Buying groups with the vision of becoming the dominant marketplace player within their vertical can create a platform where all of their members can flourish.

2. Mine the data.

An e-commerce site’s data offers invaluable insights into customer activity that can be used to constantly improve traffic and sales. What paths do customers use to navigate your site? Traffic patterns may suggest new products or cross-promotional opportunities.

3. Service your customers.

As a successful independent, you know your product and your customers better than any multi-category marketplace. Make it easy for customers to ask questions. Don’t just rely on FAQs or online manuals. Integrate online chat – with a trained service rep and not an automated chatbot. Call your customers to answer questions rather than relying on email. Offer technical support.

4. Make it easy.

Make it super simple to do business with you. For online marketplaces, search is king – if your customers can’t find it, they can’t buy it. Pair every product with images and videos to reduce confusion and enhance product descriptions. Optimize site speed. Provide charge accounts and invoice options. Save past orders, and make re-ordering as easy as one or two clicks. Track when certain products were purchased, and pro-actively remind customers of maintenance parts.

5. Reduce total costs.

Reducing costs for customers doesn’t always mean lowering prices. Localized product inventory and efficient cross-border fulfillment can save customers time and money. Look for other ways to reduce shipping costs. Offer rebate incentives to guide buyers to specific categories or to reward large customers without jeopardizing street prices.

6. Don’t forget the underserved.

Amazon focuses on large customers who buy commodity products and who ask few questions. Independent marketplaces can serve smaller, irregular customers whose purchases add up.

The stakes are high for independents. The trick is to not emulate Amazon Business. Independents will succeed by combining the knowledge, service, and passion independents bring to traditional distribution with new online tools and strategies. Buying groups can play a role by educating members and by offering relevant shared services.

One POS to Rule Them All?

By Steve_Seguin

On March 30, 2020

In Strategy, Technology

Wouldn’t life be easier if all of your members used the same POS and ERP system? Your purchasing cooperative could more easily capture sales data. You could more easily create customizations specific to your group. You could create training materials and best practices for your members.

Why wouldn’t every group want to adopt a common software system?

There are some downsides, however.

It may be difficult finding one system that satisfies all of your members. Smaller members have different needs and budgets than larger members. Some members focus more on B2B sales and others B2C. Some member-distributors belong to more than one vertical (and more than one buying group). Some members have a stronger need for eCommerce than others.

Even if there is a suitable system for everyone, it can be dangerous putting all of your eggs in one basket. Just like you wouldn’t rely on a single supplier for key products, you shouldn’t make your membership vulnerable to a single software provider. Costs and customer service change. Companies go out of business. A little competition is healthy.

Given the above, some groups attempt to create their own POS software, specific to their coop. On the surface, this seems to eliminate problems of cost and customer service while providing your members exactly what they need. Unfortunately, buying groups are not software companies and most such initiatives are doomed to failure – especially once employee turnover occurs.

Requiring a single POS or ERP system may also inhibit adding new members. Changing systems is expensive and disruptive, adding another barrier to joining your group. Invariably, exceptions get made for certain new members, defeating the purpose of a single system.

The nature of purchasing cooperatives and their independent members goes against the idea of a group-imposed software system. Members tend to be fiercely independent. It’s their biggest strength (and their biggest weakness). They know what is best for their business.

So what should a purchasing cooperative do?

Start by surveying your members and identify which POS/ERP systems they use, what they like about them, and what they dislike.

Next identify not only the functionality that your members need, but also the functionality that will advance your coop’s initiatives. This functionality should include:

· EDI capability. You will want all of your members invoices flowing electronically through your group so that you can accurately track rebates, assess preferred vendors, negotiate event buys, etc. You will also want electronic ordering to gain extra rebate revenue. Inexpensive integrations with your members’ ERP systems are crucial.

· Data feeds. As is commonly said, data is the new oil. If you can capture members’ sales data, you can more effectively run your group. Equally as important as getting data out of the system is getting data in. Do you intend to use a common PIM and send product data to your members?

· Common product numbers and product hierarchies. As a group, you can’t compare member category performance if your members use different product numbers or assign those products to a different merchandise hierarchy. Members will be reluctant to adopt a common taxonomy (see above comments regarding independence). However, a good system will allow you to assign a second product number and category in alternate fields. Make sure these fields are included in the sales data fields.

· Support for the group’s private label credit card or loyalty cards. Does your group accept Airmiles? Do you have a branded credit card? Make sure your members’ POS systems support it without manual keying.

Once you have your list of must-have functionality as well as your list of most common providers, treat them like you would any of your preferred suppliers. Negotiate a vendor buying agreement that includes costs, terms, and levels of service. Establish a rebate program. Work towards reducing the list down to 3 or 4 providers (as opposed to one) like you would in any other product category.

Remember, access to your annual or semi-annual shows is important to POS providers. It’s a key time for them to connect with their customers and generate revenue. Restrict access to these shows to preferred software providers.

Most importantly, make your list of functionality a requirement of becoming a preferred supplier. If a provider does not commit to providing the functionality you need, remove them from the list. There may be times where you need software customizations very specific to your group, and you may be required to pay for them. It will be more cost-effective negotiating on behalf of your members than for your members to do it themselves.

Make sure you maintain active relationships with your software providers. Include them in communications you would provide all of your other vendors. Take the time to understand their product and assign them scorecards like any other supplier.

By setting up a strict preferred supplier program with a small number of POS/ERP providers, your buying group can attain many of the same benefits as having a single provider without the risks.

Members Can’t Beat Amazon; Groups Can (Part 3 of 3)

By Steve_Seguin

On March 27, 2020

In Selling Cooperatives, Strategy, Technology

This is part three of a three part series. Part one outlined Amazon Business’s platform model and how the traditional strategies of member-distributors will not be competitive. Part two proposed a buying group-based strategy to compete through the creation of a new marketplace owned jointly by the membership. In part three, below, I outline more specific features of a marketplace allowing you to compete against Amazon.

Recreating Amazon’s marketplace is a sure route to failure. Sure, there are elements worth adopting – powerful search, user reviews, simple check out procedures, etc. – but rather than emulating Amazon, focus on your member-distributor’s strengths and Amazon’s weaknesses.

Amazon thrives in two areas – product information and data collection. While Amazon knows their customers, they do not know their customer’s business. Amazon doesn’t have the same level of expertise as your members do. Amazon doesn’t have your reputation and relationships within the marketplace.

A group-driven marketplace should include the following features:

1. B2C User Experience

Millennials will make up the majority of marketplace users, and they want their experience to be identical to their B2C shopping experience. An intuitive and user-friendly experience is a must. Personalization and predictive ordering are a must.

2. Helpful Product Content

The best way to attract more web traffic is to add more content and more helpful guidance to every product on your site. Create a blog where you discuss business topics of real concern to the people who use your products.

3. Offer Unique Products

Offer products that Amazon does not. This could be as simple as bundling a number of related products into a kit with a lower total price, or it could mean creating private label versions of existing high margin products.

4. Strong Customer Service

Customer service in the B2B world means solving problems. Dedicate knowledgeable sales reps who know their buyers and products to your site. Provide human touch points. Provide multi-location logistics. Strong customer service should not be anything new for your members – figure out how you can apply what your members already do to the web. Amazon cannot compete with a human experience.

5. Build a Hybrid Marketplace

B2B customers will always require an experience that includes both full service and online capabilities. Build a bridge between the online and offline worlds.

6. Maximize Your Data

Route your eCommerce data into a good business intelligence tool that will help you understand what is working and what does not.

7. Think About the Full Customer Experience

B2B eCommerce is not all about ordering products. How do your customers create claims? How do they deal with payment issues? Where do they discuss terms? Are they eligible for rebates? Where can they receive training? Are there product shows that they can attend? Make sure your marketplace makes the full customer experience a rich one.

The key to competing against Amazon is to bring the natural strengths of your member-distributors to the online world. A central group, owned by the members, can provide the leadership, guidance, and operational staff to creating a marketplace where members can compete on a level playing field.

Members Can’t Beat Amazon; Groups Can (Part 2 of 3)

By Steve_Seguin

On March 26, 2020

In Strategy, Technology

This is part two of a three part series. Part one outlined Amazon Business’s platform model and how the traditional strategies of member-distributors will not be competitive. In part two, below, I outline a buying group-based strategy to compete.

The B2B ecommerce stakes are high. Global B2B ecommerce sales are predicted to reach $3 trillion by 2024. Independent distributors, largely, have come late to the game, and their dual strategies of digital innovation and acquisitions are failing against the platform business model used by Amazon and others.

As described in part one of this article, the key to competing with Amazon is understanding their business model. Amazon’s platform allows Amazon to focus on selling a relatively small number of high volume items while leaving the rest to other suppliers on their platform. This model creates unprecedented depth to their catalogue of products while driving higher margins.

Individual distributors cannot compete with Amazon’s catalogue depth or create their own platform.

This is where purchasing co-operatives can step in.

Or, more specifically, sales co-operatives.

The idea of a sales co-operative is to take the notion of “one member, one vote” from the purchasing realm and apply it to selling online. Distributors in various industries could join together in a jointly funded initiative that can beat Amazon at the B2B game. Independents could leverage their strengths – services, customer relations, and product knowledge – in a way that Amazon could not.

Amazon is a generalist B2B marketplace. Given the size and fragmentation within B2B distribution industries, an opportunity exists for vertical-specific marketplaces. Groups – whether purchasing co-ops, buying groups, or sales co-ops – can take Amazon’s recipe for a marketplace and turn it to their members’ advantage.

It’s important to remember that a marketplace is not just a piece of technology. A marketplace is a business model. It creates value by bringing together distributors and consumers. Scale comes from growing an external network.

Adapting the purchasing co-operative model to build a niche marketplace would allow individual distributors to leverage their numbers and achieve an economy of scale necessary in the creation of a national marketplace. The sales co-operative could provide the technology and the staff to maintain the platform. It could gather the product information needed to populate the marketplace. It could drive the high standards necessary for such a marketplace to be competitive.

Most importantly, individual distributors could still compete against each other based on their own strengths, but on a level playing field.

Members Can’t Beat Amazon; Groups Can (Part 1 of 3)

By Steve_Seguin

On March 25, 2020

In Selling Cooperatives, Strategy

Independent member-distributors will not be able to beat Amazon in B2B e-commerce. There, I said it. Sure, they may be able to compete short term against Amazon, Wal-Mart, Wish, Houzz, or any of the other giant marketplaces vying to dominate the playing field, but they can’t win this battle alone in the long run.

It shouldn’t surprise you that B2B e-commerce is on the rise. According to research data from Forrester, e-commerce will make up about $780 billion in B2B sales – about 9% of all B2B sales – in 2019. They are predicted to reach $3 trillion globally by 2024.

This trend is as much of a threat as it is an opportunity for your member-distributors.

The most disruptive trends in the B2B environment of the last three years have all been related to the rise of B2B eCommerce:

Digital Shift. Competitors and customers have moved online, and customer expectations have evolved
Amazon and other Marketplaces. These marketplaces want your data and your customers
Disintermediation. Manufacturers and customers are increasingly trying to remove the middleman

In general, member-distributors, if they have responded at all, have responded with two strategies – digital innovation and mergers and acquisitions. Unfortunately, neither of these strategies can work without a true understanding of Amazon’s B2B marketplace and its threat to the independent.

First, some history. Amazon’s original foray into B2B distribution did not look like it does today. In 2012, their first attempt to enter this market took the form of Amazon Supply. Amazon Supply followed a traditional linear business model where Amazon owned all the inventory it sold. This approach ultimately failed because it could not compete on price.

Learning from their mistakes, in 2015 Amazon launched Amazon Business, a true B2B marketplace. Disruption since then has been swift, and distributors have struggled to respond.

Why haven’t independents been able to respond and gain their footing in the digital world?

Member-distributors all too often answer this question with their own fatalistic question: “How can we compete against someone as big and as technologically sophisticated as Amazon?”

This question, as well as the strategies of digital innovation and acquisitions, are blind to the biggest reason for Amazon Business’s success. Many distributors have built web- and app-based B2B portals rivaling Amazon in sophistication which have nevertheless been unable to compete with Amazon.

Amazon isn’t winning the B2B war because of their size or their technology. They are winning because of their platform business model.

Amazon Business is a B2B marketplace, or platform, that connects buyers and sellers, taking a commission on every sale. This model has allowed Amazon to grow exponentially since each new producer and consumer increases the value of the marketplace for other users.

Distributors who simply migrate their existing linear business model to the web or who acquire a new location (within the same vertical or an adjacent one) fail to understand the crux of Amazon’s threat.

In part two of this article, I will outline a strategy for buying groups and purchasing co-operatives that would allow their independent member-distributors to successfully compete against Amazon and other platform providers.

Are You Ready for “Group 2.0”? A New Identity for Buying Groups

By Steve_Seguin

On September 17, 2019

In Strategy

Your buying group is a technology company, and if it isn’t, it should be.

The hard truth is that, at this very moment, your group and your members are being disrupted. Business disruption is the new normal – it’s a reality that organizations face on a regular basis. The source of this disruption is the rapid advancement of technology and globalization, which allows new business models to be introduced at an ever-increasing rate and with rapidly decreasing costs.

There was a time when the primary role of buying groups was negotiation and administration. Technology was simple – Excel, a small accounting package, and an outsourced web site. Tech was treated as a cost center rather than as a source of competitive advantage.

Imagine Starting Over

Ask yourself, if you were starting a group of independents today and had technology bred into your bones, what would your group look like? Would you focus on negotiating rebates? On operational efficiencies? Or would you emphasize increasing sales, enlarging a customer base, and entering new revenue channels?

While the rest of the business world has gone through a technological upheaval, far too many independents have failed to embrace technology. How many of your members have a strong online presence? How many can sell to and service their customers online? How many have created specific teams for expanding online relationships and sales?

Most importantly, as a group leader, do you see these shortcomings as a downfall or as an opportunity?

Is there a model for groups of independents focused on selling that will disrupt the traditional buying group model? In other articles, I have argued for the creation of “sales cooperatives” that use the underlying principles of purchasing cooperatives but focus on revenue creation.

How would thinking of your group as a technology platform change the way you and your members act?

What if you assumed your members were virtual members rather than physical locations?

What if you embraced technology as your competitive advantage?

These are the types of questions you, your board of directors, and your members should be asking yourselves. “It’s the group’s job to do for it’s members what it’s members can’t do for themselves,” insists Jack Bailey, former president of IBC-USA – a sentiment he, in turn, attributes to Howard Brodsky, co-founder of CCA Global Partners. In today’s age, this means providing guidance and accessibility to technology.

Group 2.0

Just like the phrase “Web 2.0” marked a distinct turning point in how the Internet was used, the phrase “Group 2.0” represents a fundamental shift in thinking about how members think of their buying group. New members, having grown up with Amazon, Spotify, and Facebook will demand a new philosophy.

Bestselling author Josh Linkner insists, “We can no longer rely on the past as a game plan for winning. Deliberate disruption is the only path to sustainable growth and success.”

In other words, disrupt or be disrupted.

What can your buying group learn from Toys R Us?

By Steve_Seguin

On March 23, 2018

In Strategy

I’ve been watching the fall of Toys R Us with mixed feelings. In my twenties, I worked for a multi-location independent toy store. Despite doing everything right – competing on service, offering innovative product lines not available elsewhere, and keeping up with technology trends – the stores eventually buckled under competition from the reigning category killer at the time, Toys R Us.

Now the corporate giant Toys R Us, which went into bankruptcy last September, has begun the liquidation process, and 30,000 jobs are at risk. The reasons behind the demise of Toys R Us present an interesting lesson for buying groups.

Why did Toys R Us Fail?

Contrary to first impressions, increased competition from Amazon did not put the nail in the toy chain’s coffin. Toys R Us still had 15% of the U.S. toy chain market. Yes, Amazon had an effect, like it has on all industries. But Amazon alone didn’t kill the category killer.

Toys R Us suffered from poor financial decisions coupled with an unwillingness to adapt their business model with changes in the industry. Increased competition from Walmart and declining profitability opened the door to a debt-financed takeover by KKR and Bain Capital in 2005.

With any debt-financed takeover, the main strategy is to improve cash flow by cutting costs so that the interest can be paid. In other words, the new ownership team took their focus off the marketplace, making them unaware of key changes taking place.

Rather than wanting toys, kids wanted electronics and apps. Like the rest of us, they craved experiences rather than possessions. The toy chain was now competing against Best Buy, the Apple store, trampoline parks, and laser tag. While they should have been reinvigorating their shopping experience with interactive displays and magical shopping environments (like the LEGO store, for example), their stores remained mundane and unwelcoming.

To make matters worse, declining retail real estate prices crippled the chain’s strategy of selling off key assets to pay off their debt.

Lessons learned

The lesson of Toys R Us is how the wrong financial decisions can doom your members and your group. How changes in the market can doom an old business model, leaving you unable to compete.

To succeed, independents need both the resources and the strategic vision to invest in change, otherwise they will lose relevancy like Toys R Us, Circuit City, and Borders.

This is where your buying group comes in. What kind of strategic leadership are you offering your members? How are you providing cost-effective resources critical to keeping your members current in the marketplace? How do you predict the changes that are going to disrupt your industry? What is your role do you take with financial planning for your members?