Buying groups and purchasing coops – what is your group’s strategy for increasing member loyalty? Loyalty is defined as feelings of support or duty towards someone or something. Like communication, it is a two-way street. Your members’ loyalty can be expressed verbally – such as objecting to negative comments about the group made by other members. Loyalty can also be expressed through behaviour – such as sharing best practices with other members. The strongest groups I’ve worked with all have one thing in common: their members describe the group and the other members as family. What are you doing to foster that sense of family?
Category: Purchasing Coop 101
A purchasing cooperative is a member-owned, member-controlled organization devoted to purchasing and other supply-chain issues. Traditionally, purchasing cooperatives help their members lower their costs by aggregating their collective purchasing power, thus keeping them competitive with larger competitors.
In simple terms, independent businesses within a common vertical – such as HVAC distribution, restaurant supply, building materials retail, flooring retail, electrical distribution, etc. – come together to negotiate collectively with their suppliers. By negotiating collectively, each business effectively approaches each of their suppliers not with their own individual purchasing power, but with the purchasing power of the sum of the cooperative’s members.
For example, a “mom and pop” sporting goods store on its own does not purchase enough product to get the same deal from their suppliers as a national retailer. However, if all of the “mom and pop” sporting goods stores across the country combine their purchasing power, collectively they can negotiate a better deal with their suppliers. This allows them to be competitive with national retailers while still retaining their independence.
There are four key concepts here:
- A purchasing cooperative consists of independent members. This means that each member runs their own business the way that they see fit. Unlike franchises, they do not have to operate under a specific brand name, they can operate under their own procedures using any software systems they want to, they do not have to report their sales to the purchasing cooperative, and they can choose to leave the coop at any time. They are under no obligation to follow any of the guidelines of the cooperative, and they can even choose to ignore the supplier deals negotiated by the purchasing coop. In short, they remain completely independent.
- Purchasing cooperatives are member owned. Typically, each member owns one share – and one share only – of the purchasing coop. Every member has an equal vote in how the cooperative is run. This means that the smallest volume member has the same voice as the largest volume member. Because the cooperative is owned by the members, the cooperative itself does not have a goal of making a profit. Administrative costs are met, and funds are raised to provide various programs and services to members, but otherwise any revenue raised by the coop is returned to its members, usually in the form of rebates based on usage.
- Revenue generated by the purchasing cooperative is returned to the members, based on usage. One of they key outcomes of cooperative purchasing is a dividend from suppliers in the form of rebates. Rather than lower the list price of individual products, suppliers will negotiate a rebate with the cooperative and its members. While complexity and variety exists, in its simplest form a rebate is a reimbursement of a percentage of the purchases made throughout the year. For example, a supplier may pay back 5% of all purchase dollars spent by a cooperative’s members. This achieves the result of lowering merchandise costs based on actual purchases and not on promised purchases. Rebates are paid back to a cooperative’s members based on each member’s share of the purchases included within the rebate. The purchasing cooperative often holds back a portion of these rebates to fund the coop’s operating expenses.
- Cooperative purchasing is not price fixing. Purchasing cooperatives negotiate purchasing terms, not selling prices. Price fixing is illegal, and purchasing cooperatives must be vigilant in avoiding the appearance of impropriety here. Members benefit from reduced costs of the goods they sell, but they are free to sell those goods at any prices they wish to.
There are three broad functions of purchasing cooperatives: negotiating purchase agreements, marketing products, and providing services. As purchasing cooperatives mature, they often provide additional functions and services. Howard Brodsky, CEO of CCA Global Partners, one of the largest purchasing cooperatives in North America, once said, “It is the job of the cooperative to do for the members what the members can’t do for themselves.” In addition to aggregating purchasing power, CCA provides marketing, insurance, financing, and other services to its members.
It should be noted that for-profit buying groups exist that operate similarly to purchasing cooperatives. The main difference is that a buying group is not owned under the “one member, one share” model. Buying groups are owned by a private party who intends to generate a profit by operating the group. Despite this key difference, the operational challenges and strategies of a buying group are identical to those of a purchasing cooperative, and the terms “buying group” and “purchasing cooperative” often get used interchangeably.
Purchasing cooperatives provide a way for regional independent businesses to remain competitive with national corporate entities while retaining their independence and entrepreneurial spirit. Within a coop, members have an equal voice in controlling their future.