Technology can be a game changer.
Technology is making it easier and easier for independents to connect with distributors in ways that drive down costs for each party, which in turn increases margins. For example, more and more web sites are appearing that are designed to facilitate B2B ordering. Sites like www.stockinthechannel.com, which claims to be the largest search engine for IT re-sellers, manufacturers and distributors, hope to transform the supply chain by making it possible for all independents to buy their product in one location, without having to belong to a buying group or purchasing cooperative.
If technology exists to facilitate B2B ordering at lower prices, are traditional purchasing cooperatives still relevant? Why pay to join a coop if you can simply go to a site and do all of your ordering at comparable margins?
There are quite a few reasons, actually. It is worth noting that B2B sites typically do not understand the nuances of the independent buying model. I’ve seen a lot of tech outsiders come in, trying to adapt a corporate B2B model to the independent model, and it never works.
The Drawbacks
The biggest mistake is focusing on cost rather than on a model that includes rebates. They don’t understand that vendors are reluctant to lower costs because that tends to lower the street price of their product. Think about it. A large independent is competing against big boxes, often on price. It would be very tempting to take advantage of a lower cost to reduce their list price to beat their competition. Their competitors would respond by negotiating a similar cost reduction and lowering their own prices. If this happens on a large enough scale, the reduced price becomes the permanent street price. This example is simplistic, but illustrative.
That’s why vendors prefer to offer after-the-fact rebates. They can pay a monthly, quarterly, or annual payment based on the purchases of the re-seller. It is often difficult to trace this lump rebate back to specific products, making it difficult to assign cost and adjust street prices.
In addition to protecting their street prices, rebates have the advantage of being based on actual purchases. Negotiations around cost are based on what the re-seller thinks they will buy; rebates are based on what they actually bought.
Because of this last point, a higher upfront cost combined with a strong after-the-fact rebate will result in better overall margins from vendors.
The B2B sites don’t get this fact, probably because they view the ordering process as a technical problem to solve. They haven’t invested the time to understand the commercial ecosystem they are trying to market to.
This lack of understanding of the world of independents manifests itself in other ways as well. Most of these technology companies have visions of corporate sales which do not apply to independents. Independents are often reluctant to change their procedures and suspicious to new technology, even when offered free. Many of the hardware stores I sold POS systems to in Canada did not even have high-speed internet. And while they may belong to a group, the group can’t make a sales decision for them.
The sales cycle for new technology is one lengthy sale after another, a fact that tech companies don’t appreciate until it’s too late. I’ve seen far too many tech companies leave the independent B2B market because of this slow sales cycle.
So the purchasing cooperative model still has a viable place despite the rise of B2B technology companies looking to work directly with independents. But it is vital that coops establish themselves in the minds of their members and vendors and clearly demonstrate the value they add when it comes to technology.
What can groups do?
How can they do this?
Buying groups and purchasing cooperatives need to recognize they must do more than just negotiate prices on goods sold. They must add value through marketing programs, administrative functions, product education, group benefits packages, HR tools, and a host of other functions.
As part of their offering to members, groups need a robust technology offering for their members. The people who run buying groups should keep up with industry trends and mentor their members about how technology can be used in their businesses. They should be involved enough to help members make the right tech choices, while making sure those choices strengthen the group rather than weaken it. Groups should also use their buying power to negotiate better pricing and rebates for the technology purchased by their members.
Most importantly, groups need to invest in their own technology to compete with these start ups. Technology that is relevant to the robust ecosystem of independent businesses, an ecosystem where buying groups are still very relevant.