How do buying groups make money?

[MrMonster]

Hi all,

I’ve previously used UKBF but some time ago and myself and a partner are looking to go into business but had a few questions we cannot answer through researching the web so hoping someone could help.

We’re looking to start a membership based buying group where we will negotiate deals on behalf of business in order to help them lower costs by increasing buying power.

We aim to monetise it through a modest monthly/annual fee but also negotiate a small rebate/return into our deals with suppliers.

The issue we’re struggling to get around is how to make it work without tour members purchasing goods through our account as we do not have enough capital to offer lines of credit to our members.

How do buying groups tend to make money? Is it how we have planned to? Or are we missing something?

I can’t give much more away than this but we’re hoping to launch in June this year.

Many thanks

 

[NickGrogan]

So members are paying you twice, once to be a member and again on all deals?

 

[Mr D]

Charge an up front subscription cost per year.
To make it worthwhile its up to members to buy from the deals on offer / discounts you negotiate.

Marketing costs won't be too bad, a targeted buying group shouldn't need many members to make it work.

 

[MrMonster]

So members are paying you twice, once to be a member and again on all deals?

Hi

Apologies if I didn’t make it clear Nick.

Members pay either an annual fee or a monthly fee to have access to our deals, the suppliers we negotiate deals with will pay us a small commission. This way it encourages us to encourage our members to purchase from these suppliers

 

[MrMonster]

Charge an up front subscription cost per year.
To make it worthwhile its up to members to buy from the deals on offer / discounts you negotiate.

Marketing costs won't be too bad, a targeted buying group shouldn't need many members to make it work.

Hi Mr d!

Exactly what we’ll do, a yearly fee but it can be broken into monthly fees plus a little interest or £200 a year or £20 per month.

The small commission we’ll earn from suppliers will ensure that we encourage our members to use them once we’ve made a deal. This way the suppliers have faith we’re doing what we said because it has a financial benefit to us too.

Marketing costs are minimal, a strong cold calling and some word of mouth to gain some capital.

Without mentioning the industry, do you believe this is a viable business proposition?

 

[menetworkjadaltd]

So you only promote the suppliers that pay you rather than the suppliers that provide the best value to your members?

 

[MrMonster]

So you only promote the suppliers that pay you rather than the suppliers that provide the best value to your members?

No that wouldn’t necessarily be the case. It’s just a way to bolster income. The main priority is to get the best deals for our members but a £20/30 monthly fee would take an awful lot of members to generate some good profits. Which is why we considered the commission as a second source of revenue. We plan on making it a social enterprise where our members meet once a year at events and make it a real enjoyable group to be apart of as well as making your business more profitable.

But that’s exactly why i’ve asked on UKBF, for questions we hadn’t considered yet.

 

[redigo.]

Its hard to offer advice without knowing the industry. Would be interested know what industry it is

 

[MrMonster]

Its hard to offer advice without knowing the industry. Would be interested know what industry it is

Hi redigo,

I fully understand but at present there is no one in our industry doing this and barriers to entry are relatively minimal so I can’t give away too much as neither of us can start the venture until June and I’d hate to lose the opportunity as we’re both very excited.

There is several in the USA and 2 in Australia that seemed to be doing very well so it’s a proven model in other markets and the uk has a very similar market too.

I might be able to answer any questions you have though??

 

[Mr D]

Hi Mr d!

Exactly what we’ll do, a yearly fee but it can be broken into monthly fees plus a little interest or £200 a year or £20 per month.

The small commission we’ll earn from suppliers will ensure that we encourage our members to use them once we’ve made a deal. This way the suppliers have faith we’re doing what we said because it has a financial benefit to us too.

Marketing costs are minimal, a strong cold calling and some word of mouth to gain some capital.

Without mentioning the industry, do you believe this is a viable business proposition?

Ah one of those subscription models.

I use one of those in the US for a site and pay the monthly fee for a month then cancel, every year.
Far cheaper to pay $15 once a year than $150 a year and I get exactly the same stuff. Just I don't get it at the same time the people with 12 monthly payments or one annual large payment do.

 

[MrMonster]

Ah one of those subscription models.

I use one of those in the US for a site and pay the monthly fee for a month then cancel, every year.
Far cheaper to pay $15 once a year than $150 a year and I get exactly the same stuff. Just I don't get it at the same time the people with 12 monthly payments or one annual large payment do.

It’s by no means decided yet, we’ll probably just offer a year long package but if we do go down the route above it’ll be to encourage buying a years worth and saving some money in order for us to generate capital sooner for marketing.

But that’s not the primary source of income, it should be the commission on the spend which we can hopefully negotiate into our deals. A member spending 10k a month and paying £20 for his membership but getting an extra 1% from the supplier means that member is now worth £120 a month to us. Which means the group can be a lot more exclusive and focus on even greater niches

 

[Mr D]

It’s by no means decided yet, we’ll probably just offer a year long package but if we do go down the route above it’ll be to encourage buying a years worth and saving some money in order for us to generate capital sooner for marketing.

But that’s not the primary source of income, it should be the commission on the spend which we can hopefully negotiate into our deals. A member spending 10k a month and paying £20 for his membership but getting an extra 1% from the supplier means that member is now worth £120 a month to us. Which means the group can be a lot more exclusive and focus on even greater niches

So supplier gives a discount plus gives you money.
Hope you can negotiate well.

The buying group I am most familiar with shut down a couple of years back - they'd email saying they were putting together an order with XX at 9am on the 15th March (for example) and all orders had to be emailed in before then.
Say a dozen of us provided emails.

Each of us would get some discount, the group organiser got some discount and we'd each receive the stuff a week or so later direct from the supplier.
Rather than a dozen people doing orders of a couple of grand each the group did an order of £20k+ and got a volume discount.
The group membership cost us a couple of hundred pounds a year and to make it cost effective we had to do a chunk of orders through them. We knew before joining what companies they dealt with and their schedule of orders for the next couple of months.

 

[mattk]

What kind of goods and services are you planning on offering? Have you been to any of the suppliers and asked them what kind of volumes you need to be referring to them in order to get a discount on their advertised prices?

 

[MrMonster]

So supplier gives a discount plus gives you money.
Hope you can negotiate well.

The buying group I am most familiar with shut down a couple of years back - they'd email saying they were putting together an order with XX at 9am on the 15th March (for example) and all orders had to be emailed in before then.
Say a dozen of us provided emails.

Each of us would get some discount, the group organiser got some discount and we'd each receive the stuff a week or so later direct from the supplier.
Rather than a dozen people doing orders of a couple of grand each the group did an order of £20k+ and got a volume discount.
The group membership cost us a couple of hundred pounds a year and to make it cost effective we had to do a chunk of orders through them. We knew before joining what companies they dealt with and their schedule of orders for the next couple of months.

I hope so too! But generally speaking, the main focus is the membership. If we can attain a large enough member base then I think asking for a rebate on a few of our top customers isnt unreasonable as we can use our leverage against suppliers. By giving us 1% you gain 100 new customers, paying the same as what theyd charge larger customers but the smaller customerss arent able to buy that well alone, i dont think is an unreasonable negotiation. There are plenty of suppliers we can go to if some do not want to play ball. If it is really that difficult then we can return to our main revenue from membership.

We have toyed with the style of buying group you mentioned above however our goods vary on a daily basis so would not work that way. It would be that we negotiate fixed prices for our members and they can purchase on their own account/cash for the prices we've negotiated for them

What made the company you used to go bust, if you are aware?

 

[Mr D]

I hope so too! But generally speaking, the main focus is the membership. If we can attain a large enough member base then I think asking for a rebate on a few of our top customers isnt unreasonable as we can use our leverage against suppliers. By giving us 1% you gain 100 new customers, paying the same as what theyd charge larger customers but the smaller customerss arent able to buy that well alone, i dont think is an unreasonable negotiation. There are plenty of suppliers we can go to if some do not want to play ball. If it is really that difficult then we can return to our main revenue from membership.

We have toyed with the style of buying group you mentioned above however our goods vary on a daily basis so would not work that way. It would be that we negotiate fixed prices for our members and they can purchase on their own account/cash for the prices we've negotiated for them

What made the company you used to go bust, if you are aware?

No idea why they went under.

Negotiating fixed prices for members to order on their own account - not sure how that would work, supplier doesn't get anything extra directly?
I'm in the gift trade for part of my business, the big names know they will sell to a chunk of the gift buyers. Its the smaller suppliers who may struggle to find buyers.

 

[MrMonster]

No idea why they went under.

Negotiating fixed prices for members to order on their own account - not sure how that would work, supplier doesn't get anything extra directly?
I'm in the gift trade for part of my business, the big names know they will sell to a chunk of the gift buyers. Its the smaller suppliers who may struggle to find buyers.

I think we’ll know the beat way of orchestrating it from our first negotiation. We have discussed either getting X percentage discount for being part of our group, a fixed price list that our members get charged, or potentially even negotiating a rebate that goes back to our members every x period on their spend which they wouldn’t get before.

It’s hard to say exactly without diving in and starting negotiating but we plan on taking our first offer to a competitor and getting better.

We are looking at both independent suppliers and national suppliers to pitch our idea too. Like you said above I think this idea is likely to work more for the smaller supplier as we’ll essentially be a sales arm for them, introducing new customers that wouldn’t ordinarily shop there. Helping them grow and potentially later on in the business we’ve discussed using our (hopefully) proven negotiation techniques to then do procurement work for the smaller suppliers themselves as we know the majority of manufacturers already but that’s a potential something that came up in discussion once and hasn’t been discussed again yet

 

[menetworkjadaltd]

we considered the commission as a second source of revenue.

we’ll probably just offer a year long package but that’s not the primary source of income, it should be the commission on the spend which we can hopefully negotiate into our deals.

generally speaking, the main focus is the membership.

In order to be transparent, what would be your business model?

 

[Gordon - Commercial Finance]

Exactly what we’ll do, a yearly fee but it can be broken into monthly fees plus a little interest or £200 a year or £20 per month.

Bear in mind you can’t do this without a consumer credit licence. To do it this way you would need to get someone like Premium Credit on board.
What you can do is make your standard fee £20 a month, but offer a discount if your customers pay 12 months in advance. You’re not allowed to do it the other way round and charge a customer interest on their debt without being regulated.

 

[Chris Ashdown]

Many similar but free groups do this now with oil heating fuel where they band together and get a delivery to ten or twenty homes the same day at say a 10% discount and each customer pays the driver their own bill

At Present I belong to the Defence Discount services a fee of i think about £10 PA which gives me a 5-10% on about a thousand household name companies and virtually all popular restaurants, Just by being ex forces

You would need to get decent discounts for your customers to make it work and i doubt you would get many paying £20 per month, at present what sort of numbers of deals would you be expecting to make with the companies and what is your marketing budget to get the members, hopefully your talking 6 figure sums

 

[MrMonster]

In order to be transparent, what would be your business model?

Hi,

The business model is a membership based buying group. However if and when we have the opportunity to add a rebate clause into our negotiations then we will do to increase revenue.

 

[MrMonster]

Bear in mind you can’t do this without a consumer credit licence. To do it this way you would need to get someone like Premium Credit on board.
What you can do is make your standard fee £20 a month, but offer a discount if your customers pay 12 months in advance. You’re not allowed to do it the other way round and charge a customer interest on their debt without being regulated.

Hi Gordon,

You’ve explained it as I intended but maybe my words got mixed up!!

£250 a year or £200 if paid in full will be a likely pricing strategy

 

[MrMonster]

Many similar but free groups do this now with oil heating fuel where they band together and get a delivery to ten or twenty homes the same day at say a 10% discount and each customer pays the driver their own bill

At Present I belong to the Defence Discount services a fee of i think about £10 PA which gives me a 5-10% on about a thousand household name companies and virtually all popular restaurants, Just by being ex forces

You would need to get decent discounts for your customers to make it work and i doubt you would get many paying £20 per month, at present what sort of numbers of deals would you be expecting to make with the companies and what is your marketing budget to get the members, hopefully your talking 6 figure sums

Hi Chris,

Our deals will be done by listening to what our customer spends most on. If he spends most on a particular product then we’ll aim to get that negotiated down by X percent. If we cannot get a discount which exceeds the cost of membership then we’ve failed the customer and cannot charge.

Marketing budget is fairly limited as our startup capital is approximately 30k but the majority of that will be on advertising as we’re not expecting a salary for 3 months and our work can be started from computers which we both own.

 

[Chris Ashdown]

£200-250 per year means they must be buying expensive items to be able to recover there outlay, which would seem to indicate energy prices be it electricity or fuel

I would expect 30K to be peanuts in marketing plans to get the customers willing to risk a £250-200 investment even over a limited number of purchases and getting a salary out of three months trading for a new company is a extremely hard thing to achieve without exceptional growth figures

 

[Ian J]

Bear in mind you can’t do this without a consumer credit licence. To do it this way you would need to get someone like Premium Credit on board.

For B2B offerings?

 

[Mark T Jones]

For B2B offerings?

Depends whether said 'B' is limited or not..

 

[MrMonster]

£200-250 per year means they must be buying expensive items to be able to recover there outlay, which would seem to indicate energy prices be it electricity or fuel

I would expect 30K to be peanuts in marketing plans to get the customers willing to risk a £250-200 investment even over a limited number of purchases and getting a salary out of three months trading for a new company is a extremely hard thing to achieve without exceptional growth figures

Hi chris

Appreciate the honesty. 30k is all we have and some sheer determination and work ethic to make it happen. In my business plan I’ve got change from that 30k for other things as I think a lot of what we have to offer will sell itself and word of mouth is going to be a great thing for us.

But the typical spend would be around 5k per month for one of our customers. If we saved 5% then over the course of a year they’d of saved £3000 for a £250 outlay. I think our pricing strategy is fair and once we prove that the savings are there then it should be easier to progress.

Regarding salaries all we have budgeted for is 200 members in year 1, showing £50k in revenue plus an additional 1% rebate from select negotiations topping that figure up to around 75k. Our costs are fairly minimal minus marketing

 

[Mr D]

Hi chris

Appreciate the honesty. 30k is all we have and some sheer determination and work ethic to make it happen. In my business plan I’ve got change from that 30k for other things as I think a lot of what we have to offer will sell itself and word of mouth is going to be a great thing for us.

But the typical spend would be around 5k per month for one of our customers. If we saved 5% then over the course of a year they’d of saved £3000 for a £250 outlay. I think our pricing strategy is fair and once we prove that the savings are there then it should be easier to progress.

Regarding salaries all we have budgeted for is 200 members in year 1, showing £50k in revenue plus an additional 1% rebate from select negotiations topping that figure up to around 75k. Our costs are fairly minimal minus marketing

Have you costed what it will take to get the 200 members in year 1?

And what happens if your membership is … for example, 10?

 

[mattk]

An annual spend of £60k is going to give you a relatively small potential market. How do you intend to reach these people, as it isn't going to be your usual AdWords, SEO, Facebook etc. marketing strategy?

 

[Chris Ashdown]

The rich are notorious for not giving a dam on how much money they waste be it a few thousand on a dress they wear once or twice to a hundred quid plus for a haircut, buy a top end sports car for over £75000 and use it less than 2000 miles per year

Plus every tom dick and harry are trying to sell them something so the barriers are already in place to not talk to you

Maybe uneducated footballers and there pundits would be your best targets they seem to buy anything

If they are already spending the 5K a month what makes you think they don't have the best negotiated price now?

 

[NickGrogan]

How much procurement experience do you have?
What savings have you actually achieved in your target market?

 

[MrMonster]

Have you costed what it will take to get the 200 members in year 1?

And what happens if your membership is … for example, 10?

Then we have failed miserably as we can not negotiate a good deal on just 10 members. We can always restructure our idea and offer free membership for easier access to the buying power and give ourselves a stronger negotiating arm to get a rebate built into a deal which could be our back up plan and main source of income

An annual spend of £60k is going to give you a relatively small potential market. How do you intend to reach these people, as it isn't going to be your usual AdWords, SEO, Facebook etc. marketing strategy?

Hi,

In the industry we’re looking at there are over 80,000 potential clients with average spends of 5k or less per month. We’ll target them with our experience of working in the market.

The rich are notorious for not giving a dam on how much money they waste be it a few thousand on a dress they wear once or twice to a hundred quid plus for a haircut, buy a top end sports car for over £75000 and use it less than 2000 miles per year

Plus every tom **** and harry are trying to sell them something so the barriers are already in place to not talk to you

Maybe uneducated footballers and there pundits would be your best targets they seem to buy anything

If they are already spending the 5K a month what makes you think they don't have the best negotiated price now?

You’re overthinking our idea, we’re selling to businesses not wealthy people.

We know from over 10 years experience in the game that the smaller spenders pay more so the higher spenders can pay less and average out the companies margins.

How much procurement experience do you have?
What savings have you actually achieved in your target market?

We have over 10 years between us of procurement, purchasing and sales. I’ve personally won over £5,000,000 worth of business by purchasing better and negotiating and my previous role I built the business from a £0 turnover in my demographic to over £1.5m per year in just 18 months.