Evgeny Grigul is the cofounder of Virto Commerce, a B2B-first e-commerce innovation platform for enterprises.
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Digital commerce is dramatically changing companies' relationships with suppliers. We see more and more vertical B2B marketplaces emerging, and their market niche is constantly growing. Does this mean marketplaces will become the dominant purchasing channels in the B2B market?
It's unlikely that everything looks so clear. Firstly, for a large number of companies, traditional interactions between suppliers and buyers will remain, although they will likely become more "digital" compared to now.
Secondly, digital commerce platforms open great opportunities for other formats of B2B interactions, which previously might have looked too niche due to the relatively high level of transaction costs.
In an article on e-procurement, I wrote about how digital marketplace technologies are changing the game for group purchasing organizations (GPOs). In this article, I'll talk in more detail about the collective purchasing model and what companies should consider when looking to optimize their purchasing.
What is a GPO?
A group purchasing organization (or purchasing cooperative) is established to harness the collective buying power of multiple businesses, enabling them to secure vendor discounts through combined purchasing strength. Just like marketplaces, group purchasing organizations aim to provide the lowest possible prices for their customers, but they achieve this in a different way. To simplify, we can say that marketplaces create pressure on sellers by creating conditions for maximum competition, forcing them to reduce the price for each buyer.
A group purchasing model, on the contrary, assumes accumulating the demand of many buyers and acting as a single powerful buyer, forcing suppliers to reduce prices and improve conditions in the fight for access to an extremely high-volume channel. Like vertical marketplaces, GPOs often focus on specific niches or industries. For example, collective buying is very popular in healthcare, education, the public sector and agriculture.
The group purchasing organization can be a classic company or a cooperative. The latter option is very popular in agriculture, for example.
Group Purchasing Monetization Models
There are two basic types of group purchasing monetization models. The first type involves members paying their membership fee to the organization, which may correlate somehow with the volumes purchased by the organization through the GPO.
The second type of monetization is based on suppliers paying compensation, thus rewarding the purchasing organization for consolidating orders and absorbing account management expenses that would be quite high in a B2B context.
Are GPOs more effective for B2B buyers than B2B marketplaces?
The answer to the question posed above is—it depends. We can never say that one of these models is definitely better for a buyer. There are a lot of factors that may influence which option is preferable.
Marketplaces are a great option when buying small numbers of products with unpredictable frequency. For example, for a company that produces custom technological equipment, a vertical marketplace may be preferable since demand for components is unpredictable. However, the marketplace business model itself can (although not necessarily) result in tangible costs for the supplier, and these costs will be included in the price.
GPOs can work excellently in situations where predictable demand exists that ultimately constitutes significant volumes. The most well-known examples are related to the purchase of medicines and medical devices by clinics or the purchase of fuel and spare parts by farming organizations. However, the application of such a model is much broader.
Group purchasing can also be useful when customers need to meet some complicated regulation compliance requirements. Because of this, it's not uncommon for public agencies in the U.S. to prefer working with GPOs that allow joining legally accepted contracts instead of going through the required RFP process with each supplier.
We also see quite a few situations where franchisees of large network players (for example, in the fast food or hospitality industry) purchase necessary equipment and consumables through specialized purchasing cooperatives.
Why B2B Marketplaces Are More Recognized Than GPOs
Online B2B marketplaces have emerged thanks to the proliferation of digital commerce technologies. B2B vertical marketplaces are carving out their market niche right now, aggressively asserting themselves and continually enhancing the customer experience in the battle for customer loyalty. Additionally, we, as consumers, perceive the idea of marketplaces very well based on our everyday B2C buying experience.
All of this brings our attention to the concept of B2B marketplaces and creates a sense of the indispensability of this model. In most B2B industries, group purchasing models appeared long before the digital era. This model was conceived and then thrived in niches where the benefits of collective buying more than covered transaction costs, even though customer interaction was not digitized.
Today, not all group purchasing organizations realize that enhancing their business model with modern digital customer experience can help expand their market and better enable them to attract audiences that were economically unfeasible in the pre-digital era. However, this gap is narrowing. Working with leading companies in this area, I see them investing heavily in digital customer experience because they understand that digital transformation can help improve their business. This can provide significant benefits for their existing and potential members.
How To Unlock The Potential Of Group Purchasing Models
To successfully unlock the potential of a group purchasing model, I would recommend a few simple steps.
1. Analyze which GPO would be applicable for the procurement of your primary product categories.
2. Determine which categories are suitable for procurement through GPOs in your context and which are better suited for marketplaces or direct contracts with suppliers.
3. Assess the digital customer experience quality of the organization that piques your interest. In today's reality, digital channels owned by GPOs should match the convenience of digital B2B marketplaces.
4. Due to the growing emphasis on digital customer experience by the collective purchasing industry, periodically reevaluate the market landscape to look for new purchasing opportunities.
Digital transformation is revolutionizing B2B, offering new sales and procurement models. Companies leveraging these changes can better position themselves to gain a competitive edge by optimizing supplier relationships. Monitoring collective purchasing evolution is key to capitalizing on emerging opportunities.
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