Joining Forces

By SmallBusinessComputing Staff | Posted March 01, 2001
by Victoria Hall Smith

Among the first wave of dot-coms that came along promising to change the business world forever, there was a small group pushing the concept of group buying. Some of these were not much more than electronic co-ops, while others introduced more complex systems (such as the reverse auction) and hoped that small businesses would bite. All promised that they would finally deliver on the old promise that technology and the Web would level the playing field for small businesses.

Let's say you're a small business in need of upgrading a solid yet limiting local area network, but your budget is already stretched. Many associations and co-ops still exist for companies looking for the same kinds of equipment in a specific geographical area. Group-buying sites have simply made it easier for small businesses to do what they've always done -- band together to pool their purchasing power.

Now even more sites -- including those of some large tech vendors -- are adding similar programs, which for many companies may finally make this a viable option. According to Jupiter Research, revenues from dynamic buying sites reached $1 billion in 2000. Here's a look at just some of the ways companies are doing it:

Power In Numbers
Perhaps the site that generated the most attention for online demand aggregation was Mercata.com, which led the consumer market until its recent demise in January of this year. Nevertheless, sites have cropped up everywhere, from the likes of Works.com, which is essentially a product procurement site, to BusinessChoice.com, which offers discounts on utilities ranging from gas and electric to long distance and wireless phone service.

Despite the variety in the products and services they offer, all group-buying sites essentially work the same way. Unlike auctions where buyers compete against each other and drive up the price of an item, demand aggregators enable buyers to cooperate and drive the price down. They bring together businesses in the market for the same products and, by aggregating their purchasing power, enable the group to realize significant discounts. Price continues to drop as more buyers join.

The principles are the same as for the traditional buying co-ops, which enabled a local group with similar buying interests to get bulk rates on goods, but on the Web, the process of finding large numbers of buyers with similar needs is greatly simplified and much faster. Buyers can come from more disparate geographic bases, too.

Online, group-buying cycles are usually limited to a few days. When the cycle ends, all buyers receive the products at the lowest final price regardless of the price when they joined.

Finding The Deals
One problem with the sites dedicated specifically to group buying used to be that there was no guarantee they'd even be selling what you wanted. But now that other companies offer goods through their own sites the same way, group buying functions may simply become another feature vendors can add to attract customers. At Works.com, businesses join the service and then select the equipment and supplies they need. Works.com combines these requests with those of other member businesses and then negotiates the best price from distributors or directly from the manufacturers. Since February of last year, Scott Yore, CFO of Silicon Metrics, an Austin, Texas-based manufacturer of design tools for custom chip designers, has purchased everything from furniture to Palm PCs to ballpoint pens through Works.com. "The group-buying service is really like icing on the cake," Yore says. But he wouldn't go back. "Everything was a spot buy and it was killing us," he says.

The site also offers a procurement system for members that allows instant access to reports detailing what's being bought and by whom within the company. The procurement system combined with group buying allows Yore to give the company's 60-plus employees power to purchase their own supplies and equipment while controlling costs and tracks responsibility.

Other sites, like MobShop.com, take advantage of a buyer's natural incentive to find other buyers to help drive prices down. "Click and tell" features allow buyers to instantly send e-mails encouraging others to join a particular group buy. Buyers have the option of joining a buy cycle already in progress or starting a new one.

Now that technology manufacturers like Sun Microsystems have joined the act, all this action could add up to significant savings. Sun recently added a group-buying option on their direct sales site. Sun aggregates demand for some models of their servers, workstations, and software, all covered by the Sun standard warranty. They also provide links to the local service and support partners that most customers need. Alex Rublowsky, Sun Auctions Group Manager, says the company originally tested eBay as a way to help students and educators buy Sun products at cheaper prices. After users complained they couldn't compete with the big companies using eBay, Sun decided on the group-buying model and opened it to business buyers as well.

Back To The Future
While most of these sites allow businesses to look beyond their geographic area for buying partners, other systems take a cue from the traditional co-op buying of the past. RexOffice.com sells Web-based portal services to multi-tenant buildings. Small and medium business tenants in subscriber buildings access the company's group-buying services through building-specific portals. "Geo-aggregation works well for items that are costly to ship like servers, monitors, large boxes of printer paper, or office furniture," explains RexOffice.com CEO Thom Bogle. "But building tenants can organize other group buys as well." Currently, the service is attempting a group buy of the broadband services requested by the tenants of one building.

Not every aggregator site sells products. BusinessChoice.com, for instance, links business buyers of essential services like long distance and wireless services, gas, electric, and heating oil. Launched in August 1999, the Pittsburgh-based service was originally intended for consumers. After realizing that most users were in fact businesses, it changed the focus of its products and services. The site currently offers group buying of electric, long distance, and wireless services in New York, California, Pennsylvania, Ohio, and Massachusetts, with Maryland and Connecticut soon to follow. Health insurance for small business is its next planned offering.

he Fine Print
While group-buying sites do offer advantages to businesses looking to pool resources, there are inherent drawbacks. Selections tend to be limited at any one site because the more products that are offered, the more scattered the buyers. Fewer products mean more buyers per product and more leverage for aggregators to get the best price. For the companies that buy through the sites, that often means they won't find everything they need on one site. Do research so you have acceptable alternatives if your first choice is not available.

Remember, too, that buying cycles take a few days to attract the number of buyers necessary for the lowest prices, so don't use these services for products you need immediately. Finally, check the return and warranty policies before you commit. Most sites have liberal return policies and demand that vendors give their standard warranties, but others consider all sales final. So, buyer, be aware.

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