One peculiarity of the buying group is that effort and benefit arise at different legal entities.
The central office runs the procedure. It maintains master data, conducts the tender, negotiates and supports the members. The benefit arises at the member company, because that is where the goods are sourced and the invoice is paid.
For a business case this matters, because costs and benefits have to sit on the same side of the ledger.
The profit effect of a price reduction describes the effect on the member's result, not on the central office's. A retail company needs around 1.2 percent price reduction on indirectly sourceable spend for five percent more profit. That figure applies to the member company.
The central office initially gets none of it. It carries the licence, the implementation and the ongoing effort.
This puts the central office in an argumentative position that is familiar within cooperations. It delivers a service whose effect becomes visible elsewhere. That is not a peculiarity of procurement but the basic pattern of every buying group. It is simply rarely said out loud in a software decision.
Whether the central office is compensated through a membership fee, a levy or a share of the benefit achieved is a question of the statutes.
The membership fee is the simplest route and the one that steers least. It separates cost from usage, which makes participation easier and blurs cost transparency.
A levy per participating member company allocates cost to usage. It is transparent and creates an awkward side effect, which the next section addresses.
A share of the benefit achieved couples cost and benefit most closely and is at the same time the most laborious variant, because it requires the benefit per member to be determined and accepted. It therefore hangs on the same question that sits above every savings claim, namely which price the calculation is made against.
Which route is right is decided by the statutes, not by a study. For the business case the choice still matters.
The usual pricing model in this market segment has two parts. A base fee for the platform and a fee per connected unit, meaning per site, tenant or member company.
The larger the number of connected units, the more the base fee spreads out and the more the per-unit fee dominates the calculation. In larger groups the majority of the licence falls on that component.
This is where the conflict arises. For the effect of bundling, the decisive jump lies between one participant and a double-digit number of participants. Whether forty or sixty member companies join after that changes the result gradually. A linear fee per unit prices every additional participant the same, although the twentieth adds less than the second.
Anyone who wants to generate participation should check whether the chosen pricing model rewards it or taxes it. Tiered and capped models change the picture considerably.
A second statement follows from the same structure. Approximately, the minimum volume per unit equals the annual fee per unit divided by the effect factor.
A fee of 3,000 euros a year per connected unit requires, under mid-range assumptions, a bundleable volume of around 100,000 euros per unit, and under conservative assumptions around 200,000 euros. That corresponds to a retail company from around one to two million euros in annual revenue.
Below that size a member's participation worsens the group's economics rather than improving them. That is not a statement about the member's value to the group. It is a statement about the economics of this one tool under this one pricing model.
Should the central office carry the cost alone? That is a question of the statutes, not of arithmetic. For the business case all that matters is that costs and benefits sit in the same view. Anyone weighing the central office's costs against the central office's benefit gets a distorted result.
How do we determine the benefit per member company? Through the reference basis. The price that member last actually paid, at the same volume and the same specification, multiplied by the volume purchased. That is more laborious than a group figure, and it holds.
Does this apply to procurement consultancies with several clients? The structure is the same. Effort at the mandate holder, benefit at the client, pricing per client. The question of whether the fee structure rewards the number of active mandates arises there in exactly the same way.
Section 6.5 of the study covers the separation of effort and benefit, and section 8.4 the minimum size per unit and the effect of different pricing models on participation.
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The central office runs the procedure. It maintains master data, conducts the tender, negotiates and supports the members. The benefit arises at the member company, because that is where the goods are sourced and the invoice is paid.
For a business case this matters, because costs and benefits have to sit on the same side of the ledger.
Why this is more than an accounting question
The profit effect of a price reduction describes the effect on the member's result, not on the central office's. A retail company needs around 1.2 percent price reduction on indirectly sourceable spend for five percent more profit. That figure applies to the member company.
The central office initially gets none of it. It carries the licence, the implementation and the ongoing effort.
This puts the central office in an argumentative position that is familiar within cooperations. It delivers a service whose effect becomes visible elsewhere. That is not a peculiarity of procurement but the basic pattern of every buying group. It is simply rarely said out loud in a software decision.
Three ways the service gets compensated
Whether the central office is compensated through a membership fee, a levy or a share of the benefit achieved is a question of the statutes.
The membership fee is the simplest route and the one that steers least. It separates cost from usage, which makes participation easier and blurs cost transparency.
A levy per participating member company allocates cost to usage. It is transparent and creates an awkward side effect, which the next section addresses.
A share of the benefit achieved couples cost and benefit most closely and is at the same time the most laborious variant, because it requires the benefit per member to be determined and accepted. It therefore hangs on the same question that sits above every savings claim, namely which price the calculation is made against.
Which route is right is decided by the statutes, not by a study. For the business case the choice still matters.
Why the pricing model can reward or tax participation
The usual pricing model in this market segment has two parts. A base fee for the platform and a fee per connected unit, meaning per site, tenant or member company.
The larger the number of connected units, the more the base fee spreads out and the more the per-unit fee dominates the calculation. In larger groups the majority of the licence falls on that component.
This is where the conflict arises. For the effect of bundling, the decisive jump lies between one participant and a double-digit number of participants. Whether forty or sixty member companies join after that changes the result gradually. A linear fee per unit prices every additional participant the same, although the twentieth adds less than the second.
Anyone who wants to generate participation should check whether the chosen pricing model rewards it or taxes it. Tiered and capped models change the picture considerably.
The minimum size of a participating unit
A second statement follows from the same structure. Approximately, the minimum volume per unit equals the annual fee per unit divided by the effect factor.
A fee of 3,000 euros a year per connected unit requires, under mid-range assumptions, a bundleable volume of around 100,000 euros per unit, and under conservative assumptions around 200,000 euros. That corresponds to a retail company from around one to two million euros in annual revenue.
Below that size a member's participation worsens the group's economics rather than improving them. That is not a statement about the member's value to the group. It is a statement about the economics of this one tool under this one pricing model.
Frequently asked questions
Should the central office carry the cost alone? That is a question of the statutes, not of arithmetic. For the business case all that matters is that costs and benefits sit in the same view. Anyone weighing the central office's costs against the central office's benefit gets a distorted result.
How do we determine the benefit per member company? Through the reference basis. The price that member last actually paid, at the same volume and the same specification, multiplied by the volume purchased. That is more laborious than a group figure, and it holds.
Does this apply to procurement consultancies with several clients? The structure is the same. Effort at the mandate holder, benefit at the client, pricing per client. The question of whether the fee structure rewards the number of active mandates arises there in exactly the same way.
The next step
Section 6.5 of the study covers the separation of effort and benefit, and section 8.4 the minimum size per unit and the effect of different pricing models on participation.
→ To the white paper