“What is comfortable is rarely profitable.”
Many kitchen and bath firm owners choose their participation level in a buying group without really planning how to get the most out of it for their business. Without a plan, owners forfeit the best benefits of being a buying group member. For members who want more out of their buying group, there’s a solid strategy to increase their net profit.
Deciding to be proactive in your buying group will lead you to run a better business earning higher gross and net profit margins.
Leverage the benefits of being a kitchen and bath-buying group
SEN members are in the minority of kitchen and bathroom owners belonging to a buying group. Thousands of independent firm owners do everything independently, unaware that their business suffers from their isolation. At the same time, a single buying group member leverages substantial additional profit by consolidating their purchases to preferred vendors in the group.
Let’s look at how to leverage the benefits of being a kitchen and bath buying group member.
Imagine your firm does 2 million in sales this year, where your cost of sales is $1,420,000, your gross profit hovers around $580,000 (RICKI research reveals the industry norm is 29%), and you have net earnings of $50,000 (after market-rate salaries for you and your staff).
Let’s say you join a buying group at the beginning of the year for about $3,000 and choose five vendors within the group you decide to buy from exclusively.
Why choose five vendors? It’s good to do this since offering a variety of quality products without too many choices helps your business be seen as a paragon of excellence in the industry. Prospects will come to your business because your image lets them know what they can expect from your firm, and they’ll become repeat (or referring) customers because of your firm’s excellent service in “tangibilizing” the buying process for your clients.
Suppose you’re only choosing products from specific vendors that are either standard quality, enhanced, or superb – we at SEN call them Good-Better-Best (GBB) products. In that case, you’re adding another critical component of what it takes to be perceived as a superior value, charging more and earning a higher gross profit than your competitors.
Once owners shift their purchases to their preferred vendors, they’ll save approximately 3% by leveraging buying group purchasing power.
That’s $6,000 for every $200,000 you buy from the group’s vendor partners, and owners will earn another 2% in purchase rebates paid quarterly from the group.
Compare how an unaffiliated owner’s income statement looks next to that of an owner who belongs to a buying group:
That $4,000 rebate is a 133% return on your $3,000 membership investment. That’s a far better return than a mutual fund or owning a piece of real estate – and it’s only the beginning of leveraging your buying power. Adding the $6,000 in upfront product savings makes it an overall 333% ROI ($10,000/$3,000).
Greater leveraging of purchasing power
Fast forward to your second year as a buying group member when proactive owners make two critical moves.
- Your firm buys another $200,000 with five additional vendors.
- You recruit a non-competing kitchen and bath firm owner to join the same buying group.
Let’s say the new member follows your lead and chooses the same five vendors to buy from. You purchase $400,000 with the vendor partners, and the new member buys $200,000 with them, saving both firms 3% by leveraging purchasing power.
This is where the money starts to get good. Because of the $400,000 increase in purchases from your firm and the group’s new member contribution of $200,000, the entire buying group now earns an average of 2.25% rebates. Assuming no change in revenue, this triggers more significant rebate percentages at tier performance levels negotiated by the buying group.
From triggering rebate percentages at higher performance levels, your P&L statement would look like this by year two:
So, in Year 2, your company earns an extra $21,000 between lower material costs and quarterly rebates, generating a $700% return on your $3,000 average annual membership investment.
These numbers prove that one kitchen and bath owner can earn much more when teamed up with an industry-specific buying group.
Proof of the power of one
Some members have put those rebates to great use. One of SEN’s members generated enough savings over the years through the rebates to help him, and his wife afford a more comfortable lifestyle for the long haul.
“Those rebates paid for my two kids’ college educations,” said John Lang of Newtown, Pennsylvania.
Today Lang’s firm generates an income of over $5 million a year. Lang’s success is partly owed to streamlining his business with a Good-Better-Best selling process. Plus, his commitment to the power of one by supporting as many SEN vendor partners as possible and encouraging others to do the same.
The average kitchen and bath firm owner can leverage excellent benefits in a buying group. The keys are (a) consolidating their spending by choosing several vendors to supply their products and (b) targeting non-competitive owners to join their buying group. Imagine their buying power after a couple more referrals down the road.
What will you do with your savings from the accumulated rebates earned with your purchases from buying group vendor partners?
—SEN Leadership Team
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