Co-ops and consortiums: Are they right for you?

By Ronald A. Nykiel, dean of the College of Business at Husson University
Posted Dec. 02, 2011, at 10:16 p.m.

Co-ops and consortiums are two ways for businesses to band together, share functions and achieve efficiencies. Both have their strong points, as well as potential pitfalls of which to be aware.

A co-op is usually defined as an agreement between two or more businesses providing funding for marketing and advertising or other mutually advantageous objectives. An example would be an objective to increase business to Maine. The cooperative agreement might be structured between an airline, resort and rental car company to jointly fund and advertise a package — two or more components of a trip — to Maine. Each could advertise only their respective brand, however, there are considerable efficiencies to be gained by advertising together. And consumers buying the Maine destination often look for a package. In such a scenario, each member of the co-op, if they went it alone, may plan to spend $100,000 in select newspaper ads. By combining their ad and funds, they now have $300,000 available for advertising in the newspapers. In essence, three times as many ads (or space) than if they went it alone. This is an oversimplification, but makes the point about efficiencies and how a co-op works.

Second, a consortium is defined as a group (of companies or brands) formed to undertake an enterprise beyond the resources of any one member, for greater benefitsor efficiencies than available by oneself. For example, two or more firms decide to form a consortium for purchasing to reap the benefits of economies of scale in buying products and services each of the firms use. A few variations of this concept include membership or partnership in an electronic e-procurement group to the formation of an independent company to perform services for all equity partners. The purpose is to leverage the buying power for all companies and help each gain greater efficiencies. Not only are there economies of scale, there are other benefits as well. For example, labor savings, customized product and lower prices top the list.

Co-ops

There are numerous benefits to co-ops. In fact, they usually are efficient and effective as a marketing tool. Benefits may include stretching your reach, frequency, buying power and enhancing your product or service offer. This latter benefit can take the form of a more attractive offer, more convenient method of purchase and even increased awareness and brand image. Having your brand available through the distribution and purchasing channels of your co-op partners increases the odds of purchase and offers additional convenience to the consumer. Increased awareness comes with increased frequency made possible by the co-operative buying power of the group in the co-op versus one individual entity. In addition, selecting the right co-op partners can also enhance your brands, product or service image.

There are a few pitfalls to look for in co-operative endeavors. First, you may not always be in total control of the effort. A partner, agency or intermediary may directly interface with your customers. Second, while you may have an equal position on the cooperative program, your reputation and image could suffer as a result of a partner mishandling a customer or just not living up to your level of service. Third, if you or your agency does not have the lead or control in the co-op, you may not receive your fair share of the endeavor.

Overall, a well-planned and executed co-op with good partners usually produces a positive experience. The risks are lower and the control greater than in a consortium.

Consortiums

To some degree, consortiums function like co-ops, however, they tend to be more permanent in nature. Consortiums usually provide efficiencies in manpower. In fact, entire functional departments or the majority thereof are replaced by the consortium. The advantages include reduced overhead, reduced capital expenditures and equipment and most likely much greater operating efficiencies. These benefits apply to all members of the consortium. Other benefits may include longer operating hours, substantially more reach (distribution), better training and customer service.

The downsides for consortiums include third-party interface with customers, not receiving fair treatment (especially smaller participants) and the need to feed, nourish and monitor the consortium. Strong oversight is needed with respect to fees charged and fair share issues. More pitfalls may include the stability of the consortium itself from both a financial and managerial perspective. In the case of a marketing consortium, you are trusting a third party with an essential functional area of your business and with handling your up-sell, down-sell and customer interface at the point of purchase.

Consortiums may make considerable economic sense. In fact, they may be better, more professional and more efficient than one’s own function in this area. Obviously, not every consortium will live up to expectations. You do not have direct control and it will likely take more time to fix a problem than if it were your own departmental function. Finally, if you decide to switch consortiums or go back and perform the functions yourself, more time and investment will be required.

In some areas, such as purchasing, the economies of scale and efficiencies may be exceptionally favorable. On the other hand, if your goods do not arrive on time or at all you will really have to scramble to operate. Also, you may sacrifice product customization for quantity and efficiencies, not to mention lack of choice or dominance by major participants if you are the small player.

Participation in a co-op or consortium ultimately comes down to a business decision related to need and cannot be generalized. This decision involves a considerable amount of trust, ethics and understanding of legal implications. In today’s economic environment, survival and competitive advantages are often closely linked. Co-ops and consortiums, if managed with attention can result in considerable advantages, perhaps just enough to not only survive, but to prosper.

Ronald A. Nykiel, dean of the College of Business at Husson University, has a number of books on travel and tourism marketing and served on a presidential commission on travel and tourism, the board of the United States Travel Association, and on a governor’s revenues forecasting commission.

http://bangordailynews.com/2011/12/02/business/deans-of-business/co-ops-and-consortiums-are-they-right-for-you/ printed on September 18, 2014