Group purchasing organizations (GPOs) negotiate discounts on goods and services for members. They can be horizontal or vertical, and are charged through commissions or membership fees. GPOs have been around for centuries, with large warehouse stores making bulk buying a common experience.
A group purchasing organization, or GPO, is a coalition of individuals or companies that combine resources to negotiate discounts from suppliers of goods and services. Although common primarily in the healthcare industry, group purchasing organizations manage the full range of goods and services. From food to electronics, people find lower costs when purchasing power increases.
The simplest form of a group purchasing organization is known as a cooperative. The term is short for cooperative and applies to individuals who have banded together to purchase a specific item or group of items. An example could be a group of farmers who come together to negotiate better prices for seeds or agricultural equipment. This concept is known as collective purchasing power.
On a large scale, companies can band together to buy goods or services at significantly lower cost than they could on their own. For example, a small business can join a health care group purchasing organization and thus get better rates on health insurance. This larger, tight-knit group of members can look to health care providers to negotiate better prices on health care packages. The cost of membership is paid for with savings available to small businesses. A company should analyze the cost versus benefits before joining a group purchasing organization.
A group purchasing organization can be horizontal or vertical, referring to the market segment of goods and services available for purchase. A vertical group buying organization focuses only on one industry, while a horizontal group buying organization tries to get maximum discounts on most goods and services in a broad market.
The cost of running a group buying organization is charged in the form of commissions or rebates, or may be passed on to the consumer in the form of membership fees. In this way, no one or company assumes the burden of administration. In the case of nonprofit group purchasing organizations, most or all of the discounts are passed on to the end user.
While the popularity of joining a group buying organization is relatively new, the concept itself has been around for centuries. Throughout the 1900s, the idea of bulk buying in order to save money grew immensely, with large warehouse stores making bulk buying a common experience. When applied to billion dollar markets and million dollar customers, the savings can add up quickly.
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