Private sector group purchasing lets businesses combine their buying volume, usually through a group purchasing organization (GPO), to get prices and terms that many could not win alone. The main benefits are lower prices on everyday indirect spend and less time spent negotiating. The main risks are fees you did not see and savings measured against list prices.
This guide covers how these groups work, how they earn money, how to work out whether one is worth joining and what else you could do instead.
What is private sector group purchasing?
Most people first hear about GPOs in hospitals, but the model has spread. Una, a GPO that serves businesses, describes two types:
- Vertical GPOs serve one industry, such as healthcare, hospitality, dental or veterinary.
- Horizontal GPOs serve private businesses across industries and focus on what nearly everyone buys, such as office supplies, shipping and food service.
Private sector groups are mostly horizontal, so they deal with indirect spend rather than the raw materials that go into your product.
What are the benefits?
- Better pricing on small categories. A mid-size company rarely has the volume or staff to negotiate every category alone.
- Less negotiating work. The agreements already exist, which suits a small purchasing team.
- Faster access. You can start buying without running a full bid for each category.
- A price check. Group pricing gives you something to compare your current suppliers against, even if you stay with them.
How do these groups make money?
There are three common models, and many groups mix them. These are worth understanding because they decide what your saving really is.
| Model | How it works | What to watch |
|---|---|---|
| Supplier fees | The supplier pays the group a percentage of what members buy | Free to you, but the group earns more when you spend more |
| Member fees | You pay onboarding fees, annual dues or fees tied to your spend | Subtract these from your saving |
| Commitments | You agree to minimum volumes or a long term | Penalties can outweigh the discount |
Una puts healthcare GPO supplier fees at about 1.22% to 2.25% of purchase value. We did not find a reliable published figure for business GPOs. In healthcare, a GAO report found experts split on whether supplier fees push prices up, with little evidence either way, so ask any group to explain how it is paid.
Is it worth joining? A simple way to work it out
Start with your own numbers, not the group’s headline saving. Here is an example with made-up figures:
| Step | Example |
|---|---|
| Annual indirect spend | $2,000,000 |
| Share the group has agreements for | 25%, or $500,000 |
| Lower price on those items after testing real quotes | 8%, or $40,000 |
| Share your staff will actually buy on agreement | 70%, or $28,000 |
| Minus fees and switching costs | $8,000 |
| Net saving per year | $20,000 |
The two steps most people skip are testing real quotes and allowing for staff who keep buying elsewhere. A spend analysis gives you the starting figures. Also check whether the saving is real money or cost avoidance.
Questions to ask a group before joining
- What is the total yearly cost, and what saving do we need to break even?
- Is there a minimum purchase, and what happens if we miss it?
- Can we cancel at any time without a penalty?
- Are there paid tiers for full access to agreements or advice?
- Is the first spend analysis free, and will you price our actual items?
- Will you disclose the fees you receive from suppliers?
When group purchasing is a poor fit
- Your spending is concentrated in a few specialized suppliers the group does not cover.
- You already have strong negotiated pricing because of your own volume.
- Nobody will check that staff are buying on agreement.
- You need purchases to go through your procurement system and the group’s suppliers cannot do that.
What else could you do?
You can reduce the number of suppliers and negotiate with those left, which is the idea behind supplier consolidation. You can tighten card spending with a purchasing card program. You can also compare the largest group purchasing organizations if a GPO still looks right.
A third option is to buy from a company that already has the volume, which is how Hubzone Depot works, though it is not a GPO. Hubzone Depot spends about $400 million a year on procurement, and customers use that combined buying power to get lower prices than they would alone. Its marketplace of more than 12 million products sits inside the buyer’s own ERP or procurement system, such as SAP Ariba, Coupa or Oracle, so every purchase is accounted for. Hubzone Depot is an SBA-certified HUBZone and Women-Owned Small Business. For parts that are hard to find, Spotbuy returns one clear quote.
Frequently asked questions
What is the main benefit of group purchasing for a business?
Lower prices on everyday goods and services without negotiating each category yourself. The saving depends on what you pay now, so test it on your own items.
Are group purchasing organizations free to join?
Many are, because suppliers pay them. Others charge dues or set minimums. Ask for the total cost in writing.
Can small businesses use a GPO?
Yes, and they often have the most to gain because they have the least buying power alone. Check that the group’s agreements cover what you buy.
What is the difference between a horizontal and a vertical GPO?
A vertical GPO serves one industry. A horizontal GPO serves many industries and focuses on goods and services that most businesses buy.
