How Group Purchasing Can Mean Big Savings for Small Businesses

Small businesses use a wide variety of products and services in the course of their operations, everything from office supplies and equipment to information technology, payroll processing, and employee benefits administration. Unfortunately small firms often pay more for such goods and services than large companies because of a lack of volume or scale. But there is a way small business owners can enjoy the same kinds of cost savings their big brethren do on essential goods and services: by participating in group purchasing.

Group purchasing is the collective participation of many different individuals or small businesses in the purchase of products or services, thus enabling participants to benefit from discounted or group rates. While it isn’t new, group purchasing has generally been underutilized by small businesses in the United States.

This may be starting to change, however, with the emergence of a number of different online consumer-group buying services, such as GroupOn and LivingSocial. These services primarily offer localized deals and discounts on items such as restaurant meals, retail store purchases, and event tickets.

On the business side, group purchasing is usually done via group purchasing collectives or group purchasing organizations, known as GPOs. These organizations represent hundreds or sometimes thousands of small businesses, so they are able to offer economies of scale to their participants by aggregating their combined purchasing power. There are two primary types of GPOs:

• Vertical market: These serve companies within a specific industry or market segment and are usually formed through industry, trade association, and advocacy groups for the benefit of their members. Vertical marketing GPOs are especially popular in the health care, manufacturing, food services, legal, and nonprofit industries.
• Horizontal market: These serve companies across all industries and market segments. A good example is Group Purchasing Solutions, which has partner contracts with some of the nation’s largest office supply, telecommunications, shipping, janitorial services, and computer equipment companies. GPS members can often obtain products and services from these partner companies at substantial discounts.

GPOs don’t all operate the same. Some require that members pay fees to participate, some collect fees from the product and service providers, and still others collect fees from both members and providers. Be sure to investigate any potential GPO you may be considering carefully and ask the following questions:

• Do members pay administrative fees, and if so, how much are they? Make sure that your potential savings from membership in the GPO will more than cover any fees you’re required to pay.
• Are members required to purchase from a certain number of vendors, or is a minimum volume of purchases required? If so, make sure you’re comfortable with the vendors available and that you will need enough of their products and services to meet the minimum requirements.
• What kind of member support does the GPO offer? Disputes occasionally arise between GPO members and vendors, for late deliveries, disputed invoices, overall service, and even fraud, for example. Ask GPOs about their dispute resolution processes and procedures and make sure you’re comfortable with them.

Don Sadler is a freelance writer and editor specializing in business and finance.