Have you ever heard the term group purchasing organization? If you have, you might wonder, “What is a buying group? Can a buying group help my small business?”
Buying groups are organizations composed of businesses banding together for strength in numbers. Larger groups tend to negotiate better prices and payment terms for the products and services each business needs. This is especially helpful when the businesses in the group need many of the same products or services.
Independent owners and small businesses constantly search for ways to lower expenses, stay on top of finances and within budgets, and always stay a step ahead of competitors.
One popular solution to these business needs is joining a buying group. Group purchasing organizations, or GPOs, handle all purchase payments, product and service sourcing, suppliers, and related contracts. You get to enjoy the purchasing power with none of the upkeep. Plus, joining a buying group means you’ll pay much less for the items and/or services you need than if you tried to buy them independently. A buying group gives you a fighting chance against your competition, especially if you’re one Shopify store in a sea of many. Zenti’s Shopify integration can help streamline your payment acceptance.
If you compete with larger companies, they can often offer similar or even the same products to consumers — usually for much less than you can afford to offer. Plus, your big-name competition tends to get notified of new products months in advance of your small business. In addition, if products are suffering a supply crunch, such as today’s microchip shortages, the larger companies either already have the product in stock or at least first dibs on upcoming releases — not small, independent businesses.
This supply crunch means small businesses tend to see much smaller profit margins, if they see profits at all. At its worst, this crunch can spell disaster for a small business already dealing with budgetary constraints. The only way to remain competitive and maintain your small business’s independence is by joining a GPO.
What is a buying group? How does it work?
Businesses of all sizes, but particularly small businesses, often look for ways to cultivate better relationships with suppliers. When these businesses join forces, they can leverage the purchasing power of a group. If you’ve ever looked at a Uline supply catalog, for example, you’ve probably noticed that buying smaller quantities means each item costs more individually. Conversely, buying larger quantities of a single item means paying less per item.
Companies like Uline tend to offer better service to businesses that purchase bulk supplies annually through their company. For instance, say your business uses zip ties. You don’t need thousands of them, but if you’re part of a buying group of businesses that also use zip ties in their daily operation, the group can buy thousands of them at a much lower cost-per-item than you could buying them on your own. You get the added benefit of a relationship with the supplier by proxy of the buying group acting on your behalf.
On top of better pricing for the items you need, you’ll enjoy other benefits, such as special annual promotions or rebates on bulk purchases. In these cases, the buying group splits the difference between all the businesses in the group. While some buyers’ groups offer their collective buying power to any business that identifies as a small business, others provide services to specific niche industry businesses. With some research, you may find a buying group dedicated to your specific offering. You may even find a GPO that works with distributors you’re already familiar with.
The bottom line is that no per-item or per-order discount you negotiate can come close to the purchasing agreement discounts negotiated by a buying group. If you operate a retail store, profit margins can be slim, which is why Zenti offers low-cost processing for retail businesses. Whether you join a local buying group that helps businesses just in your own community or you find a GPO that works on a massive scale, a buying group and its members must both see the benefit of the partnership.
What types of businesses join buying groups?
IBIS World reports that the United States has over 700 buying groups, making up a 5 billion USD market size. Industries with small businesses leveraging the purchasing power of a GPO include:
- Non-profit entities
What’s interesting about this is that the savings small businesses in these industries see using the purchasing power of a GPO rarely trickle down to consumers. This is especially noticeable in the healthcare, grocery, and retail industries. For instance, grocery store markups tend to spike in line with supply chain issues — with grocery store merchant services from Zenti; you can pass your payment processing savings on to your loyal customers!
Do you have to pay to be part of a buying group?
Most GPOs charge membership fees. If you’re considering joining a specific GPO, research how the group receives its funding, what membership fees go toward, and other information, such as how much purchasing power your membership fee offers your specific business.
Some buying groups use membership fees as part of the group’s purchasing power, while other groups receive commissions from suppliers. Additionally, some groups may use a combination of these tactics. At the very least, it’s important to understand where a group’s funding comes from and what your membership fees entitle you to.
For instance, do your membership fees automatically grant you purchasing power, do you need to place a minimum order, or is there a specific amount you must purchase in addition to your membership fee? Your membership in the group should work out in your favor. Find out whether you’ll actually get a better deal than you would on your own after paying membership fees and meeting other requirements.
Be sure to research buying groups in your specific niche or industry. If you know business owners in the community, reach out and ask how they buy supplies and if they belong to any GPOs. Most business owners would be happy to share this information, while some may choose to keep it private.
No matter what industry you’re in, you could find several benefits within a buying group, not the least of which is saving money. See what options are available to you and perform due diligence to ensure it’s the right fit. This research alone could substantially reduce your expenses, and so can zero-cost processing with Zenti.
What are the benefits of membership in a GPO?
Joining a group purchasing organization includes benefits such as lower prices on items you’d already be purchasing, reduced shipping fees, a central hub for ordering, support from the GPO itself, and more. Let’s take a look.
Lower product prices
By combining several businesses into one, a buying group negotiates greater discounts, which typically result in prices that companies can’t get on their own. The more the group buys, the better the deal. Orders are consolidated and placed with the supplier, which then offers preferred rates for bulk purchases. The GPO passes the savings on to its members as a perk of membership. It should be noted that many suppliers require rather large order minimums before they’ll apply any discounts. Membership in a buying group helps small businesses meet those minimums. Procurement becomes easy, per-unit costs are much lower, and contract negotiations are simplified.
Reduced shipping fees
Most vendors waive shipping charges for orders of this size. In other cases, buying groups often negotiate lower shipping fees and, in some cases, even qualify for free shipping if an order is large enough. While this is undoubtedly an added benefit, remember that this typically means the entire order is shipped to one address. Ensure you understand how you will receive your products in buying groups that interest you.
Central ordering hub
Small business owners are typically short on time, making membership in a GPO another way you can save your most precious commodity. GPOs not only help you source the products you need at a lower cost than you’d pay on your own, but they also help facilitate the ordering process. Ordering through one centralized hub simply makes the entire process run more efficiently.
Support from the GPO
As a small business owner, it doesn’t hurt to get advice or support when you need it. Many GPOs actively participate in supporting their members. In fact, many GPOs are trade associations or lobbying organizations. In addition to the benefits of actual purchases, buying groups can even offer legal advice, industry updates, business assistance, workshops, and forums for support.
Other benefits include:
- Minimized workloads
- Less risk
- International purchases
The type of businesses that can benefit most from GPOs are businesses that appreciate and understand the partnership. Bringing together professionals from all walks of life allows for greater information exchange. Business owners get to share their knowledge, best practices, tips and tricks they’ve discovered over the years, challenges they’ve faced and how they overcame them, and even bad experiences they’ve had and how they learned from them.
Since GPOs manage every stage in the contract lifecycle for the group, your business independently benefits from significantly reduced workloads — you can focus more on your business strategies.
A GPO’s objective is to create positive groups that last long-term — keeping members is important. They also aim to provide members with suppliers that offer the best quality for the investment. Buying groups fully vet suppliers before choosing those they’ll do business with, ensuring the supplier’s value and credibility and lessening member risk. For instance, if a purchasing organization chooses vendors based solely on those that offer the cheapest products, it won’t take long before the group’s reputation suffers.
Finally, products created abroad often have lower costs of material and labor, which means lower prices for businesses, making international suppliers attractive to domestic businesses. But learning how to negotiate with suppliers in other countries is often complicated due to differences in culture, not speaking the language or differing product requirements. Plus, you’ll be charged an ISA fee. There are GPOs that specialize in international sourcing and procurement, and these groups typically need an offshore merchant account. Zenti can help ease international payment processing.
Sounds great…but are there any disadvantages of buying groups?
As you’ve seen, GPOs have plenty of advantages for small business owners. But what about disadvantages? The most significant disadvantage of buying groups is that they likely already have a set roster of suppliers. If you currently source products from a vendor you really like, there’s a chance the buying group you want to join doesn’t partner with that vendor. If they don’t, you might not get any discounts — it would work out the same as if you were buying from the vendor on your own. In rarer cases, some groups partner exclusively with certain vendors, and in that case, your current vendors wouldn’t qualify.
Finally, if the GPO is on the smaller side, there may be requirements like volunteering to help other group members. Make sure you understand these requirements before joining. If you have responsibilities of your own that won’t allow wiggle room for volunteering or potential mandatory events, consider a purchasing group that doesn’t have these requirements.
Partnering with Zenti
Buying groups typically have lots of members. This reality can make complex deals challenging to handle. Having a low-to-no-cost payment processor on your side can help keep disturbances to a minimum, especially if you need to switch payment processors. Reach out to learn more about how Zenti can help with your GPO.