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What is Group Purchasing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Group purchasing is a process that allows several individuals or businesses to come together for the purpose of purchasing various types of goods and services at discounted rates. The idea behind this type of purchasing consortium is to combine the buying power of all the members and use that volume purchasing to convince service providers to extend the same low rates to every member of the group regardless of that member’s actual usage. Smaller retailers have often used this approach to secure discounted pricing on goods for resale in their stores, allowing them to successfully compete with larger retailers that operate on a national or international basis.

The scope of the group purchasing may be very narrow in scope, limited to one particular range of products. For example, the group or cooperative may seek discounted rates on different types of telecommunication services. Within this range, vendors for long distance services, cellular services, Internet, and even teleconferencing services may seek to secure contracts with the group, extending rates that are usually reserved for larger clients. At other times, the consortium may be structured to allow for the joint procurement to extend to just about any type of good or service, allowing the members to freely pick and choose which programs they wish to opt into and use with any degree of frequency.

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Everyone involved in the group purchasing effort benefits from the arrangement. Members of the group receive discounts that are based on the total business volume of the collective, rather than just their own volume usage of a given product. Typically, this results in savings that help to reduce operational expenses even for smaller entities that participate in the group purchasing, which in turn increases the amount of net profit that the smaller business generates. At the same time, each member of the group potentially has the ability to offer their customers a wider range of goods and services than would be possible if negotiating pricing with vendors on their own.

Vendors also benefit from working with group purchasing organizations. Typically, this approach allows the vendor to secure a significant number of new clients with relatively little effort. Since many of these agreements require signing a contract that requires the central organization to encourage members to do business with approved vendors, the impact on the business volume of the vendor can be impressive. As a result of the increased volume in business, the vendor is able to enjoy a healthier bottom line, a larger client roster, and a greater degree of financial security, at least for the duration of the contract with the group purchasing organization.

The exact structure of a group purchasing organization will vary, based on the goals of the group and the amount of financial support that members provide to operate a central organization that is capable of finding and locking in the most competitive pricing for various goods and services. Some groups of this type operate on a local or regional level, while others secure vendors on a worldwide scale. As the group increases in membership, negotiating new pricing with vendors is not uncommon, with that new pricing providing even greater benefits for everyone involved with the consortium.

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