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How Do GPOs Make Money?
By Mackenzie Oakley | July 21, 2020
Group purchasing remains one of procurement’s best-kept secrets. Not because the concept is new – the first group purchasing organization was established in 1910 – but because preconceived notions about the concept of group purchasing are still prominent in the sourcing world today.
If you’re concerned that a group purchasing organization, (GPO) won’t be able to accommodate your unique requirements or worry that a GPO will lock you in indefinitely, the team at Una is dedicated to answering your questions so you have all of the information available to determine if group purchasing is right for you.
In this article, we’ll address one of the most frequently asked questions regarding group purchasing organizations and one that often serves as a point of contention when it comes to joining a GPO: what fees are associated with joining and how do GPOs make money?
We’ll cover the following:
- The history of GPOs and how they were initially structured
- Different ways GPOs may be funded
- How a GPO like Una makes money
History of GPOs
As previously mentioned, the first group purchasing organization was established in the healthcare industry in 1910 as a way for hospitals and clinics to save money on supplies and medications. The GPO negotiates the prices of these items, among other things, on behalf of the healthcare provider. At first, the number of GPOs grew slowly with only about 10 established by 1962. This number increased to around 40 by 1974 as growth was stimulated by Medicare and Medicaid.
That number tripled by 1977 and today, there are approximately 600 GPOs serving healthcare providers throughout the United States.
In 2019, it’s estimated that GPOs saved the healthcare industry more than $34 billion and will reduce supply chain costs by more than 13% over the next decade.
Growth in other industries
After growing in popularity in the healthcare industry, the GPO model caught on in other verticals as well, including the business, hospitality, dental and veterinarian segments.
Horizontal GPOs are great at reducing procurement costs by combining the demand for non-strategic, indirect spend on supplies and services of a broad spectrum of industries and trades. As a result, the consolidation of purchasing power and the GPO’s ability to establish contracts achieves preferred pricing, terms, and service standards for their members.
The Million Dollar Question
The concept of group purchasing and working with a group purchasing organization sounds appealing but what are the fees associated with joining a GPO? Will you end up paying to save? How do GPOs make money?
Healthcare GPOs are normally funded by administrative fees paid by vendors. Usually based on the price of whatever items are purchased, the fee is paid when a GPO member buys through a GPO contract. On average, the contract administrative fee for healthcare GPOs ranges from 1.22% to 2.25%.
Likewise, GPOs in other vertical or horizontal segments typically make money by using this same vendor-fee model. GPOs might also collect participation fees from their members, or a use combination of the two methods. The membership fee may be a one-time thing paid upon joining or a set fee collected on an annual basis. In other circumstances, some GPOs might even waive their membership fee after a certain purchasing threshold has been met.
When researching GPOs and their pricing structure, we recommend working with one that is completely transparent about the way they conduct business and what they expect of their members when it comes to fees and purchasing volume.
The Una Difference
At Una, our pricing structure is set up so membership is always free to join and free to use. Really, it’s free. Every time you purchase through an Una contract, we are paid an administration fee by the supplier. In turn, we use the administrative fee to finance our services, allowing us to make and keep membership free for our members.
In other words, we make money by saving you money.
Free membership might sound too good to be true, but the reasoning is simple. Suppliers are motivated to pay admin costs because it essentially guarantees an increase in volume sold thanks to the collective buying power of Una’s membership.
As a group purchasing organization, Una simply facilitates the connection between suppliers and manufacturers and the businesses that need their products and services. Most importantly, we take the time to vet our suppliers and negotiate the contracts so our members are free to pick their favorites and start saving immediately.
In addition to never charging a membership fee, Una does not require members to purchase from certain suppliers or commit to a specified purchase volume. As a result, you are in control as a member and our team of Sourcing Advisors are here to provide support every step of the way.