Bulk purchasing allows consumers to lower the cost of a product by buying a large amount of it at once or contracting to buy a large amount of it over time.  Producers agree to the lower price because it guarantees them a sale, ensures that they can produce at volume, and can involve lower marketing and other administrative costs.

The power of bulk purchasing is greatest when the purchaser is buying commodities or other products where multiple producers are selling similar or identical goods, such as generic drugs.  Bulk purchasing exerts far less power when negotiating for a unique good, such as a drug that is still under patent and that has unique benefits.

Wal-Mart now bulk purchases over 360 generic drugs and resells them for $4 for a 30 day supply to their customers.  They claim this has saved their customers over $600 million since they introduced this program.

The New York Public Interest Research Group (NYPIRG) runs a fuel oil buyer’s group in which they negotiate a single contract with a fuel oil supplier for all of the members at once.  This typically saves members 10-15% per gallon on their fuel oil purchase.  NYPIRG gets a small membership fee from the members and then takes a few cents per gallon on each purchase.

Agway, now a part of Southern States Cooperative, bulk purchases fertilizers and other agricultural products for their member farmers.

Business Model: 

An intermediary aggregates the purchasing power of many and negotiates a single low price for that good.  The intermediary takes a cut of the savings and passes the rest of the savings on to the end consumer.  Sometimes the intermediary charges the end consumer a membership fee.

Assumptions: 

1. There is competition among producers.  If a product is unique enough and needed enough the producer will maintain their ability to set the price even in the face of a large bulk purchaser who the producer knows needs the product.  The more similar competing products can serve the same need the stronger the hand of the bulk purchaser.
2. Bigger is better.  The more the intermediary can aggregate consumer demand the stronger his hand.
3. Some of the savings must be passed on to the end consumer or they won’t have an incentive to purchase through the intermediary.  This can be as simple as Wal-Mart’s low prices or can involve a consumer signing a contract such as in NYPIRG Fuel Buyer’s Group where consumers sign one year contracts in the expectation of savings throughout the season.

Speaks to multiple leverage points.

• Potential  of new alliances to create risk pooling or collective purchasing/action
• Alliances can aggregate purchasing demand
• New kinds of alliances, such as online support groups for patients with chronic conditions, offer the potential to organize them into bulk purchasing groups.
  
• Transparency across multiple pricing and reimbursement strategies
• Bulk purchasers attract end consumers partly by having transparent pricing.  Wal-Mart advertises $4 prescriptions for 360 different generic drugs.  The NYPIRG Fuel Buyer’s Group uses the spot market price printed in the paper plus a certain percent to set prices with distributors.