Bargaining power of buyers: Porter’s Five Forces Analysis
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The bargaining power of buyers comprises one of Porter’s five forces that determine the intensity of an industry. The other forces include barriers to entry, industry rivalry, the threat of substitutes and the bargaining power of suppliers.
The presence of powerful buyers reduces the profit potential in a given industry. Buyers increase competition within an industry by forcing down prices, bargaining for improved quality or more services, and playing competitors against one another. The result of this is diminished industry profitability.
How to assess the power of a buyer group
The power of an industry’s important buyer groups depends upon:
- Characteristics related to its market situation
- The relative importance of its purchases from the industry as compared to its overall business
The following conditions indicate that a buyer group is powerful:
- The buyer group is concentrated or purchases large volumes relative to the seller’s sales
- Products purchased from the industry represent a significant percentage of the buyer’s costs or purchases
- Products purchased from the industry are standard or undifferentiated—alternative suppliers are easy to find and competitors are played against each other
- Few switching costs exist (little penalty for moving to another supplier)
- Profits earned are low (greater incentive to reduce purchasing costs)
- Buyers pose a significant threat of backward integration—buyers demand concessions, and may engage in tapered integration (producing some components in-house and purchasing the rest from outside suppliers)
- The industry’s product is not important to the quality of the buyer’s products or services
- The buyer has full information (their knowledge of demand, market prices and supplier costs provide them with leverage)
How to mitigate a strong bargaining power of buyer
| Increase switching costs | You can create an environment that makes your buyers more reliant on you; if they were to switch over to a different vendor, it may cost them. Apple’s products/services are an excellent example of increasing switching costs. The company has developed what is known as the “Apple Ecosystem” and has created products/services that can be interconnected, synchronized and seamlessly integrated to provide the best user experience possible. Each product/service introduced by the company complements their overall product suite to maintain their customer base. |
| Vertical integration | You can lower your buyer’s bargaining power by exploring forward vertical integration opportunities in your business. For example, Nike introduced their retail store as a Direct-to-Consumer sales strategy, allowing them to bypass the licensed retailer, distributor and wholesaler from the supply chain. This gave them immediate access to consumers, project an exclusive brand identity and dictate their terms. Keep in mind that this option is more viable and logical in a business-to-business environment than in a business-to-consumer environment. |
| Offer differentiated value | When your buyers have many options and all products are comparable, differentiating yourself will mainly involve pricing of the product. Differentiation can also be done by including value features, performance, efficacy, durability or warranty. This scenario is more relevant in the consumer market. |
| Innovative business models | If you have a novel technology, consider licensing it rather than selling it. Customers will have limited access to your technological know-how in this manner and will also look to you for installation and after-sales support. In some ways, this could be a new source of revenue |
| Personalize your customers’ experience | It is crucial to personalize your customers’ interactions with the product and engage with them as individuals. The more personalized their use of your product, the more difficult it is for them to move to a different option provided by a competitor. One of the best examples of personalization is Amazon’s product recommendations, as they use AI and Deep Learning techniques to create product suggestions. This gives customers more product information, while also improving their whole shopping experience. |
| Offers, complimentary services and price strategies | Lowering product prices, offering discounts on long-term membership and providing free product upgrades are some conventional ways to retain customers. |
It is critical to understand and assess your buyers’ bargaining power. Bargaining is more than just price negotiation; your customer can bargain on the technical, functional or economic aspects of your product/service. You must identify and mitigate your buyers’ bargaining power, regardless of how good your relationship with them is or whether they use their power.
Hitesh Badgujar