The bargaining power of buyers is one of Porter’s Five Forces that can help businesses and researchers determine the level of competition and the intensity of the entire competitive environment. The other forces identified by Michael E. Porter are the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, and the intensity of competitive rivalry.
Defining, Explaining, and Understanding the Bargaining Power of Buyers
What Are the Effects or Impacts of Buyer Bargaining Power on a Particular Business? How Does this Power Affects Competition?
To understand what buyer bargaining power is, it is first important to note that “buyer power” is the capability of consumers to exert pressure on businesses to lower their prices, provide higher quality products, and/or offer better customer services.
Because of this capability, customers attain a bargaining power that can indirectly or directly enable them to negotiate terms and conditions about a product or their purchases, influence the decision of businesses, and drive the direction of an entire industry.
Porter argued that buyer power affects the ability of a particular business organization to achieve profitability or maximize its earning potential, while also affecting trends in the competitive environment of a particular industry.
The impacts of the bargaining power of buyers are both positive and negative. A strong bargaining power promotes competition, thereby giving consumers more options. A weak bargaining power creates some sort of monopoly.
In other words, a strong bargaining power fundamentally makes an industry more competitive and reduces the control of businesses over their products and the market. A weak bargaining power puts consumers at the mercy of a particular business.
What Are the Factors Influencing the Bargaining Power of Buyers? What Are Some Specific Real-World Examples?
There are different factors that influence the bargaining power of buyers, especially the level at which customers can exert pressure on businesses and the industry or whether their buyer power is strong or weak. Take note of the following:
• Availability of Options or Alternatives: One of the factors influencing the bargaining power of buyers is the availability of alternative products. More alternatives mean more bargaining power while few alternatives give buyers less power.
• Presence of Substitute Products: Similar to alternative products, substitute products give consumers more options that allow them to exert pressure on a particular business. Substitutes are products that address the same economic needs. Fish is a substitute for cattle meat and smartphones are substitutes for landlines. Remember that the threat of substitutes is one of the Five Forces identified by Porter.
• Buyer-To-Seller Concentration: If buyers are more concentrated than sellers or if there are few consumers and many sellers, then the buyer bargaining power is low. This is called the buyer concentration-to-firm concentration ratio.
• Accessibility of Market Information: Another factor influencing the bargaining power of buyers is the availability and accessibility of market information. Examples include real estate listings or prices of plane tickets and hotel bookings. Access to this information makes consumers more informed about their options and eventual purchase decisions, thereby giving them more bargaining power.
• Price Sensitivity of Consumers: Price sensitivity measures how much the price of a product affects the willingness of consumers to make a purchase. In certain industries and product categories, when the price goes up, demand goes down, and vice versa.
• Costs of Switching Products: Switching costs are the costs incurred by consumers as a result of switching products or brands. These costs can be monetary, psychological, or based on effort and time. A low switching cost gives buyers an incentive to readily switch to either an alternative or substitute product, thereby giving them strong bargaining power. High switching cost gives them weak bargaining power.
• Unique Selling Points of Products: Products with a high differentiation compared with alternatives or substitutes lower the bargaining power of consumers. Alternatives and substitutes that have a high degree of similarities increase bargaining power.
• High Volume Purchases of Buyers: There are industries or markets, as well as transactions, with consumers transacting at large volumes. High volume purchases give these consumers a stronger buying power against a particular business. Examples include standardized products such as production raw materials including textiles and packaging, among others; and wholesale trading to third-party distributors.
What Can Businesses Do to Mitigate the Impacts of Buyer Bargaining Power? How Can They Leverage this Bargaining Power?
The general effect or impact of the bargaining power of buyers centers on whether or not a particular business can increase the price of its product, as well as on whether or not it should reevaluate its marketing and specific product development strategies.
Note that there are different ways to mitigate the impacts of this bargaining power. However, it depends on what particular factors influence the bargaining power of buyers. As such, mitigation strategy can be industry-dependent or market-dependent.
An example would be the smartphone market. To lower the bargaining power of consumers, a manufacturer can introduce a highly differentiated device through product innovation. It can also introduce smartphone products that are priced relatively lower.
Businesses can also leverage this bargaining power either by creating a new product category to effectively create a new market demand or create a specific market niche with relatively higher barriers to entry and less threat from new entrants.
Creating loyalty is also another way to address the bargaining power of buyers. Apple has proven that it can still offer relatively more expensive products than its competitors due to its brand strategy that revolves around creating brand loyalty and product complements.