Wondering what is bargaining power of buyers? This blog article got you covered!
Well coming across the phrase “bargaining power of buyers” surely you have also encountered Porter’s Five Forces which are competition, supplier power, buyer power, threat of new entrants and substitute products and services. Below is an illustration from Harvard Business Review.
Porter’s Five Forces framework can be useful for framing strategies for a company to confront these factors to their competitive and profit advantage. This blog article however focuses on explaining the “Bargaining Power of Buyers”.
So What is Bargaining Power of Buyers Really?
Well, there are variations of definitions of bargaining power of buyers, it is normally attributed to the state when a buyer is able to demand terms that are more favourable to them than the seller.
Another definition tells that bargaining power of buyers can also be the ability of the buyer to lower prices for their favour hence reducing the profit of the seller.
One common illustration of bargaining power of buyer is when there is a group of people or company that are able to lay down – and demand negotiating terms that are more advantageous to them compared to sellers (and sometimes even other buyers).
What are Factors Influencing Bargaining Power of Buyers? Here are Some.
- Economic importance of buyers to suppliers.
This one is pretty obvious right? One illustration to further elaborate on this is, the larger the buyer size, the higher the bargaining power is.
However, this may also vary. For instance, not only the number of buyers should be high but there are instances that a buyer is only a single client but can affect the seller’s profit to a large extent.
- However, bargaining power of buyers can also be affected by the nature of demand and this does not always intend to reduce profit of sellers.
In some cases, buyers are willing to pay more (and hence demand) to be provided with products and services that they are looking for. This way, both the buyer and seller benefit from the scale and type of demand.
- Decline in supplier performance.
This factor may increase bargaining power of buyers. However, this does not necessarily intend that buyers would automatically exercise their bargaining power.
Well, How Do Buyers Exercise Their Bargaining Power in Different Industries?
Well, the question to ask first before determining how buyers exercise their negotiating power is how do buyers gain bargaining power in the first place?
This usually happens when the demand for a particular good or product is high that the buyers get a sense of control over the decision of sellers and their strategies in delivering and selling their products.
In retail industry, the higher the buyer’s discount, the lower the retail prices of a product. Normally, in retail industry, most people see that the bargaining power of buyers is best exercised through the ability to demand discounts in retail.
However little do people know the bargaining power of buyers in retail industry is best exercised by the larger size of buyers, not by small buyers.
For example, if larger buyers are able to demand larger discounts, suppliers will have to compensate their loss or reduced profit against smaller buyers.
In the airline industry, all of porter’s five forces are greatly at work. There is high competition in terms of price among rivalries, airline industry in itself is an expensive business which already causes a significant amount of reduction from the company’s profit.
That’s not all, there are always new players in the industry and substitutes such as other means and options of transportation are readily available.
While when it comes to buyers, their negotiating power lies within the buyer’s unpredictability. Generally, buyers would choose the best prices without considering much of the quality of services, while others choose quality over expense.
To begin with, in the technology industry there may be instances when power between buyer and suppliers may be imbalanced.
This is because supplier companies are usually smaller in size compared to buyers. For example, buyers in the technology industry comprise everyone who has access to computer and the internet.
Also, buyer power in technology industry is even made stronger due to the tight competition in the industry, meaning, there are a lot of other technological options available in the market.
The bargaining power of buyers in technology can be exercised more in instances when the buyer is important to the entirety of the supplier’s surplus.
It is also best exercised when suppliers need to adopt certain technologies in order to cope with the demands of their large or firm buyers.
Fast food industry
Fast food industry comprises a wide array of substitute products, hence the competition is too high, and the bargaining power of buyers are also higher.
Not only that, there is very low switching cost for buyers within the fast food industry. Buyers usually do not feel the monetary consequences of shifting from one fast food product to another.
In these cases, fast food chains are compelled to offer better prices, keep up with improving their products to keep buyers, while buyers are able to bargain for demands in terms of prices and quality of products.
There’s just too much pressure keeping up with buyer preferences in the fast food industry!
However, suppliers do not always lose the game of fast food industry. These companies are wise enough to stay rich and to stay in the business course.
So… Suppliers have ways to compensate for low prices through the high number of suppliers. These fast food chains normally have access to cheap products, materials and ingredients too!
This is yet another industry where buyers exercise high bargaining power. Due to the variety of products in the grocery industry, just like in fast food industry, substitutes are plenty and shifting costs are low.
However, it is also important to know that the relevance of grocery to buyers is also high. Grocery products are of absolute necessity for buyers too.
What does this mean? If there is inefficiency among retailers and grocery supply chain in terms of competition and prices, buyers may also suffer consequences.
Why? Because any problem in the competition among suppliers and retailers can significantly affect consumers because as earlier mentioned, grocery products are of high importance for consumers.
Buyer power is not only exercised by daily consumers too. Retailers also exercise bargaining power of buyer over suppliers and this power depends on retailer buyers and suppliers relationship. Here comes in play concepts such as standard “market price” or “market framework”.
But Wait, When is Bargaining Power of Buyers High?
So here are several scenarios:
- Bargaining power is high when buyers are few in number hence the seller will have to ensure that their products will sell with the few numbers of people within their target market.
- Buyer power is also high when a particular buyer comprises a large percentage of profit.
- The presence of increased competition also relatively increases the bargaining power of buyers since there are other options to explore from.
- Access of buyers to information such as production cost can enable buyers to bargain for lower prices.
- If a buyer is price sensitive, any changes in the prices (whether necessary or not) may send off buyers away hence the seller will have to concede to their demands in order to keep the transaction alive.
And When is Bargaining Power of Buyers Low?
So here are several scenarios:
- Bargaining power is low when buyers are high in numbers, meaning there is high demand for products and services.
- Lack of access to information regarding the product may also weaken bargaining power of buyers because knowledge regarding the product can be used as leverage for bargaining demand. Without this, there’s one less support for pushing demands forward.
- Another is if the product is one of a kind, meaning there are few sellers that offer particular products and services or if the product is unique in the market.
- When there are few substitute products available in the market.
- When the volume of production is low.
There’s More! Tips for Scoring A+ for Bargaining Power of Buyers Essays
- In topics such as bargaining power of buyers, there is a wide array of circumstances and scenarios that differ from one another, hence scoring high in your essays depend on how you argue your points.
- Lectures tend to give higher marks when they see and read that essays are written with structure and coherence. Hence, in writing and presenting your arguments, it is good to create sub-sections to your essay in order to show structure and coherence.
- Give your lecturers numerical data to support your argument. It is always good in essays to be backed with quantitative data. It makes your essay more reliable and it does look good on paper.
- Most importantly, whenever lecturers and professors require essays, often they are looking for specific arguments and points. Hence, it is important to heed carefully on the instructions given to you for your essays.
Sooooo there you go! We hope we have provided you with enough information about what bargaining power of buyers really is!
Did this blog article help? If yes, feel free to comment below and share to your friends!