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Bargaining Power Of Buyers

Updated on March 5, 2024
Article byAswathi Jayachandran
Edited byRashmi Kulkarni
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bargaining Power Of Buyers?

The Bargaining Power of Buyers is the influence buyers can have while transacting with sellers, suppliers, or vendors. Due to this leverage, buyers can negotiate better prices, delivery terms, quality, and services. Buyers can steer negotiations in markets dominated by buyers in large numbers. Buyer Power is analyzed qualitatively under Porter’s Five Forces Model, which studies the competitive forces influencing an industry.

Bargaining Power Of Buyers

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Analyzing the bargaining power of buyers can offer useful insights for every stakeholder, including consumers. Businesses can assess their position and ascertain whether they have leverage in price setting by outlining the extent of power buyers hold. It also helps companies recognize market conditions that require them to accommodate changing customer demands.

Key Takeaways

  • The bargaining power of buyers refers to buyers’ ability to influence product prices, terms of sale, delivery, quality, and customer service.
  • It forms part of Porter’s Five Forces Model, which is used as a method for strategic business planning. The model was introduced and propagated by Michael Porter in 1979.
  • Consumer bargaining power is unmistakable in many markets. This is because customers can apply pressure and bring about crucial changes in prices, product quality, service levels, promotional offers and benefits, etc.
  • Consumer power is high in cases where buyers can collectively make demands and enforce the rules that suit or favor them in a market.

Bargaining Power of Buyers Explained

The bargaining power of buyers, a key aspect of business strategy and industry analysis, is the buyers’ ability to affect an industry’s profitability. It is a component of Porter’s Five Forces Model—a method for strategic business planning. Michael E. Porter, a professor at Harvard Business School, created Porter’s Five Forces Model in 1979.

The bargaining power of buyer definition states that the presence of strong buyers diminishes the profit potential of an industry. Consumers create competition within an industry by driving down costs, negotiating higher quality or more services, and pitting rival businesses against one another. This harms profitability.

Buyers, or consumers, are entities that purchase goods and services. Various business segments in a particular industry may be affected by different levels of buyer influence. Assessing them can help understand whether the products and services in a market are standard or niche by considering prices, features, availability, alternatives, etc. In addition, it shows how easy it is for customers to switch to alternatives or find similar products manufactured by competitors and whether they prefer competitor products.

Buyer power is a highly noticeable phenomenon, as influential buyers can use their presence to bring prices down or demand more products or services at existing prices. This way, they capture more value at the same price. Buyer or consumer power for particular goods or services reaches its peak when the number of sellers in a market is insignificant compared to the buyers in that market. Similarly, buyer power is high when products are undifferentiated, i.e., when products are easily available. If the cost of switching to a new product is low, buyer power is high.

Another aspect that must be considered in today’s times is the availability of products online (via the internet). Since buyers have access to various products and services, in addition to comprehensive information about them, their power or influence over sellers increases disproportionately.

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Factors

Several factors affect buyer power, and they might change based on the market and the business. These factors can strongly impact the profitability and competitiveness of firms. Given below are some important elements that affect buyer power:

  • Buyer number: If a particular industry has limited buyers, they have high purchasing power. Companies operating in such industries must meet customer expectations pertaining to quality, prices, delivery terms, and discounts for customer retention.
  • Availability of alternatives: This enhances the purchasing power of consumers. Buyers can bargain and secure better terms or prices when similar alternatives offering comparable benefits and features are easily available in the market.
  • Switching costs: These costs affect the purchasing power of buyers. When switching costs are low, customers can quickly switch suppliers. On the other hand, high switching costs can reduce buyer power because changing suppliers or vendors becomes more expensive and challenging. This is particularly true for bulk purchases.
  • Backward integration potential: This refers to integrating or merging suppliers to obtain better delivery terms and product quality. It helps customers enjoy high bargaining power over existing suppliers.

Examples

Here are a few examples that facilitate further discussion about the meaning of the bargaining power of buyers.

Example #1

Let’s consider a company named ABC Ltd. manufactures ceiling fans. The electrical fittings and appliances market is saturated since numerous sellers operate in these markets. This means customers have high bargaining power as they have several choices. They can compare prices, quality, and services of various sellers and purchase from a dealer who offers the best bargain or deal. To withstand the competition and remain stable in the market, ABC Ltd. is forced to offer the following:

  • highly competitive prices
  • frequent promotional offers
  • heavy discounts, and
  • several combination deals.

Example #2

Buyer power has no effect on luxury items, such as designer bags, apparel, jewelry, etc. Since buyers do not have bargaining power in these markets, no price reduction is seen in such markets that sell niche luxury products. Luxury brands can sell their products at high prices without engaging in negotiations (of any form).

As these products are difficult to procure, buyers have no influence over sellers or their business strategies. Customers pay a premium for a luxury brand’s reputation, the product’s distinctive characteristics, and the prestige associated with displaying such products in the community, among other things. This strengthens a luxury brand’s market position and lowers buyers’ bargaining power.

How To Reduce?

Businesses can employ certain strategies to reduce buyer power. They have been listed below:

  • Brand loyalty reduces the bargaining power of buyers since customers are willing to pay higher prices (for the products they prefer) due to certain appealing features of such products.
  • Increasing product differentiation typically reduces the chances of buyers finding alternatives and switching brands.
  • Reducing the relative negotiating power of major consumers by acquiring businesses through horizontal integration to increase a business’ size can help beat buyer power.
  • Boosting the financial stability and internal growth rate of a business allows companies to combat buyer power by streamlining internal processes and implementing cost reduction techniques that do not affect product quality, brand image, or market standing.
  • Merger and acquisition strategies help companies strengthen their position and reduce the alternatives customers have in specific product categories, compelling them to buy at prices commanded by the sellers in a given sector.
  • Similarly, a monopoly in a sector enables a company to demand higher prices for its products.

Advantages And Disadvantages

In this section, let us discuss the advantages and disadvantages of the bargaining power of consumers.

Advantages

  • Product prices typically do not skyrocket and become inflated as consumers can rally for a reduction in prices or switch to alternatives easily. This ensures every buyer, irrespective of their financial status, has access to basic or essential products and services.
  • It results in improved quality and customer service, as buyers demand better products and services at the current prices.
  • As competition in the market increases, innovation occupies a prominent place, leading to the creation of better products and services. Companies are left with no other choice but to innovate to stay relevant and competitive in the market.
  • Customers can find the best products and services in a specific category by comparing the deals offered by online and offline sellers. Hence, buyers need not settle for less as extensive product information and several choices become available, helping them make judicious purchase decisions.
  • When governments (local or national) define consumer protection laws, a marked rise in customer power is observed.

Disadvantages

  • Increased competition forces the prices in a market to go down, causing a significant reduction in sellers’ profit margins.
  • It reduces the overall profitability of businesses in the market.
  • If buyer power is extremely high, it can compel manufacturers to cut down costs associated with research and development, raw material supplies, and skilled labor, among other things. This can have a negative impact on product quality, with inferior goods entering the market.
  • If the friction between buyers and sellers, suppliers, or vendors is intense, it can lead to extreme dissatisfaction and unrest in markets, making business challenging.
  • Manipulating customers through prestige pricing (by creating a distorted image about product quality) to fight high customer power is a distinct possibility.

Frequently Asked Questions (FAQs)

1. How to determine the bargaining power of buyers?

The determination of the bargaining power of consumers involves analyzing multiple market conditions and scenarios. These are market concentration, price sensitivity, and availability of alternatives, among other things. They may also include switching costs, the size of buyers in a market, industry regulations, etc.

2. How to deal with the bargaining power of buyers?

Businesses can use tactics like product differentiation, business acquisition through horizontal or backward integration, internal growth measures, etc.

3. How does the bargaining power of buyers affect a business?

A firm may be strongly impacted by consumers’ bargaining power. If buyers have significant bargaining power, they may demand price reductions, special offers, or other concessions, which usually affect profit margins. Additionally, it might force companies to spend more on making their products appealing to customers by boosting their singularity.

4. When is the bargaining power of buyers low/weak?

Customer power is low in the following cases:
– When buyer numbers surpass supplier or seller numbers,
– When switching costs are high,
– When mergers and acquisitions or business integration in any form is effective,
– When product differentiation is high, and 
– When substitutes or alternatives are not easily available, customer bargaining power is low.

This article has been a guide to what is the Bargaining Power Of Buyers. Here, we explain it with examples, how to reduce it, factors, advantages, & disadvantages. You may also find some useful articles here –

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