What is the bargaining power of buyers?
Buyer’s Bargaining power refers to the pressure consumers can exert on businesses to get them to provide higher quality products, better customer service at lower prices.
So, strong buyers can pressure sellers to lower prices, improve product quality, and offer more and better services. All of those things represent costs to the vendor.
Let’s just take an example, Two companies A and B are producing substitutes with nearly equal pricing.
Now we have a situation wherein company A raises its prices because it thinks consumers won’t mind since their product is required.
But the consumers shift to company B and therefore the sales of company A thus falls.
Company A now wakes up to understand this fact and quickly rolls back the price increase. Thus the buyers have bargained and shifted back to company A. So that’s how it works.
How to assess the power of a buyer group
The power of an industry’s important buyer groups depends upon:
Factors affecting bargaining power of buyers
Buyer’s Concentration
If the amount of buyers is little relative thereto of suppliers, the buyer’s power is going to be stronger. Conversely, if the buyers are widespread, then their business is additionally smaller, and that they are easy to ignore for a producer.
Percentage Of Sales
Another leverage for a buyer is the amount of business they provide to a producer. If the share of sales from one buyer is critical, then the producer won’t want to risk losing their business.
Switching Cost
If switching costs are low for a buyer, then any dissatisfaction with a producer or a product will cause a loss of business. This is often because the customers are going to be ready to find an alternative with minimum hassle and inconvenience.
Threat Of Integration
If the customer can integrate or merge suppliers, the customer has greater bargaining power over the prevailing suppliers.
Price Sensitivity
If the buyers are sensitive to changes in prices and may stop the purchase from producers, then it becomes difficult to ignore their demands.
Available Substitutes
If there are many substitutes or alternatives within the market, then the buyers will have tons of options to modify and search around.
Information
If buyers have full information regarding the producer’s operations and what their actual costs are, then they’ll be able to demand better prices from the producer.
Undifferentiated Products
If the producer sells a typical or undifferentiated product, then they’ll usually have the potential threat of a buyer switching producers.
If many producers are supplying an equivalent sort of product, a buyer will have the choice of exploring possibilities.
Bargaining Power is High If
- Buyers are more concentrated than sellers.
- The switching costs of the buyer are low.
- Also, the threat of backward integration is high.
- The buyer purchases products in bulk (high volume).
- They can get similar products/services from other suppliers.
- The buyer is well-educated regarding the product
- Substitutes are available.
- The product is not differentiated.
Bargaining Power is Low if
- Buyers are less concentrated than sellers.
- The switching costs of the buyer are high.
- The threat of backward integration is low.
- The buyer is unable to get similar products/services from other suppliers.
- The buyer is uneducated regarding the product.
- Substitutes are not available on the market.
- Buyer purchases comprise a small portion of seller sales.
Increasing Switching Costs
Focus on creating an environment that your buyers would miss if they switched to a different vendor.
For Instance, manufacturers of health monitor bands usually build a companion website to store users’ historical health data in the cloud.
Customers would think twice about changing to another vendor and leaving their data behind.
Offering Differentiated Value
Customer retention always starts with a good product. In a B2B scenario, you will hit a sweet spot if your products stand out of the box for the quality or performance of buyers’ final products and services.
Increasing The Social Presence
Promote your products among influential people within the buyers’ circles, getting key endorsements when appropriate.
Use Pricing Strategies
This helps to increase retention. You can opt for implementing pricing strategies through lower prices for current customers or long-term membership deals.
Complimentary Services
You can attract customers through your business model by offering after-sale services they find valuable.
Personalizing Customers’ Experience
Personalize your customers’ interaction with the merchandise and therefore the company. The more personalized their use of your product is, the harder it’s for them to modify over to a special solution.
Offer Attractive “Upgrades”
If an agreement is coming to an end, you’ll offer a beautiful upgrade if customers renew. Think about how cell phone companies offer free upgrades or app installations in the latest smartphone every two years.