It can be described as the pressure consumers exert on businesses to make them provide better customer service, higher quality products, and lower prices. The buyer’s bargaining power dictates the competitive environment for sellers, thereby influencing their ability to obtain profit.
When a buyer is strong, the seller is pushed to lower the prices, provide more and better services, and improve product quality. If a buyer is stronger, the industry becomes more competitive, and the seller’s profit potential is reduced.
Buyer’s power is highest when they can get together, and they account for a bigger percentage of the sales revenue of the producers. Or when several suppliers provide the same type of product.
Similarly, if a buyer is weak, that is, at the mercy of the seller in terms of quality and price, the market becomes less competitive, making sellers make more profit.
Categories of Buyers
A company must understand all the types of buyers before coming up with strategies to handle them. The buyers are unique in their ways, and a seller has to address their specific needs. Each group has its potential power over suppliers and producers and must be handled with care. Here are five different groups of buyers:
- Adopters- They don’t shy away from trying out new products to see if they offer any value to them. These people will understand a product before adoption, making themselves a credible source for the product’s references. Read more about free no deposit slots. Adopters are the opinion leaders of their particular market segments and thus set example for others.
- Innovators- Comprising mainly of a small group of early buyers, innovators are up-to-date on the industry. Since they’re always on a mission to experiment with new products, innovators are aware of the current and future technological trends. Once they purchase a product and they like it, they will influence other potential innovators to buy a similar product. On the contrary, innovators don’t always influence a widespread trend.
- Early Majority- Unlike adopters and innovators, this group is not quick to try out new products in the market. The early majority rely on credible references from others. And will only accept a product once their peers approve of it. New and innovative products don’t necessarily thrill the group.
- Late Majority– By the time the late majority purchase a product, stronger buyers might be already consuming the next new product. They wait for a product to be known and established in the market. Once the prices fall, and they can prove the reliability of the product, a purchase can be made.
- Excessive Traditionalists- The group purchases a product once it has become a need or a necessary purchase. By then, competitors will have entered and established themselves in the market, and prices will be at the lowest level.
Personalities of Buyers
Different buyer behavior exists within a buyer group and influences how the product market will operate. Here are some of them.
- The serious buyer- While they are very serious about buying, the serious buyers aren’t in a hurry to purchase a product. They weigh all the alternatives and make choices based on the benefit of each product.
- The highly motivated- They have carried out their comprehensive research, are informed, and are ready to purchase immediately. They are not only willing but also have the means to make the purchase.
- The bargain hunter- It’s unclear whether bargain hunters have the capital for a full-priced purchase or are just habitual bargainers. They want to buy, but must first get a convincing deal before going ahead with the purchase.
- The casual looker- Most of the time, they just look or browse different products. They probably don’t have the means to buy right now or aren’t interested in buying at this point. Maybe the casual lookers are just getting prepared in advance for future purchases.
Types of Business Buyers
Businesses put many considerations before deciding to buy products and materials for their businesses. Where the buyer is in a position to make a large profit for their company, they often gain influence that can allow them to control the market. Here are four types of business buyers.
- The intimidators- They aim to get a good deal at whatever means. They may use the power to force their way into better deals with a company. The intimidators aren’t afraid to use threats and hostility to sway the negotiations.
- The number crunchers- They collect information, create a market model, and use these data in product purchases. Through the model, they can decide on which product to purchase, when to buy it, and the price to pay. If needed, they can use the data to apply pressure later.
- The engineer- They are mainly interested in how a product functions. The engineers discuss and make decisions based on features and technical details of the product.
- The talker- They share their knowledge widely, thanks to the belief that they fully understand how the market works or operates. With a strong background in their fields, talkers are rarely dismissed. However, to ease conversation and decisions, it’s crucial to know what interests them.
Factors Determining Buyer’s Bargaining Power
A company’s product and selling decisions depend on the strength of buyers present in the market. Meaning a stronger buyer can demand lower prices, higher quality products, and services. Forcing different companies to engage in price wars, which end up making the industry less attractive.
The strength of the buyer’s bargaining power depends on the market condition and characteristics, and sales revenue percentage they provide.
- Buyer Concentration
Few yet more concentrated buyers have a stronger power over the producers. The producers won’t ignore any demand since their sales revenue depends on the few customers. But when buyers are widespread, a producer can easily ignore them since their business is smaller.
- Sales Percentage
A producer will never think of losing one buyer with a significant sales percentage. They will do everything to keep him.
- Undifferentiated Products
When a company sells undifferentiated or standard products, then there is a high chance that a buyer will switch to another company. When many companies supply the same type of products, they give consumers room to explore possibilities.
- Switching Cost
A buyer with a low switching cost can easily find an alternative seller. They can leave whenever they experience any dissatisfaction with a product or a producer.
- Threats of Integration
The producer has little power if a buyer is capable of integrating backward. Such buyers may start producing the product by themselves, or even acquire the producer.
A buyer who is aware of a company’s operations and product costs can demand better prices. When the consumer isn’t fully informed, producers can take advantage of and exploit them.
- Price Sensitivity
A producer can’t ignore the demands of consumers who are price sensitive and can stop buying products if price increases.
- Available Substitutes
With several substitutes or alternative products in the market, a buyer will have more power since they have many options to choose from.
How to Manage the Bargaining Power of Buyers
Businesses can handle consumer’s bargaining power by protecting the business from strong buyers or choosing the right buyers. Here’s how a company can protect a business from a strong buyer.
- Low-cost production: Even though this strategy can only survive the short term, a business can lower the production cost to offer low prices for buyers.
- Pick easy to serve customers: A business should choose a smaller customer base with easier access and less service cost.
- Differentiate the product: Create a unique benefit or feature that isn’t available among competitors but is vital to the consumers.
- Establish walk away prices: This may not always be possible, but a business can create a minimum price that can’t be crossed for whatever reason. It works if the relationship between buyer and consumer is good.
- Offer only desired benefits: Rather than creating several features that buyers may not know about, a business can concentrate on what the consumer needs. In the process cut production costs as they satisfy their customers.
A business can also opt to attract buyers who, instead of being demanding, become partners of the company. It can achieve this through:
- Choosing buyers whose priority is quality, reliability, and ease of delivery of the product. They focus on value rather than price.
- Choosing buyers requiring customization that only your company can provide.
- Getting buyers who have customers that demands your products.
- Selecting buyers with customers willing to pay a higher price.
- Going for buyers whom the product plat an important role in their product portfolio
Example of Bargaining Power: Coca Cola Company
The individual customer’s bargaining power in the Coca-Cola Company is low. The individual customers not only buy in small volumes but also are not concentrated in a specific market.
The level of differentiation between them and their close competitor, Pepsi, is low. Switching cost is low for customers, but both companies enjoy strong brand loyalty. The Coca-Cola customers aren’t sensitive to price.
Whether a retailer or individual, backward integration isn’t possible for customers. The only way for a retailer to acquire bargaining power is through buying products in large volumes. In general, customer bargaining power is weak.