Key Determinants of Buyer s Power. Part I. Bargaining Leverage.
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1 Key Determinants of Buyer s Power. Part I. Bargaining Leverage. The company s choice of buyers should be viewed as a crucial strategic decision. A company can improve its strategic posture by finding buyers who possess the least power to influence it adversely.
2 Key Determinants of Buyer s Power Today we will continue with the Key determinants of Buyers power from the point of view of Bargaining leverage Determinants of Buyer s Power BARGAINING LEVERAGE or PRICE SENSITIVITY 1. Differentiation of Products 2. Buyer Switching costs relative to the firm switching costs 3. Presence of Substitute Products 4. Buyer Concentration vs. Firm Concentration 5. Buyer Volume 6. Price/Total Purchases 7. Buyer Information 8. Ability to backward integrate 9. Brand Identity 10. Impact on quality/performance 11. Buyer Profits 12. Decision makers incentives 13. Pull-Through 2
3 Key Determinants of Buyer s Power. Bargaining Leverage Buyer Switching costs relative to the firm switching costs Presence of Substitute Products Buyer Volume Buyer Concentration vs. Firm Concentration Buyer Information Ability To Backward Integrate Pull-Through 3
4 1. Switching Costs The lower the cost of switching products Switching Costs: The more effective is the buyer power Higher switching costs (defined earlier) lock the buyer to particular sellers and mitigate buyer power SAP ERP has higher switching costs vs other software Starbucks vs. Costa Coffee or Nero. Lower switching costs Gasoline from Shell, Texaco or Exxon: Lower switching costs 4
5 2. Presence of Substitute Products When there are substitutes Presence of Substitutes The buyer can consider to replace the seller or the product itself for another one Identifying substitute products entails searching for other products that can perform the same function as the product of the industry. A book can be replaced by a video from YouTube Cow Milk substituted by vegan milk Securities can be replaced by alternative inv. funds 5
6 3. Buyers Volume The bigger the purchases of the customer Large volume buyers are particularly potent forces if heavy fixed costs characterize the industry (as in corn refining and bulk chemicals) and raise the stakes to keep capacity occupied. Buyers Volume The greater is the damage from losing that customer Supermarket Chain buying all production beef to a Nicaraguan firm An investment banking boutique without diversity of clients Bombardier losing a top big client A buyer group will be powerful if it purchases large volumes relative to seller sales. Retaining its business is financially important to the seller. 6
7 4. Buyers Concentration. The smaller the number of buyers Buyers Concentration Quota Sugar Exports Latin Countries to the world The difficult is it for the seller firm to find alternative buyers if one is lost High-end buyers for luxury apartments in Guangdong Luxury yachts above $200 Millions price If a buyers group represents only a few concentrated number, it will be able to exert considerable influence on prices, quality and terms to the sellers. 7
8 5. Buyers Information The better informed buyers are about producers and their relative price Buyers information Doctors and Lawyers do not display prices to buyers The better are they able to bargain Investment advisors for Financial Structuring More informed the buyer about used car Buyer power is also increased if buyers have a lot of information about market conditions, supplier costs and offers to other buyers. 8
9 6. Ability Backward Integration If the buyer refuses to deal with producers Threat of Backward Integration Bride refusing to deal with a Wedding Planner The alternative for the buyer is to DIY Coffee clients refusing to buy at Starbucks in order DIY coffee at home DIY: Do it yourself Vegetable buyers refusing to buy and growing their own veggies If buyers are either already partially integrated or pose a strong threat of backward integration, they are in a position to demand bargaining concessions. 9
10 7. Pull-Through (Make to order) If the buyer purchases orders to companies who use pull-through production Pull Through Atelier Versace: Made To Order Evening Gala dresses The buyer benefits of product customization for his specific needs Cartier Personalized and unique design wedding rings Maison Tamboite Custom made bicycles Since products are made as they are ordered, it is possible to cost-effectively tailor an order to each customer's specific needs, instead of only offering a generic product. 10
11 11
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