When is buyer power high

The second major component of buyer power is price sensitivity : how sensitive buyers are to a given price. It goes without saying that buyers always prefer to pay less for the same value; however, there are plenty of factors that impact when a buyer is more likely to negotiate. Equally as important, brand value, product differences, and decision-maker incentives matter a great deal with respect to how sensitive buyers are to price.

Brand value is a broad topic which must be explored in its own right, but for the purpose of this blog, brands generally command higher willingness to pay from consumers think of how willingness to pay increases after only adding the name Hermes or Chanel to a handbag.

Incentives do matter. Businesses that serve commercial buyers should keep in mind that there are usually several people with varying goals involved in procuring products and services. Large corporations benefit from these types of deliberate friction-filled tiered decision structures with respect to negotiating almost anything from inventory purchases to company acquisitions and thus serve as a testament the impact these sales cycles have on industry players.

The table below summarizes the factors that contribute to buyer power across the media products wholesale distribution and fulfillment industry serving commercial consumers. Overall, buyer power is high within the industry. While Company Z faced its fair share of challenging industry dynamics, generally, industry dynamics are not static; they are dynamic. As industries shift through the business cycle, from early growth to late growth to maturation then decline, buyer power, in addition to other industry forces, shift with them.

Even within different stages of the business cycle, business model and technological disruptions may materially shift dynamics. To combat minimizing differentiation, Company Z began offering end-to-end inventory management services.

By further integrating with consumers, Company Z effectively increased switching costs, as consumers would risk operational disruption to switch to unintegrated competitors. Many competitors began offering a similar service, reducing buyer power industrywide. Over the last few years, many startups have entered into the marketplace with subscription-based revenue models. For example, Dollar Shave Club, a subscription-based seller of grooming products, operates a subscription-based revenue model mailing consumers razorblades and other grooming accessories on a monthly basis.

Compared to a traditional brick and mortar convenience store, Dollar Shave Club DSC removed the need to even think about shopping and offered a personalized and consistent razor experience.

As an aside, businesses that offer products or services that are constantly improved or used regularly are the best candidates for this type of subscription revenue model innovation. Hilti is a power tool maker that sold high-quality tools into the construction industry.

Buyer power is impacted by bargaining leverage, the measure of leverage buyers have relative to the target industry players, and price sensitivity, the measure of buyer sensitivity to changes in price.

A structured framework used to analyze and understand an industry. The Five Forces are competitive rivalry, threat of new entrants, threat of substitutes, supplier power, and buyer power. Ofsted Report - Good. It can be influential enough to control a market. In some cases, there is strength in numbers: for example, if a large number of buyers make a particular demand, it can be harder for an organisation to resist it. Equally, if a customer buys in large quantities, they can demand preferential terms.

Conversely, a company looking to sell a specialist product in a sector where there are only a few buyers may find that these buyers are in a better position to dictate terms. Buyers come in all shapes and sizes with different approaches and demands. They might be serious or casual purchasers, influenced by quality or price — or both.

A few examples are:. All of these things represent costs to the seller. A strong buyer can make an industry more competitive and decrease profit potential for the seller. On the other hand, a weak buyer, one who is at the mercy of the seller in terms of quality and price , makes an industry less competitive and increases profit potential for the seller.

The concept of buyer power Porter created has had a lasting effect in market theory. Conducting an industry analysis can be overwhelming and confusing.

If buyers are more concentrated than sellers — if there are few buyers and many sellers — then buyer power is high. If the consumer is price sensitive and well-educated about the product, then buyer power is high. Then if the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high.