Previously we have discussed Porter’s Five Forces and how they can be utilised by businesses and other organisations to plan ahead. Having focused on Potential Entrants and Substitutes, we are now investigating Buyer Power.
What is Buyer Power?
Buyer Power is the bargaining power wielded by customers who purchase a product or service, or by clients who make a purchase to distribute/sell on. 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.
What are the different types of buyers?
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:
- Well-informed buyers, looking for a high-quality product
- Bargain hunters looking for a good deal
- Early adopters who like to be the first to purchase a new product
- High-volume buyers, who can influence terms and price by buying in bulk
What is the threat of Buyer Power?
Depending on the strength of buyers, they can influence pricing, even to the extent of starting a price war among competitors.
Buyer Power can also impact product quality: for example, a buyer might stop purchasing a product because a better quality version has come on to the market at a similar price. In some cases they will be prepared to pay more for a better quality product, or to choose a more expensive product that will last longer or is cheaper to run.
The margins and profitability of a company can be affected by having to reduce prices or improve quality.
Buyers can find themselves in a powerful position if it’s easy to switch to another company, especially in cases where buyer loyalty is low. Furthermore, a company that relies too heavily on one customer can be vulnerable if the customer moves business elsewhere.
A few examples of Buyer Power
A good example of when buyers have influence is insurance – for a car, house, travel etc. A buyer can bargain with an insurer wanting to increase their premiums if there are plenty of other companies offering the same service cheaper. In fields such as insurance, companies often promote introductory offers for new customers to encourage them to switch loyalties.
Buyer Power can start price wars in supermarkets, where discounters have challenged the dominance of the major multiples in recent years, and where companies sometimes offer “lost leaders” – products on special offer, on which they make no money in a bid to attract customers into the store for other purchases. At the same time, supermarkets can control the terms of purchases from their own suppliers by buying in bulk.
A buyer may demand a higher quality product that brings long-term gains, such as choosing a car that costs more to purchase but is more economical to run.
Ways of protecting a business from Buyer Power
These can include:
- Securing brand loyalty
- Creating products or services that are unique or have unique features/benefits
- Appealing to customers through price (high or low)
- Selecting buyers who are easy to access and service
- Offering buyers something that the buyers’ customers are demanding
Buyers can wield a lot of power over a company’s decision making, depending on the type of products and services on offer and the kind of buyer a business is hoping to attract.
For maximum profits and success – and to reduce risk – companies should ensure they are aware of different types of buyers, how to market their products and services to them and how to secure brand loyalty. At the same time, they should avoid relying too heavily on one buyer, as this leaves the business exposed if this customer stops buying from them.