There will always be a difference in the bargaining power between an individual buying different construction material like cement, steel or bricks and a real estate builder buying them in bulk for the number of properties he may have been building over so many years. This is an example of buyer with strong bargaining power.
Buyers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favorable terms of business.
Buyers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favorable terms of business.
Below facts attach greater power to buyers:
1. Undifferentiated or Standard Supplies: In a perfectly competitive market situations with large number of suppliers supplying same kind of standard supplies, buyers purchasing more quantities will have advantage over suppliers where buyers force suppliers to supply quality products at lower costs.
2. Buyer's Price Sensitivity: Buyers buying behavior vary with respect to their sensitivity to prices. For example, let us say buyer “A” purchases little quantify of a product from a supplier because his usage of that product is less (or the product is less important for him). Let us take another buyer “B” who purchases more quantity of a product from the supplier because his usage of the product is much (and the product is more important for his business line). Let us suppose, Buyer “B” is more price sensitive that he cannot afford for more cost at this juncture. In this situation, if that particular supplier wants to increase his product unit’s price, then Buyer “B” with high price sensitivity may apply his bargaining power over the supplier to decrease the price. Else, he threatens to shift to other supplier. Thus, depending on how important the item is for the buyer’s usage and proportion he may be spending on the item concerned, buyers’ sensitivity to price varies. Any customer with high price sensitivity gains advantage in its bargaining power.
3. Accurate Information about the Cost Structure of Suppliers: A more informed customer about cost structure of suppliers can negotiate more with suppliers. Whenever such customers notice a decline in the supplier’s costs they would always bargain for a proportional decrease in price.
4. Greater Concentration in Buyer’s Industry than in Supplier’s Industry and Relatively large Volume Purchase: This means that buyers are large and more powerful than suppliers. Government departments like police department when negotiating for large orders of security weapons or intelligence equipment’s will necessarily command a greater hold than its supplier as there will be only few number of such institutions buying them at a given point of time.
5. Credible threat of Backward Integration by Buyers:Different from forward integration which suppliers tend to attempt at, buyers in order to hold their position stronger in the market may integrate in backward manner. This will mean that the buyer extends himself to the previous stage of manufacturing or distribution for which it had been dependent on suppliers till now. An example could be of an entertainment channel which airs programmes outsourced from organizations producing them outside, get into the business of producing its programmes in house.
1. Undifferentiated or Standard Supplies: In a perfectly competitive market situations with large number of suppliers supplying same kind of standard supplies, buyers purchasing more quantities will have advantage over suppliers where buyers force suppliers to supply quality products at lower costs.
2. Buyer's Price Sensitivity: Buyers buying behavior vary with respect to their sensitivity to prices. For example, let us say buyer “A” purchases little quantify of a product from a supplier because his usage of that product is less (or the product is less important for him). Let us take another buyer “B” who purchases more quantity of a product from the supplier because his usage of the product is much (and the product is more important for his business line). Let us suppose, Buyer “B” is more price sensitive that he cannot afford for more cost at this juncture. In this situation, if that particular supplier wants to increase his product unit’s price, then Buyer “B” with high price sensitivity may apply his bargaining power over the supplier to decrease the price. Else, he threatens to shift to other supplier. Thus, depending on how important the item is for the buyer’s usage and proportion he may be spending on the item concerned, buyers’ sensitivity to price varies. Any customer with high price sensitivity gains advantage in its bargaining power.
3. Accurate Information about the Cost Structure of Suppliers: A more informed customer about cost structure of suppliers can negotiate more with suppliers. Whenever such customers notice a decline in the supplier’s costs they would always bargain for a proportional decrease in price.
4. Greater Concentration in Buyer’s Industry than in Supplier’s Industry and Relatively large Volume Purchase: This means that buyers are large and more powerful than suppliers. Government departments like police department when negotiating for large orders of security weapons or intelligence equipment’s will necessarily command a greater hold than its supplier as there will be only few number of such institutions buying them at a given point of time.
5. Credible threat of Backward Integration by Buyers:Different from forward integration which suppliers tend to attempt at, buyers in order to hold their position stronger in the market may integrate in backward manner. This will mean that the buyer extends himself to the previous stage of manufacturing or distribution for which it had been dependent on suppliers till now. An example could be of an entertainment channel which airs programmes outsourced from organizations producing them outside, get into the business of producing its programmes in house.