Bargaining Power of Buyers & Suppliers Explained

Bargaining power is defined as the ability of parties to influence each other. It is an essential part of the negotiation, and the party with higher bargaining power will be able to strike a better deal for themselves. and we also learn

Core benefit proposition is that proposition put forward by a company which talks about the main and the most important benefit that a consumer would derive from consuming that product.

A core proposition can talk about the product in itself and also how it is different from its competitors. The core benefit of a product is also used in positioning a brand.

The core benefit proposition helps customers make an informed buying choice. It is not always that a consumer just looks at the basic benefits that he/she will derive from consuming a product. For example, buying a car is not just to satisfy the need of travel that arises in daily life. It is much more than that.

It is a status symbol for many. It is a very emotional purchase when you buy your first vehicle. In this way, there are multiple motives that are attached to every purchase. A core benefit proposition will attract customers to satisfy a very particular need of theirs.

Taking the same example forward, if you had to buy a car for offroad traveling, you will most likely buy the Range rover. This is because the one thing Range rover is good for is offroading. You can go to any terrain with this car. Same goes for JEEP. These are brands which are very clear about their Core benefit proposition.

A core benefit proposition also acts as a point of difference by helping a potential customer distinguish between competing brands.

Let us move on to look at a few examples that make us understand this concept more clearly.

Explanation

We encounter negotiation in every phase of life. In negotiation, while one party tries to keep everything they have, the other party tries to take everything. The ultimate aim of every party is to get the best deal in negotiation.

The measurement of how they will get a better deal is done by the party’s ability to influence each other. That influence in power is called bargaining power. When both parties are sort of equal in a debate, their bargaining power is equal. Equal bargaining power is possible only in a perfectly competitive market, which is practically non-existent.

The ultimate aim in a negotiation is to get the agreement done in their favor, and this can only be done by having a higher bargaining power.

Importance of Bargaining Power

Getting the best deal in business is the ultimate aim. The reason any business would resort to negotiation is to get the best out of the deal. Every party in negotiation tries to score the highest returns, which happens when they have higher bargaining power.

Having a higher bargaining power will let you dictate the majority terms and conditions of the deal. The process of negotiation goes the way the party with higher bargaining power dictates.

The customer and the business are two essential elements of bargaining power. Considering the customer, creating an optimum pricing strategy is very important.

Determining factors of Bargaining power

Determining factors of Bargaining power

Multiple factors affect bargaining power. Following are a few of them:

1. Having alternatives

Whenever it is done, usually, two parties are involved. Let us call those parties A and B. A and B have to bargain with each other to strike the deal. Still, while party B does not have any other alternative apart from A, party A has other alternatives than party B. In this case, party A will have higher bargaining power over party B.

This is because if the deal is not in favor of party A, they can always walk away from the negotiation and get other options, but party B cannot walk away from the deal because they don’t have any other options.

2. Hurdles in switching to alternatives

Let us continue with the above example to understand the concept. While party A has many options, sometimes, switching to those options may not be an easy process. Reaching a negotiation stage involves going through multiple stages, and losing a negotiating party at probably the last stage is not something party A would do because it would have to go through all those processes again to reach the negotiation phase.

It would cost time and money for party A. Therefore, the harder it is to switch to alternatives, the higher will be the bargaining power of party B.

3. Lack of importance

A party will have higher bargaining power if they can walk out of the deal without having significant consequences. A party could have multiple stakes involved in the negotiation process, and it could be essential for them to strike the deal.

In such a case, they will have lower bargaining power. On the other hand, if the other party is not going to have significant consequences of losing the deal, then they will have higher bargaining power.

4. Relevant knowledge

When you go to a negotiation, it is taken for granted that you are aware of the terms and conditions and other factors of negotiation. The other party’s knowledge, strengths, and weaknesses, policies, policies, strengths and weaknesses, other affecting factors, etc. should be there with you.

The more knowledge you have, the better will be the bargaining power, since knowledge is power when it comes to the negotiation process. Knowing will ensure that no one will dupe you. In business, as such, knowledge is power.

Bargaining power of Suppliers

The bargaining power of suppliers is one of the essential elements of porter’s five forces. It refers to the pressure that the suppliers can apply to the manufacturer or the companies by manipulating the product’s quality, price, or availability.

The profitability of the buyer is affected by the bargaining power of the supplier. Here, buyers mean the companies who purchase the products or raw materials given by the suppliers. The attractiveness of the industry is determined by the competitive bargaining power of the suppliers.

The significant factors that determine suppliers’ bargaining power are several suppliers, forward integration by the suppliers, the dependence of the supplier on a specific buyer, availability of suppliers, and cost of switching suppliers.

Bargaining power of suppliers is usually high when

  1. The switching cost of buyers is high.
  2. The buyer depends on suppliers
  3. When the number of suppliers is less than the buyers
  4. When the threat of forward integration is very high
  5. When switching cost of suppliers are less
  6. When there are no substitutes available

The bargaining power of suppliers is low when

  1. There are many substitutes available
  2. There are many suppliers as compare to the buyers
  3. The switching cost for buyers is low
  4. When the supplier depends on the size of a particular buyer,
  5. When buyers are not dependent on suppliers

Bargaining power of buyers

Bargaining power of buyers

The bargaining power of buyers is another element in porter’s five forces. It is the pressure that the customers can put on businesses to get a better deal for themselves, which includes but is not limited to getting higher quality products, improved customer service, and lower prices on the product.

The major factors which determine The bargaining power of buyers are:

The number of buyers in comparison to suppliers, the dependency of buyers purchases on a specific supplier, backward integration, and switching cost.

Bargaining power of buyers is high when

  1. The product is undifferentiated
  2. The number of buyers is less as compared to the suppliers
  3. There are multiple substitutes available in the market
  4. The buyer purchases majority of the product from the seller
  5. The buyer purchases the product in bulk
  6. The switching costs of buyers are meager

Bargaining power of buyers is low when

  1. The number of buyers is large in comparison to suppliers
  2. If The buyer is unable to integrate effectively backward.
  3. The cost of switching of buyers is high
  4. When substitutes are not available in the market
  5. When the product is differentiated heavily

Importance of buyer power in industry analysis

The buyer power helps to determine the threats and opportunities and industry. It also helps to determine if the company can attain above-average profits. It also helps to understand the industry’s competition and is useful for making informed strategic decisions. Buyer power is significant in the analysis of the industry.

It helps to understand the profitability that the company is making in the industry and if it is sufficient or not. Buyer power is also crucial for the understanding of the attractiveness of the industry.

When an industry has a very high buyer power, the attractiveness decreases because no seller would easily agree to have lower bargaining power.

Purpose of the bargaining power of suppliers

Purpose of the bargaining power of suppliers

When the supplier power is low, it increases attractiveness in the industry for the buyers. This is because the buyers are not restricted by the suppliers, which can be essentially cost-saving for buyers. When the supplier power is higher, then it increases the attractiveness of the industry, and since the buyers depend on suppliers, it reduces the profit potential of the industry

Conclusion

Bargaining power is an essential concept of negotiation which is used to exert influence. Higher bargaining power will turn the deal towards your way, while a lower bargaining power will turn the deal away from you.

It is also an essential and core concept of Porter’s five forces to understand the industry and its competitors.

Examples of Core benefit proposition

Duracell

Core benefit proposition

The core value proposition of Duracell is its durability! Their brand name and their advertisements are all in sync with their core value proposition. The very word ‘Duracell’ instantly makes a customer think of this as a cell that is more durable and long lasting than others. Their advertisements show the cell lasting longer than others in a very creative way, making the rabbit bring a smile to your face!

Colgate Optic White

Core benefit proposition 2Colgate is a trusted brand and very well known for the dental care products that it makes. However, as discussed before, customers do not always buy products to satisfy their basic needs. They also make the purchase for the peripheral benefits that come along. A toothpaste is mainly used to keep the oral cavity clean and germ free. This is satisfied by all brands.

However, there are other peripheral benefits like sparkling white teeth that are desirable by consumers! Colgate Optic White’s core benefit proposition is sparkling white teeth, apart from the regular benefits like clean breath, germ free oral cavity etc. If a customer is looking for a toothpaste that can satisfy the basic needs, but more importantly make his/her teeth white, then Colgate Optic White will definitely be in his/her consideration list!

Volvo

Core benefit proposition 3

Volvo is one of the top luxury car makers in the world. While Volvo has many feathers in its hat, the one that it boasts off the most is the safety features that its cars come with. Volvo markets its cars as the safest in the world and this is its core benefit proposition. This does not mean that it does not offer other desirable like speed, comfort, efficiency etc. If a customer is very concerned about safety and still wants luxury, Volvo will be a priority!

Summary: There are multiple advantages of having a benefit proposition and showcasing all the benefits of your products. However, if you have a core benefit which you use in all your marketing communications, it helps the brand in differentiating itself and in positioning as well.

Differentiated marketing combines the best attributes of undifferentiated marketing and concentrated marketing. It appeals to two or more distinct market segments, with a different marketing plan for each. Typically differentiated marketing creates more total sales than undifferentiated marketing, but it also increases the costs of doing business.

differentiated marketing

Some features of Differentiated Marketing are:

A. Differentiated Marketing also called as multisegment marketing is wherein a company attempts to appeal to two or more clearly defined market segments with a specific product and unique marketing strategy tailored to each separate segment.

1. Firms such as Maruti-Suzuki use differentiated marketing to attract all segments. Others, such as Hyundai, and Microsoft appeal to two or more segments, but not all segments.

2. Some companies, such as Time Inc., use both undifferentiated marketing and concentrated marketing approaches in their multiple-segmentation strategy. They have one or more major brands for the mass market and secondary brands geared toward specific segments.

B. Company resources and abilities must be able to produce and market two or more different sizes, brands, or products. Costs vary, depending on modifications needed.

C. It should enable the firm to achieve several objectives:

1. Sales maximization.
2. Recognition as a specialist.
3. Diversification.

D. Differentiated marketing can be achieved without involvement in the majority fallacy.

E. Two or more sizable and distinct consumer groups are necessary. The more clusters facing the firm, the greater the opportunity for differentiated marketing.

F. Wholesalers and retailers usually find differentiated marketing to be desirable, because it enables them to reach different consumers, offers a degree of exclusivity, allows orders to be concentrated, and encourages private labels.

G. Total profits should rise as the number of segments serviced increases.

H. A firm must balance revenues obtained from selling to multiple segments against the costs.

I. A company must be careful to maintain product distinctiveness in each consumer segment and to guard its image.

Image differentiation

Image differentiation

A person responds differently to company and brand images. Identity comprises the ways that a company aims to identify or position itself or its product, whereas image is the way the public perceives the company or its products. Image is affected by many factors beyond the company’s control.

Image differentiation

For example, Nike mainstream popularity turns off 12-to-24-years-olds, who prefers Airwalk and other alternative brands that convey more extreme sports image. Hence Image differentiation is important for a company or product. An effective image establishes the product’s character and value proposition, it conveys this character in a distinctive way and it delivers emotional power beyond a mental image. For image differentiation to work, it must be conveyed through every available communication vehicle and brand contact, including logos, media and special events.

Some Important Points wrt to Image differentiation are:

1.Great companies are significantly better, not just a little better
2.”Differentiate products, not devices”
3.The most dangerous and quickest evaporating differentiation is lower price unsupported by lower costs
4.High tech buying decisions are based on cold hard logic and rational analysis – except where information overloaded buyers are concerned
5.Real product differentials plus good promotion is a powerful influence
6.Complexities make it easier for products to be different, but harder for customers to know the differences
7. Complexity plus standardization tends to make high tech products seem similar to most buyers
8.It takes time to learn the subtle distinctions between complex products, sometime on minor technical details And, if the differences don’t exist in the customer’s mind, they do not exist
9.The “differences must make a difference”

Personnel differentiation
Companies can gain a strong competitive advantage through having better-trained peopleSingapore Airlines enjoys an excellent reputation in large part because of its fight attendants. The McDonald’s people are courteous, the IBM people are professional and the Disney people are upbeat. The sales forces of such companies as General ElectricCisco, Frito-Lay, and Northwestern Mutual life enjoy an excellent reputation. Well- trained personnel exhibit six characteristics: competence, courtesy, credibility, reliability, responsiveness and communication.

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