key determinants of buyer´s power. part i. bargaining leverage. · 2017. 10. 13. · wedding...

Key Determinants of Buyer´s Power. Part I.

Bargaining Leverage.

Eleonora Escalante MBA-MEng, Strategic Corporate Advisory Services

© 2017 Eleonora Escalante-all rights reserved

“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”.

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

Key Determinants of Buyer´s Power


© 2017 Eleonora Escalante-all rights reserved 2

Today we will continue with the Key

determinants of Buyers power from

the point of view of Bargaining

leverage…

https://support.office.com/es-ES/article/b89770f1-deb1-4a19-94ef-342aa15a4689


© 2017 Eleonora Escalante-all rights reserved 3

Buyer Switching

costs relative to

the firm

switching costs

Presence of

Substitute

Products

Buyer

Concentration

vs. Firm

Concentration

Buyer

Volume

Buyer

Information

Ability

To Backward

Integrate

Pull-Through

Key

Determinants

of Buyer´s

Power.

Bargaining

Leverage

Key Determinants of Buyer´s Power. Bargaining Leverage


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



The lower the cost of switching products

The more effective is the buyer power

1. Switching Costs

ExamplesSwitching Costs:

4


“Higher

switching costs

(defined earlier)

lock the buyer to

particular sellers

and mitigate

buyer power”




When there are substitutes

The buyer can consider to replace the seller

or the product itself for another one

2. Presence of Substitute Products

ExamplesPresence of Substitutes

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


“Identifying

substitute

products entails

searching for

other products

that can perform

the same function

as the product of

the industry”.




The bigger the purchases of the customer

The greater is the damage from losing that

customer

3. Buyers Volume

ExamplesBuyers Volume

Supermarket Chain

buying all production

beef to a Nicaraguan firm

An investment banking

boutique without

diversity of clients

Bombardier losing a top

big client

6


“A buyer

group will be

powerful if it

purchases large

volumes

relative to seller

sales. Retaining

its business is

financially

important to

the seller”.

“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”.




The smaller the number of buyers

The difficult is it for the seller firm to find

alternative buyers if one is lost

4. Buyers Concentration

ExamplesBuyers

ConcentrationQuota Sugar Exports

Latin Countries to the

world

High-end buyers for

luxury apartments in

Guangdong

Luxury yachts above $200

Millions price

7

.


“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”.




The better informed buyers are about

producers and their relative price

The better are they able to bargain

5. Buyers Information

ExamplesBuyers

informationDoctors and Lawyers do

not display prices to

buyers

Investment advisors for

Financial Structuring

More informed the buyer

about used car

8


“Buyer power is

also increased if

buyers have a lot

of information

about market

conditions,

supplier costs and

offers to other

buyers”.




If the buyer refuses to deal with producers

The alternative for the buyer

is to DIY

6. Ability Backward Integration

ExamplesThreat of Backward

IntegrationBride refusing to deal with a

Wedding Planner

Coffee clients refusing to buy

at Starbucks in order DIY

coffee at home

Vegetable buyers refusing to

buy and growing their own

veggies

9

DIY: Do it

yourself


“If buyers are

either already

partially integrated

or pose a strong

threat of backward

integration, they

are in a position to

demand

bargaining

concessions”.




If the buyer purchases orders to companies

who use pull-through production

The buyer benefits of product customization

for his specific needs

7. Pull-Through (Make to order)

ExamplesPull Through

Atelier Versace: Made To

Order Evening Gala

dresses

Cartier Personalized and

unique design wedding

rings

Maison Tamboite Custom

made bicycles

10


“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”.



11


key determinants of buyer´s power. part i. bargaining leverage. · 2017. 10. 13. · wedding...

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