If you were a buyer, what would you do to increase your power?
Power is the ability to influence others. Therefore, the bargaining power of the buyer refers to a buying organization’s ability to influence its supplier. Most people aim to maximize their power in various ways to achieve favorable outcomes in commercial negotiations. The level of bargaining power can vary depending on the specific market and the size of the companies involved.
For example, consider sourcing utilities for a manufacturing company. Due to high production levels, utility costs represent a significant portion of the company’s expenses. However, if there is only one utility supplier in the market which is a government-owned corporation, then you have little to no bargaining power. The supplier acts as a price maker, and you must accept its offer unconditionally.
Conversely, in a monopolistic competition market, you may have more influence as a buyer. Many suppliers offer similar products with varying qualities and features. Take soft drinks, for example: if you are sourcing them for your company, the market includes major brands like Coca-Cola, Pepsi, Fanta, and Sprite, alongside numerous smaller brands. Although the products differ slightly in quality, these suppliers cannot independently set their prices. Instead, they base their pricing on their competitors’ rates because they know buyers have many alternatives and can easily switch suppliers. Clearly, when you purchase in large volumes, you are more likely to have the power to negotiate lower prices.
Through these examples, you’ve seen some of the advantages of power. As suggested by this article’s title, I will now outline several ways to strengthen your bargaining power in future purchases.
Choose a Market Where You Have Leverage
Naturally, you won’t have leverage in every purchase, but you should always strive to maximize it. If the market you’re targeting has very few suppliers, consider adjusting your product specifications to enter a different market with more supplier options. Besides, you can use performance specification or lower your requirements to reach more suppliers.
Purchase Size
You’re more likely to receive significant discounts when you buy in large volumes. Bulk purchasing allows the supplier to benefit from economies of scale, enabling them to offer lower prices. However, be sure to consider storage costs and your production schedule to avoid excessive inventory.
Be an Informed Buyer
When you possess deep knowledge of the market, you’re in a stronger position to persuade suppliers. Valuable information puts you at an advantage and allows you to better influence pricing and terms.
Consider Backward Integration
Backward integration is a business strategy in which a company acquires its supplier. This gives the company greater control over the production process and reduces dependence on external suppliers. Additionally, it can lower costs by eliminating intermediaries.
Let us know if you have other suggestions for enhancing a buyer’s bargaining power!
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