The Five Forces Model (Bargaining Power of Buyers )

Bargaining Power of Buyers
                     In general, industries are more attractive when the bargaining power of buyers (a start-up’s customers) is low. Buyers can suppress the profitability of the industries from which they purchase by
demanding price concessions or increases in quality. For example, even in light of the problems it has encountered over the past several years, the automobile industry remains dominated by a handful of large automakers that buy products from thousands of suppliers in different industries. This enables the automakers to suppress the profitability of the industries from which they buy by demanding price reductions. Similarly, if the automakers insisted that their suppliers provide better-quality parts for the same price, the profitability of the suppliers would suffer. Several factors affect buyers’ ability to exert pressure on suppliers and suppress the profitability of the industries from which they buy. These include the following:
Buyer group concentration:
                    If the buyers are concentrated, meaning that there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy.
Buyer’s costs:
                  The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays. For example, if the component sold by the supplier represents 50 percent of the cost of the buyer’s product, the buyer will bargain hard to get the best price for that component.
Degree of standardization of supplier’s products:
                   The degree to which a supplier’s product differs from its competitors’ affects the buyer’s bargaining power. For example, a buyer who is purchasing a standard or undifferentiated product from a supplier, such as the corn syrup that goes into a soft drink, can play one supplier against another until it gets the best combination of features such as price and service.
Threat of backward integration:
The power of a buyer is enhanced if there is a credible threat that the buyer might enter the supplier’s industry. For example, the PC industry can keep the price of computer monitors down by threatening to make its own monitors if the price gets too high.