Bargaining Power of Customers Example, A Practical Guide

Bargaining Power of Customers Example, A Practical Guide

How to Increase Your Bargaining Power with Customers: A Practical Guide

Customers are the lifeblood of any business, but they can also be a source of frustration and stress. How do you deal with customers who demand lower prices, better terms, or more services? How do you negotiate effectively and maintain a positive relationship with them? How do you increase your bargaining power and avoid being taken advantage of?

Key Takeaways

Bargaining power of customers is the ability of customers to influence the price, quality, or terms of a product or service.

Bargaining power of customers depends on several factors, such as the number and size of customers, the availability of substitutes, the switching costs, the differentiation of products or services, and the price sensitivity.

Bargaining power of customers affects the competitive intensity and attractiveness of an industry, and the profitability of a business.

You can increase your bargaining power with customers by segmenting your customers, differentiating your products or services, adding value to your products or services, bundling your products or services, and negotiating effectively with your customers.

You should also do your research, be flexible, and be respectful when dealing with your customers.

In this article, we will explore some examples of bargaining power of customers, and how you can use various strategies and tactics to increase your own. We will also provide some tips, frequently asked questions, and key takeaways to help you apply these concepts to your own business.

What is Bargaining Power of Customers?

Bargaining power of customers is the ability of customers to influence the price, quality, or terms of a product or service. It is one of the five forces that determine the competitive intensity and attractiveness of an industry, according to Michael Porter’s Five Forces Framework.


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The bargaining power of customers depends on several factors, such as:

  • The number and size of customers: If there are many customers who buy small quantities, they have less bargaining power than if there are few customers who buy large quantities.
  • The availability of substitutes: If there are many alternative products or services that customers can switch to easily, they have more bargaining power than if there are few or no substitutes.
  • The switching costs: If it is costly or difficult for customers to switch from one supplier to another, they have less bargaining power than if it is easy and cheap.
  • The differentiation of products or services: If the products or services offered by suppliers are unique or highly valued by customers, they have less bargaining power than if the products or services are standardized or commoditized.
  • The price sensitivity: If customers are sensitive to changes in price, they have more bargaining power than if they are indifferent or loyal.

Examples of Bargaining Power of Customers

Here are some examples of industries where customers have high or low bargaining power:

Retail:

Customers have high bargaining power in retail, because they have many choices of where to shop, they can compare prices online, they can switch easily, and they are price sensitive. Retailers have to compete on price, quality, service, convenience, and loyalty programs to attract and retain customers.

Airlines:

Customers have low bargaining power in airlines, because they have few choices of carriers, they face high switching costs due to booking fees and cancellation penalties, they value safety and reliability over price, and they are loyal to frequent flyer programs. Airlines have more control over pricing, capacity, and routes, but they also face high competition from other modes of transportation and online travel agencies.

Pharmaceuticals:

Customers have low bargaining power in pharmaceuticals, because they have few choices of drugs, they face high switching costs due to prescriptions and regulations, they value efficacy and safety over price, and they are loyal to brands. Pharmaceutical companies have more control over pricing, innovation, and patents, but they also face high barriers to entry, research and development costs, and regulatory scrutiny.

How to Increase Your Bargaining Power with Customers

There are several ways that you can increase your bargaining power with customers, depending on your industry, product or service, and customer segment. Here are some general strategies and tactics that you can use:

Segment your customers:

Not all customers are the same. Some may be more profitable, loyal, or strategic than others. By segmenting your customers based on their needs, preferences, behavior, or value, you can tailor your offerings and pricing to each segment. You can also identify your most valuable customers and focus on building long-term relationships with them.

Differentiate your products or services:

One of the best ways to increase your bargaining power is to offer something that your competitors cannot match. This could be a unique feature, benefit, quality, design, brand image, or customer experience. By differentiating your products or services from the rest of the market, you can create a competitive advantage that reduces the threat of substitutes and increases customer loyalty.

Add value to your products or services:

Another way to increase your bargaining power is to add value to your products or services that goes beyond the core offering. This could be a complementary product or service, a warranty or guarantee, a free trial or sample, a discount or rebate, a loyalty program or reward, or a referral program or incentive. By adding value to your products or services, you can increase customer satisfaction, retention, and referrals.

Bundle your products or services:

A related tactic is to bundle your products or services together into a package deal that offers more value than buying them separately. This could be a cross-sell or an up-sell of related products or services, a subscription or a membership that provides access to multiple products or services, or a bundle or a bundle discount that offers a lower price for buying multiple products or services together. By bundling your products or services, you can increase customer spending, loyalty, and switching costs.

Negotiate effectively with your customers:

Finally, you can increase your bargaining power by negotiating effectively with your customers. This means being prepared, knowing your goals and limits, understanding your customers’ needs and motivations, building rapport and trust, communicating clearly and persuasively, making concessions and trade-offs, and closing the deal. By negotiating effectively with your customers, you can achieve win-win outcomes that benefit both parties.

Tips for Increasing Your Bargaining Power with Customers

Here are some important tips to keep in mind when trying to increase your bargaining power with customers:

Do your research:

Before you engage with your customers, do your homework. Know who they are, what they want, how they buy, and what they value. Know your competitors, their strengths, weaknesses, and strategies. Know your industry, its trends, opportunities, and threats. Know your product or service, its features, benefits, and costs. The more you know, the more confident and credible you will be.


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Be flexible:

While you should have a clear idea of what you want to achieve, you should also be willing to adapt to changing circumstances and customer needs. Be open to feedback, suggestions, and requests. Be ready to offer alternatives, options, or solutions. Be prepared to compromise, collaborate, or cooperate. The more flexible you are, the more likely you will reach an agreement that satisfies both parties.

Be respectful:

While you should be assertive and confident in your position, you should also be respectful and courteous to your customers. Don’t be aggressive, rude, or arrogant. Don’t lie, cheat, or manipulate. Don’t make unrealistic promises or demands. Treat your customers as partners, not adversaries. The more respectful you are, the more trust and goodwill you will build.

Tip

A simple but effective tip to increase your bargaining power with customers is to ask open-ended questions that encourage them to reveal their needs, preferences, goals, challenges, or concerns. This way, you can understand their situation better and offer solutions that address their pain points or create value for them.

Bargaining Power of Customers: A Statistical Report

The bargaining power of customers is one of the factors that affect the competitiveness and profitability of an industry. According to Porter’s Five Forces framework, customers can influence the price, quality, and service level of a product or service by switching to alternative or substitute products, negotiating with suppliers, or demanding more value for their money. In this report, we will examine some examples of how the bargaining power of customers affects the global demand in different industries.

Airline Industry

The airline industry is a highly competitive and low-margin industry, where customers have a strong bargaining power due to the availability of alternative airlines, online price comparison websites, low switching costs, and high price sensitivity. Customers can easily compare the fares, schedules, and services of different airlines and choose the best option for their travel needs. Moreover, customers can also switch to other modes of transportation, such as trains or buses, if they find them more convenient or cheaper. These factors put pressure on airlines to lower their prices, improve their quality, and offer more benefits to attract and retain customers. As a result, the global demand for air travel is influenced by the bargaining power of customers, especially in times of economic downturns, pandemics, or environmental concerns.

Fashion Industry

The fashion industry is another example of an industry where customers have a high bargaining power due to the abundance of choices, trends, and preferences. Customers can choose from a wide range of brands, styles, designs, and prices when shopping for clothing and accessories. They can also switch to new or different brands without much loyalty or cost. Furthermore, customers can influence the fashion industry by expressing their opinions, tastes, and values through social media, blogs, reviews, or word-of-mouth. These factors force fashion brands to constantly innovate, differentiate, and adapt to changing customer demands and expectations. Therefore, the global demand for fashion products is driven by the bargaining power of customers, especially in terms of quality, sustainability, and social responsibility.

Automobile Industry

The automobile industry is an example of an industry where customers have a moderate bargaining power due to the high involvement, differentiation, and regulation of the product. Customers have to consider many factors when buying a car, such as performance, safety, reliability, comfort, design, fuel efficiency, environmental impact, and price. They also have to deal with various intermediaries, such as dealerships, financing companies, insurance companies, and government agencies. These factors make it harder for customers to switch between different car brands or models without incurring significant costs or risks. However, customers can still influence the automobile industry by demanding more value for their money, comparing different options online or offline, or opting for alternative modes of transportation. Hence, the global demand for automobiles is affected by the bargaining power of customers, especially in terms of innovation, customization, and regulation.

Frequently Asked Questions

What is the difference between bargaining power of customers and bargaining power of suppliers?
Bargaining power of customers is the ability of customers to influence the price, quality, or terms of a product or service. Bargaining power of suppliers is the ability of suppliers to influence the price, quality, or terms of a product or service. Both are factors that affect the competitive intensity and attractiveness of an industry.

How does bargaining power of customers affect profitability?
Bargaining power of customers affects profitability by influencing the revenue and costs of a business. High bargaining power of customers means lower prices, higher quality, or better terms for customers, which reduces revenue for suppliers. Low bargaining power of customers means higher prices, lower quality, or worse terms for customers, which increases revenue for suppliers.

How can I measure bargaining power of customers?
There is no definitive way to measure bargaining power of customers, but some indicators that can help are:

  • The percentage of sales that come from a few large customers
  • The percentage of sales that come from repeat or loyal customers
  • The percentage of sales that come from referrals or word-of-mouth
  • The price elasticity of demand for the product or service
  • The customer satisfaction ratings or reviews for the product or service
  • The customer retention or churn rates for the product or service

References:

https://mpra.ub.uni-muenchen.de/44953/1/MPRA_paper_44953.pdf

https://econpapers.repec.org/bookchap/oxpobooks/9780198288817.htm



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