Powerful Buyers

Customers likewise can force down prices,demand higher quality or more service,and play competitors off against each other- all at the expense of industry profits .

A buyer group is powerful if

  1. It is concentrated or purchases in large volumes. Large volumes buyers are particularly potent forces if heavy fixed costs characterize the industry as they do in metal containers, corn refining, and bulk chemicals, for example-which raise the stakes to keep capacity filled.
  2. The products it purchases from the industry are standard or undifferentiated. The buyers, sure that they always can find alternative suppliers. May play one company against another, as they do in aluminum extrusion.
  3. The products it purchases from the industry from a component of its product and represent a significant fraction of its cost. The buyers are likely to shop for a favorable price and purchase selectively. Where the product sold by the industry in question is a small fraction of buyers’ costs, buyers are usually much less price sensitive.
  4. It earns low profits, which create great incentive to lower its purchasing costs. Highly profitable buyers, however, are generally less price sensitive.
  5. The industry’s product is unimportant to the quality of the buyers’ products or services. Where the quality of the buyers’ products is very much affected by the industry’s product buyers are generally less price sensitive.
  6. The industry’s product does not save the buyer money. Where the industry’s product or service can pay for itself many times over, the buyer is rarely price sensitive; rather he or she is interested in quality. This is true in services like investment banking and public accounting, where errors in judgment can be costly and embarrassing, and in business like the napping of oil wells, where an accurate survey can save thousands of dollars in drilling costs.
  7. The buyers pose a credible threat of integrating backward to make the industry’s product. The Big Three auto producers and major buyers of cars often have used the threat of self manufacture as a bargaining lever. But sometimes an industry so engenders a treat to buyers that its members may integrate forward.
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