Understanding Bargaining Power In Business

Who has the power in a negotiation? It will vary from negotiation to negotiation. There are a number of factors that will determine how much bargaining power each party holds. Simple things like relevant knowledge can tip the scales one way or the other.

Buyers will always attempt to negotiate the best deal with the lowest prices. On the other side, sellers will always work to sell at the highest possible price.

Each side will do everything in their power to reach their desired outcome. Negotiation skills can only take you so far. Bargaining power can determine the outcome of the business negotiations.

Key Takeaways:

• Bargaining power is an ever-evolving measure of one party’s ability to influence another in negotiations.

• Using Porter’s Five Forces of Industry Analysis can help you to understand the current competitive positions and they are:

  • The bargaining power of suppliers

  • The bargaining power of buyers

  • Competitive rivalry

  • The threat of substitution

  • The threat of new entry

• When building your bargaining power it’s important to do your research beforehand, create the right environment, and supply support for your negotiations to help increase your bargaining power.

What Is Bargaining Power?

Bargaining power is an ever-evolving measure of one party’s ability to influence another in negotiations. Which party has the most leverage? Which side has the upper hand? Who has more influence over the outcome of the deal?

• The party with the higher bargaining power will have the ability to swing the negotiations in their favor. They will have the ability to negotiate a deal that is closer to their desired outcome.

• There are many factors that can influence someone’s bargaining power. And, each party’s power is not concrete. There is an ebb and flow to it. It will vary from negotiation to negotiation as well as from moment to moment. The power can shift from one party to another at any time.

• Bargaining can occur at any stage of the deal being struck, so having an understanding of the bargaining power of each side can go a long way. Buyer and seller can bargain on the price of a product or service, the perks and add-ons or bonuses included in the purchase, the schedule for a service to be completed, product or service modifications, and more.

• Everything from money, authority, influence, information, time and more can have an effect on the bargaining power. Something as simple as more information can shift the power from one party to another in the blink of an eye.

Porter’s Five Forces of Industry Analysis

Using Porter’s Five Forces of Industry Analysis can help you to understand the current competitive positions. It is an effective tool in business.

Many will use this tool when identifying new products or services your company is looking to offer. It is also an effective tool to use when analyzing the market and business environment (SWOT analysis is also an effective tool to use here).

The Five Forces of Industry Analysis can also be used to help you understand the balance of power, and thus your own bargaining power, in a given negotiation.

It focuses on five vital sources that Porter believed affect business competition. These five forces are:

1. Competitive Rivalry. This is the first of Porters Five Forces. This refers to the number of competitors and their ability to undercut the company. If there is a larger number of competitors, along with the number of equivalent products and service’s they offer, the lesser the power of a company.

   Buyers and suppliers will often seek out the competition if they are able to offer a better deal. If the competitive rivalry is lower than normal, a company has greater power to charge higher prices and se the terms of deals to achieve higher sales and profits.

2. The Bargaining Power of Suppliers. Suppliers gain power if they can increase their prices easily or reduce the quality of the product. If they are the only ones who can supply a certain service, they will have considerable supplier power.

   The more suppliers you have to choose from, the easier it is to switch to a cheaper alternative. But if you are unable to change suppliers, they have a stronger position and can charge more. This can ultimately affect your profitability.

3. The Bargaining Power of Buyers. If the number of buyers is lower than the number of suppliers, then is called “buyer power.” This means that the buyer may find it easier to switch to a new, cheaper competitor. This can result in the prices going down.

4. The Threat of Substitution. This is referring to the likelihood of your customers finding a different way of doing what you do. It can be cheaper, better, or even both. Companies that produce goods or services for items that have no close substitutions will have more power to increase prices.

   If there are close substitutions, customers have an option to choose which company to buy the product from, resulting in the company’s power being weakened.

5. The Threat of New Entry. A company’s power can be affected if there are new entry’s into the market. If it takes little effort and money to enter into your market and compete effectively, then rivals are able to quickly enter and weaken your position.

The Bargaining Power of Buyers

One of Porter’s Five Forces of Industry Analysis is The Bargaining Power of Buyers. This vital force refers to the bargaining power that customers, or consumers, can use against a business or retailer to negotiate for a better deal.

Whether they are attempting to lower prices, negotiating additional add-ons, pushing for higher quality products, demanding better customer service, etc., a win for the customer equals costs for the seller. The buyer’s bargaining power will play a role in each and every sale, contract, and negotiation.

The analysis of the bargaining power of customers, or consumers, is conducted by the seller. When assessing the buyer’s bargaining power, the company will need to consider how difficult it will be for the customers to lower prices or succeed in demanding more for the same price.

• The number of buyers. Also referred to as buyer concentration, this refers to the ratio of buyers to sellers. If the number of buyers is smaller than the number of sellers, the buyer’s bargaining power will be stronger than that of the seller.

  Of course, the same can be said of the opposite. If the number of buyers is larger than the number of suppliers, then the seller will have higher bargaining power.

• The number of comparable suppliers. If there are a number of suppliers who can offer the same product or service, or a comparable product or service, then the buyer’s power will be higher. With several available alternatives, buyers are not tied to a single vendor and can use this to negotiate on their behalf.

• Switching costs. Switching costs refer to the cost to a buyer to switch suppliers. If the number of suppliers is low, then the buyer’s bargaining power will suffer.

• Backward integration. Backward integration is when a company integrates or merges with another company that supplies the product or service they require. If the buyer is able to successfully merge suppliers, then the buyer will have greater bargaining power.

• Price sensitivity. If price is a factor in the supplier’s competitive strategy, then the buyer will be sensitive to changes in pricing. This can give more strength to the buyer’s bargaining power.

• Undifferentiated products. If the product being offered by the supplier is generic and undifferentiated, then the buyer is more likely to switch suppliers. Without a solid differentiation strategy, the buyer’s bargaining power will grow.

• Bulk purchases. If the buyer purchases at a high volume (in bulk), their bargaining power is higher.

Determining the buyer’s bargaining power matters during negotiations, but it can also affect the profit potential for a specific industry or product. Higher buyer power can lower the industry’s profitability, lower the appeal for suppliers, and make it more difficult for them to gain the upper hand.

Suppliers can make moves to increase their bargaining power, though. They can start to shift the power back to their side if they:

• Employ an effective differentiation strategy

• Increase the switching costs

• Implement a strong pricing strategy

• Offer complementary services or products

• Personalize the customer experience

• Implement an upgrade strategy

• Increase their social presence and testimonials

The Bargaining Power of Suppliers

On the other side of the negotiation is the supplier. The Bargaining Power of Suppliers is the bargaining power that suppliers can wield over their customers. This includes raising prices, lowering quality, reducing product availability, limiting access, and more.

This applies to all different types of suppliers:

• Manufacturers

• Vendors

• Distributors

• Wholesalers

• Independent suppliers

• Importers

• Exporters

• Drop shippers

The factors that determine a supplier’s bargaining power are similar to that of the buyers. They are:

• The number of buyers. As a reminder, this refers to the ratio of buyers to sellers. If the number of suppliers is smaller than the number of buyers, the supplier’s bargaining power will be higher.

• The number of comparable suppliers. The less competition, the better. If the supplier can offer products or services that are not offered by many others, then they strengthen their bargaining power.

• Switching costs. If a supplier can maintain higher switching costs, buyers will not be able to change suppliers as easily. This will lend to the bargaining power of the suppliers.

• Differentiated products. If the supplier employs a strong differentiation strategy and offers unique products that cannot be matched easily by competitors, then their bargaining power will be higher than the buyers.

Surprisingly, it is the industries with low supplier power that are more attractive. These industries will have increased profit potential. High supplier bargaining power will actually decrease profit potential as the buyers rely more heavily on the suppliers.

Build Your Bargaining Power

There are some factors that you will have very little control over. The number of comparable suppliers, the number of buyers, how many of your customers purchase items in bulk, etc., are all factors that are out of your hands.

There are, however, some things you can do to build your bargaining power and increase your chances of negotiating your desired outcome.

To build your bargaining power, you can:

1. Do your research. When you are faced with a strong buyer or seller, make sure you do your research on them beforehand. Look for signs on what makes their buying or selling power strong. This will help determine how you go in with your negotiations and arguments.

2. Create the right environment. If you have control over the setting, then you have the ability to use it to your advantage. By creating the right environment for your negotiations, you can influence the other party.

   An uncomfortable environment will hardly put anyone in a giving mood. A bright, comfortable environment with food and drinks available can make them more willing to give than take.

3. Supply support for your negotiations. Whether you include a negotiation partner or supply supporting materials, bringing something to assist you in making your argument can boost your bargaining power.

4. Prepare your arguments. Mock interviews are a common tool when preparing for important interviews. So, why wouldn’t you participate in some mock negotiations?

   If you can look at the negotiation and see the potential arguments from your opponent, you can come prepared. By preparing yourself ahead of time, you will be better able to make a convincing argument.

5. Dress the part. Just as you would with anything else, dressing the part for your negotiations can make a difference. If you don’t look professional or put together, the opposition will not take you seriously. It will have a negative impact on your bargaining power if you don’t dress for success.

6. Know your limits. Understand when to walk away when the other party attempts to take advantage of you with aggressive or unfair tactics. They may be subtle so it’s important not to give in to anything that is lower than what you want and your negotiations.

How to Determine How Much Bargaining Power You Have

Here are some questions to ask yourself before you enter into a negotiation. Your answers can help you determine how much bargaining power you have.

• How Strong or appealing are my alternatives?

• Should I utilize these alternatives as reference points during the negotiation?

• What information do I have about the other party, such as their goals, priorities, strengths, weaknesses, and time-related or financial constraints that may impact the negotiation?

• Do I have a reliable, trustworthy reputation from the other party’s perspective?

• Can I utilize my social status or network of influence to learn more information, persuade the other party to agree to my terms, or alleviate any constraints they may face?

• Which negotiation techniques are most likely to succeed with this party?

• Can I predict the other party’s willingness to compromise or make concessions?

• Can I create a better alternative before the negotiation begins to gain more bargaining power

Author

Samantha Goddiess

Samantha is a lifelong writer who has been writing professionally for the last six years. After graduating with honors from Greensboro College with a degree in English & Communications, she went on to find work as an in-house copywriter for several companies including Costume Supercenter, and Blueprint Education.