Relationship between the bargaining power of customers and suppliers
Posted: Mon Jan 06, 2025 8:47 am
The bargaining power of suppliers affects business profitability, as does the bargaining power of customers and the other Porter forces. But how do they relate? In reality, the power of customers pressures companies to reduce the final price of their products, since consumers will usually seek to pay less.
In this case, if suppliers have the strength to increase the costs of an input that makes the product more expensive and customers have the influence to demand a lower price, the company will have less profits and will run the risk of becoming an unprofitable business, leading to its closure.
This relationship exists not only between these phone library two elements, but also between Porter's 5 forces. Hence its importance for the creation and management of a company.
The results of this study can be applied to the SWOT analysis of the company to categorize it within the strengths, weaknesses, threats and opportunities.
Read more : What is a SWOT analysis and how it can help your business
What are Porter's 5 forces and what are they used for?
Customer bargaining power
Bargaining power of suppliers
Threat of new competitors
Threat of new products
Rivalry between competitors
Porter's forces are part of an economic model developed by Michael Porter (professor at Harvard Business School) to determine the competitive variables that a business generally faces in any market.
Its structure emphasizes that a company not only faces its direct competitors, but also a series of agents that are represented by these forces.
What are Porter's 5 forces? Here is a brief explanation of each one:
1. Customer bargaining power
When there are many suppliers or substitute products, customers have high bargaining power because they can buy from whoever offers the best prices, creating influence on companies and lowering their prices. On the other hand, when the consumer can only buy from a single supplier, their bargaining power decreases and the power lies with the supplier.
2. Bargaining power of suppliers
Do suppliers have the ability to influence the decisions and actions of the company that buys from them? In an everyday example, if farmers go on strike to demand fair payment for their crops and stop supplying lettuce, the supply decreases and prices rise. In this same case, a company that sells salads cannot afford this event, so the bargaining power lies with the suppliers.
3. Threat of new competitors
A business is stronger when it has fewer competitors and when it leads the market. For this reason, pioneers have a great competitive advantage over companies that join the game to snatch the monopoly.
4. Threat of new products
This force does not only consider similar products or services, but rather it considers products or services that address the same need, and innovation is an ally of this force. For example, for the need for transportation; for a company that sells cars, substitute products could be motorcycles or electric bicycles.
5. Rivalry between competitors
Perhaps one of the best-known forces, because as competition and rivalry increase, the battle to capture these customers becomes more aggressive among companies. Thus, strategies to differentiate themselves in the market decrease, leaving price reduction as the main argument, leaving quality in the background.
Tip: Analyzing these forces will give you insight into the context surrounding your business, but the results alone do not represent a response or strategy.
In this case, if suppliers have the strength to increase the costs of an input that makes the product more expensive and customers have the influence to demand a lower price, the company will have less profits and will run the risk of becoming an unprofitable business, leading to its closure.
This relationship exists not only between these phone library two elements, but also between Porter's 5 forces. Hence its importance for the creation and management of a company.
The results of this study can be applied to the SWOT analysis of the company to categorize it within the strengths, weaknesses, threats and opportunities.
Read more : What is a SWOT analysis and how it can help your business
What are Porter's 5 forces and what are they used for?
Customer bargaining power
Bargaining power of suppliers
Threat of new competitors
Threat of new products
Rivalry between competitors
Porter's forces are part of an economic model developed by Michael Porter (professor at Harvard Business School) to determine the competitive variables that a business generally faces in any market.
Its structure emphasizes that a company not only faces its direct competitors, but also a series of agents that are represented by these forces.
What are Porter's 5 forces? Here is a brief explanation of each one:
1. Customer bargaining power
When there are many suppliers or substitute products, customers have high bargaining power because they can buy from whoever offers the best prices, creating influence on companies and lowering their prices. On the other hand, when the consumer can only buy from a single supplier, their bargaining power decreases and the power lies with the supplier.
2. Bargaining power of suppliers
Do suppliers have the ability to influence the decisions and actions of the company that buys from them? In an everyday example, if farmers go on strike to demand fair payment for their crops and stop supplying lettuce, the supply decreases and prices rise. In this same case, a company that sells salads cannot afford this event, so the bargaining power lies with the suppliers.
3. Threat of new competitors
A business is stronger when it has fewer competitors and when it leads the market. For this reason, pioneers have a great competitive advantage over companies that join the game to snatch the monopoly.
4. Threat of new products
This force does not only consider similar products or services, but rather it considers products or services that address the same need, and innovation is an ally of this force. For example, for the need for transportation; for a company that sells cars, substitute products could be motorcycles or electric bicycles.
5. Rivalry between competitors
Perhaps one of the best-known forces, because as competition and rivalry increase, the battle to capture these customers becomes more aggressive among companies. Thus, strategies to differentiate themselves in the market decrease, leaving price reduction as the main argument, leaving quality in the background.
Tip: Analyzing these forces will give you insight into the context surrounding your business, but the results alone do not represent a response or strategy.