Bargaining power is defined as the ability of parties to influence each other. It is an essential part of the negotiation, and the party with higher bargaining power will be able to strike a better deal for themselves.
We encounter negotiation in every phase of life. In negotiation, while one party tries to keep everything they have, the other party tries to take everything. The ultimate aim of every party is to get the best deal in negotiation.
The measurement of how they will get a better deal is done by the party’s ability to influence each other. That influence in power is called bargaining power. When both parties are sort of equal in a debate, their bargaining power is equal. Equal bargaining power is possible only in a perfectly competitive market, which is practically non-existent.
The ultimate aim in a negotiation is to get the agreement done in their favor, and this can only be done by having a higher bargaining power.
Importance of Bargaining Power
Getting the best deal in business is the ultimate aim. The reason any business would resort to negotiation is to get the best out of the deal. Every party in negotiation tries to score the highest returns, which happens when they have higher bargaining power.
Having a higher bargaining power will let you dictate the majority terms and conditions of the deal. The process of negotiation goes the way the party with higher bargaining power dictates.
Determining factors of Bargaining power
Multiple factors affect bargaining power. Following are a few of them:
1. Having alternatives
Whenever it is done, usually, two parties are involved. Let us call those parties A and B. A and B have to bargain with each other to strike the deal. Still, while party B does not have any other alternative apart from A, party A has other alternatives than party B. In this case, party A will have higher bargaining power over party B.
This is because if the deal is not in favor of party A, they can always walk away from the negotiation and get other options, but party B cannot walk away from the deal because they don’t have any other options.
2. Hurdles in switching to alternatives
Let us continue with the above example to understand the concept. While party A has many options, sometimes, switching to those options may not be an easy process. Reaching a negotiation stage involves going through multiple stages, and losing a negotiating party at probably the last stage is not something party A would do because it would have to go through all those processes again to reach the negotiation phase.
It would cost time and money for party A. Therefore, the harder it is to switch to alternatives, the higher will be the bargaining power of party B.
3. Lack of importance
A party will have higher bargaining power if they can walk out of the deal without having significant consequences. A party could have multiple stakes involved in the negotiation process, and it could be essential for them to strike the deal.
In such a case, they will have lower bargaining power. On the other hand, if the other party is not going to have significant consequences of losing the deal, then they will have higher bargaining power.
4. Relevant knowledge
When you go to a negotiation, it is taken for granted that you are aware of the terms and conditions and other factors of negotiation. The other party’s knowledge, strengths, and weaknesses, policies, policies, strengths and weaknesses, other affecting factors, etc. should be there with you.
The more knowledge you have, the better will be the bargaining power, since knowledge is power when it comes to the negotiation process. Knowing will ensure that no one will dupe you. In business, as such, knowledge is power.
Bargaining power of Suppliers
The bargaining power of suppliers is one of the essential elements of porter’s five forces. It refers to the pressure that the suppliers can apply to the manufacturer or the companies by manipulating the product’s quality, price, or availability.
The profitability of the buyer is affected by the bargaining power of the supplier. Here, buyers mean the companies who purchase the products or raw materials given by the suppliers. The attractiveness of the industry is determined by the competitive bargaining power of the suppliers.
The significant factors that determine suppliers’ bargaining power are several suppliers, forward integration by the suppliers, the dependence of the supplier on a specific buyer, availability of suppliers, and cost of switching suppliers.
Bargaining power of suppliers is usually high when
- The switching cost of buyers is high.
- The buyer depends on suppliers
- When the number of suppliers is less than the buyers
- When the threat of forward integration is very high
- When switching cost of suppliers are less
- When there are no substitutes available
The bargaining power of suppliers is low when
- There are many substitutes available
- There are many suppliers as compare to the buyers
- The switching cost for buyers is low
- When the supplier depends on the size of a particular buyer,
- When buyers are not dependent on suppliers
Bargaining power of buyers
The bargaining power of buyers is another element in porter’s five forces. It is the pressure that the customers can put on businesses to get a better deal for themselves, which includes but is not limited to getting higher quality products, improved customer service, and lower prices on the product.
The major factors which determine The bargaining power of buyers are:
The number of buyers in comparison to suppliers, the dependency of buyers purchases on a specific supplier, backward integration, and switching cost.
Bargaining power of buyers is high when
- The product is undifferentiated
- The number of buyers is less as compared to the suppliers
- There are multiple substitutes available in the market
- The buyer purchases majority of the product from the seller
- The buyer purchases the product in bulk
- The switching costs of buyers are meager
Bargaining power of buyers is low when
- The number of buyers is large in comparison to suppliers
- If The buyer is unable to integrate effectively backward.
- The cost of switching of buyers is high
- When substitutes are not available in the market
- When the product is differentiated heavily
Importance of buyer power in industry analysis
The buyer power helps to determine the threats and opportunities and industry. It also helps to determine if the company can attain above-average profits. It also helps to understand the industry’s competition and is useful for making informed strategic decisions. Buyer power is significant in the analysis of the industry.
It helps to understand the profitability that the company is making in the industry and if it is sufficient or not. Buyer power is also crucial for the understanding of the attractiveness of the industry.
When an industry has a very high buyer power, the attractiveness decreases because no seller would easily agree to have lower bargaining power.
Purpose of the bargaining power of suppliers
When the supplier power is low, it increases attractiveness in the industry for the buyers. This is because the buyers are not restricted by the suppliers, which can be essentially cost-saving for buyers. When the supplier power is higher, then it increases the attractiveness of the industry, and since the buyers depend on suppliers, it reduces the profit potential of the industry
Bargaining power is an essential concept of negotiation which is used to exert influence. Higher bargaining power will turn the deal towards your way, while a lower bargaining power will turn the deal away from you.
It is also an essential and core concept of Porter’s five forces to understand the industry and its competitors.