HOW TO INCREASE THE BARGAINING POWER OF A BUYER

Bargaining power of a buyer plays a major role when negotiating with suppliers. Leverage is key in negotiation and as a buyer your bargaining position gives you this.

Bargaining power is the ability of a party in a negation to influence or direct the behaviour of the other party

A QUICK THING ABOUT BARGAINING POWER OF A BUYER

As a buyer or any party to a negation you have to realize that negotiation is not always an option and in fact being invited to a negotiation or being in a position to invite a party to one suggest some kind of influence or a desire to get something from the other party.

Take something like price, if a buyer has little to no bargaining power, then they straight away accept that there isn’t much they can do to change the price or any other aspect of the supplier’s offer. BUT what if they are creative?

Faced with situations like this, creative buyers will look for other sources of leverage or power that might influence the supplier to see the benefit in making a concession

Power or more precisely perceptions of power, are critically important in understanding the commercial negotiation process.

FACTORS AFFECTING BARGAINING POWER OF A BUYER AND WHAT TO DO

There are 3 levels you can use to analyses the bargaining power of a buyer and these are;

Macro level: on a global scale

At this level the bargaining power of a buyer is dependent upon global or national forces such as changes in population growth and demographics, interest rates legislative changes etc. Basically, the sort of factors that will fall under, social, technological, economic, environmental, legal and ethical bracket.

The thing about these factors is that they don’t just affect one buyer but all buyers within the given macro environment. So, to increase your bargaining position at this level you just have to analyze the factors and see how they grant you leverage or take away from you. For instance, legislation that aims at reducing green gas emission in cars would mean increase in electric car prices holding other factors constant.

Micro level: industry related level

Unlike macro factors stipulated in a STEEPLE analysis, which will affect a number of organizations across all industries, micro environmental factors affect the players in a particular industry or market and their relative power in negotiations.

The most accepted and established model to assists us in this case is the porter’s five forces model by Michael Porter.

Ignoring the other four factors and focusing on the buyer, you need to know that as a buyer your barging power will depend on the following;

• The number of the suppliers in the industry. If you are looking to buy something in a market that has many suppliers then as a buyer you have a choice regarding suppliers, and that would mean that you can use this to your advantage. The same cannot be said if there are few suppliers since this gives the supplier some form of ‘monopoly’.
• The size of the order you are placing. If you think about it, a seller will look favorably at a buyer if the buyer’s business is attractive in the sense that, 1) the seller gets an advantage from doing business with them and 2) whether or not there is profit on the purchase. The size of your order should at least meet one of these two factors.
• Existence of substitutes in the market would mean that the buyer has a walk away position if the supplier proves unreasonable. As a buyer you always have to establish your alternative to a negotiated agreement.
• Number of buyers in the market. The buyer is weak if there are many parties interested in what the supplier is offering. Its just a question of demand and supply

ONE -ON- ONE LEVEL WITH THE SUPPLIER

As a buyer you may find it desirable to leverage or even coerce a supplier into a deal but remember the supplier has decisions to make too and the choice depend on;

1. how does the supplier look at the relationship?
2. Is the buyer’s business sufficiently important for the supplier to make a concession?
3. Will the supplier want or accept the buyer as a long-term customer or partner?

Mostly the bargaining power of a buyer at this level just depends on if or not the supplier thinks the buyer is good to do business with.

Factors that will make a supplier keen to do business with a buyer will include;

1. Good reputation and good standing in the market e.g for environmental or ethical leadership
2. Fair, ethical and professional trading practices (e.g paying suppliers promptly, not entering into unnecessary disputes, keeping suppliers well informed, not squeezing profit margins excessively
3. Trust, arising from reliable follow-through on representation and commitment made in negotiation and post-contractual dealings
4. Willingness to share risks, cost and value gains equitably with supply partners (i.e seeking reciprocity or win-win; not making excessive demands and hard bargaining techniques, without offering any benefits or concession in return
5. Constructive interpersonal relationship with negotiators and contracts at the buying firm