Bargaining Power of Buyers

• Firms seek to maximize the return on their invested capital.
• Buyers want to buy products at the lowest possible price— the point at which the industry earns the lowest acceptable rate of return on its invested capital.
• To reduce their costs, buyers bargain for higher quality, greater levels of service, and lower prices.
• Customers are powerful when:

  • They purchase a large portion of an industry’s total output.

  • The sales of the product being purchased account for a significant portion of the seller’s annual revenues.

  • They could switch to another product at little, if any, cost.

  • The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers’ industry.
• Consumers armed with greater amounts of information about the manufacturer’s costs and the power of the Internet as a shopping and distribution alternative have increased bargaining power in many industries.