Bargaining Power of Customers

Customers can exert influence on producers. Where there are a small number of buyers, for example, or a predominant/single buyer, the producer’s opportunities for action are limited. In the situation where one customer accounts for a significant proportion of a supplier’s business, then the one customer can exert considerable influence and control over the price and quality of the products that it buys. Such firms can demand the highest specification in products, with tight delivery times (for just-in-time manufacturing and hence reducing the cost of raw material inventories) and customized products.

Buyers exert pressure in industries by hunting for lower prices, higher quality, additional service and through demands for improved products and services. In general, the greater the bargaining power of buyers, the less advantage sellers will have. Not all buyers have equal bargaining power with sellers; some may be less sensitive than others to price, quality or service. For example, in the clothing industry, major manufacturers confront significant customer power when they sell to retail chains like Marks and Spencer and Burton. However, they can get much better prices selling to small owner-managed boutiques.

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