The product that the buyers purchase represents a large portion of the buyer’s cost. In such a case price is an important issue for the buyers. They are very keen to bargain for favorable terms and indulge in selective buying. For example when you buy an AC or a refrigerator you tend to bargain hard for a price concession than when you buy a pack of cigarettes. This partly explains why cigarette manufacturers enjoy better margins (they charge me on branded cigarettes) than the appliance industry (they can’t afford to turn away buyers).
The products that the buyers purchase are standardized or undifferentiated. In such cases, buyers have a tendency to play one seller against another. Consider for example the purchase of steel by automakers. For the most part steel remains largely a differentiated commodity. So Maruti, Hyundai , Daewoo, TELCO, can easily get attractive discounts from their suppliers.
The buyer faces few switching costs. In such a situation he can always trigger a price between suppliers to his advantage. For example individual buyers virtually incur zero switching cost when they decide to buy Santro rather than Matiz. Such a situation is forcing manufacturers to remain focused on the needs and desires of people.
The buyer’s margins are low. This creates pressure for the buyers to reduce their purchasing costs, as in the case of Trent. Shopper’s stop and other retailing giants in India where the margins are low forcing them to be more price sensitive.
Threat of Backward Integration:
Buyers can engage in backward integration (they become their own suppliers) brewing and soft drink firms obtain favorable terms from Can suppliers by constantly threatening to integrate backward into can production.
Where the quality of the buyer’s products is very much affected by the industry product, buyers are fewer, prices sensitive. The buying power of personal computer manufacturer is relative to the manufacturers of micro processors Intel, Motorola) is limited by the critical importance of these components to the functionality of their product.
Full Information: The more accurate information buyers have regarding demand, prevailing market prices and supplier costs the greater is their buying power.
Consumers generally speaking end to more prices sensitive if they are buying products that are undifferentiated expensive relative to their incomes and of a sort where quality is not particularly important.
Threat of Substitute Products:
Substitute products are different goods or services from outside a given industry that perform similar or the same function as a product that the industry produces. The presence of substitute products puts a ceiling on the prices that can be charged by an industry. When relative prices rise above that of the substitute product (say the tussle between tea versus coffee plastic containers versus gals’ jars, paper bags in place of plastic bags) customers tend to switch their loyalties toward the substitute. Unless the industry in question is able to upgrade the quality of the products or differentiate it somehow, the industry’s profit potential will be in doubt. In recent times deregulation and technological advancements have given birth to a large number of substitutes that have successfully taken market share away from traditional firms in India. For instance deregulation of the financial services sector has permitted a large number of financial institutions to offer a wide range of services (ICICI, IDBI, HDFC Tata Finance etc) that were once available only from banks. Likewise technological advances based on CD-ROMs are posing a serious threat to conventionally printed reference books. The digital film less camera represents a direct substitute threat that could substantially erode market shares of Eastman Kodak and Fuji Film. The situation becomes quite worrisome of the substitutes possess price or performance characteristics that tend to improve over time. Oil has posed this kind of threat to gas, the price of oil has been declining in recent years relative to that of gas forcing some gas users to switch to oil to power electric utility plants. Effort by gas produces to arrest this trend has reduced industry profitability in recent times to a low level.
Source: Strategic Management