Powerful customers compete by forcing the firms to reduce prices, improve quality of products and services, and by playing competitors against one another. When there is a powerful group of buyers, there will be buyers’ market and profitability of the industry will suffer. Bargaining power of buyers will be high in the following circumstances:
- The volume of purchase is high relative to the total sales of a firm. Large volume buyers are powerful when the industry is characterised by heavy fixed costs.
- The industry’s products are standardised or undifferentiated. In such a case the buyer, may play one firm against another because they can get the products from alternative suppliers.
- The products purchased from the industry constitute a significant part of the buyer’s total cost. The buyers are likely to shop for the most favorable price. This happens in case of industrial products, e.g., TV picture tubes and automobile components.
- The industry’s product is not important for the quality of buyer’s product.
- Buyer’s profitability is low and, therefore, pressure for price reduction is high.
- Buyers are well informed about alternative sellers and their prices and quality levels.
There is high potential for backward integration by buyers as in case of textiles, automobiles. etc.