If you are a business person, you may have experienced supplier bargaining power which is one of the primary factors that affect competition in the business world. According to the supplier bargaining power, the other factors, such as pricing and availability of the products and services, will change, making the business world competitive. Since the high bargaining power of suppliers plays a great role in the business world to change many other factors, we provided everything about it through a guide, and here it is.
With this power, suppliers can control the transactions with their buyers adjusting the conditions and terms while impacting the ability of the company to operate profitability. Therefore, you should learn more about this supplier’s bargaining power. Understanding this concept is essential for people relying on suppliers to obtain products or services. Therefore, if you are one of them, read this guide until the end and learn more about the bargaining power of suppliers.
What is Bargaining Power of Suppliers
The bargaining power of the suppliers means the influence that the supplier can cause on the cost of the products and services and company operations. Simply put, with the bargaining power that the suppliers have, they can sell their products and services to the buyers at prices that are favorable and beneficial for them, agreeing to the conditions and terms that are good for the suppliers.
Suppose your company or your business is in an industry where the suppliers have high bargaining power. In that case, they can increase the prices of their products and services without concern about their buyers as these suppliers have higher demands. Not only that, if these suppliers want, they can reduce the quality of the product to decrease their cost. And also, they can impact terms and conditions to be formed that are very beneficial for them.
But what happens if the bargaining power of a supplier is low? Then, these suppliers will reduce the prices of their products and services to attract more buyers, improve the quality of their products and services to increase their sales, adjust the payments for overseas customers, etc. All these actions of the suppliers will be determined by the power of the bargain that they have.
Why the Bargaining Power of Suppliers Matters
As we said earlier in this guide, the bargaining power of suppliers is a factor that affects competitiveness in a relevant industry. As we said, suppliers with high bargaining power can increase the prices, request favorable terms for them, control the availability of the products and services and many more even if you want to keep a shifted market pricing strategy.
Even though this is good for the suppliers with higher bargaining power, it will be highly harmful to the buyers, making the company’s profit lower. Therefore, learning about the bargaining power of the suppliers, the factors affecting it, and the ways of reducing this power will be very helpful for you to conquer this threat in any industry.
Factors Affect the Bargaining Power of Suppliers
Some factors affect the bargaining power of the suppliers. When you read these factors through this guide, you can see how these factors affect the bargaining power and how they will affect the bargaining power of suppliers.
- Number of Suppliers – this is the first factor affecting a specific supplier’s bargaining power. When there are a few suppliers, the bargaining power each will get is higher, but when there are more suppliers for the industry, the bargaining power will decrease. This is because of the number of buyers’ options in a certain industry to satisfy their needs.
- Switching Costs – when a company switches from one supplier to another and the cost of switching is higher because that supplier has more bargaining power. When the switching cost is higher, the buyers are less likely to switch to another supplier.
- Unique products and services – if a supplier provides a unique range of products and services that cannot be seen everywhere recently, then this supplier has great bargaining power. Since the buyers have limited alternatives, they are willing to pay as the suppliers need to acquire the products.
- The Reputation – if a supplier has a good reputation for the products and services, then that supplier will gain more bargaining power. When the brands are highly reputed, buyers pay as the suppliers need to get the products and services from them.
How to Reduce the Bargaining Power of the Suppliers
As you know, the factors that affect the supplier bargaining power let us see how we can effectively reduce the supplier bargaining power. Since the high bargaining power of the suppliers is not beneficial for businesses and companies who rely on the suppliers, learning ways to reduce the bargaining power will help you turn the tables.
- Diversify the Suppliers – when you work with more than one supplier at a time, you do not have to depend on a specific supplier, not affecting the suppliers’ bargaining power.
- Build Strong Relationships – when you have strong relationships with the suppliers, you can build mutual trust with each other, and then it will be helpful for you to reduce the supplier bargaining power.
- Negotiate Terms – when you negotiate favorable terms with the suppliers for both parties, businesses can reduce costs and improve the quality of the products.
- Innovations – when you invest money in research and development, businesses can create new products or services without depending on suppliers.
Lastly, we would like to remember again to follow these steps to reduce suppliers’ bargaining power as they threaten the companies’ profitability. When you have greater control over the factors affecting the bargaining power while following the steps to reduce it, you can make your company a huge success with dozens of profits. Therefore, remember what we have taught you in this guide and use the necessary steps to get rid of the bargaining power of suppliers as there should be no more waiting its time to act.