Analyzing Your Industry: Buyer Power

Buyer power is the control that your customers have over whether or not they buy from you. If it’s easy for them to get your product somewhere else, then buyer power is high. If you’re fulfilling a need that can’t be met easily elsewhere, then buyer power is low. This is the third post in our series on the 5 Forces Analysis for industry assessment.

Let’s start with an example. For gas stations, buyer power is high. Drivers can get their gasoline at Shell or Arco or any number of other gas station, often with very little inconvenience, as gas stations are often located right across the street from each other. But for the companies that supply the gas to the stations, buyer power is really low; the gas station’s main product is gas, and without it, they are unlikely to sell anything else from their convenience stores, because drivers will stop coming.

Switching Costs

The buyer’s price for going to another provider is called the switching cost. For example, if you’re locked into a 3-year cell phone contract, it’s going to cost you a lot to buy out of that contract and go to another cell phone provider. In this case, switching costs are high. Without contracts, the switching costs would be very low, which is exactly why cell service providers want you to sign that contract.

At the opposite extreme is my favourite example, restaurants. It costs almost nothing for a hungry person to switch their weekly pub visit from the bar one block east of the office to the bar one block west. So, if you want to keep that buyer’s business, you better provide a compelling reason for them not to try the other guy.

What Buyer Power Means for your Business

If you’re in an industry where buyer power is high, then your marketing is all about differentiation – offering something cheaper, better, different, trendier than your competitors. If you have more power over your buyers, lucky you – but don’t abuse it! If people are locked into long-term buyer relationships with your business and they’re not happy, that bad press could keep others from committing to you.

What power do your buyers have over you?