Know the importance of bargaining power on a business
Having a bargaining power or bargaining power in a business can be one of the important capital to gain profit. By having a better bargaining power among competitors, of course your business will be more easily glimpsed by prospective consumers and business partners while negotiating.
Negotiate any agreement requirements, formal or not, is a complicated problem. Taking a trade example, buyers will always want to negotiate with the lowest possible prices, while sellers will always try to sell at a high-priced price.
The bargaining strength is one of the many economic concepts that are introduced to facilitate understanding of all different factors that can affect how the agreement is made and how business performance. In this article, we will explain what bargaining power, what can affect it, and what significance in business.
Here is a complete discussion about bargaining power and how to increase it to make your efforts more profitable:
What is Bargaining Power?
Bargaining power or fresh power is the size of the capacity of one party to influence other parties. This is an important point in negotiations because the parties with higher bargaining power can take advantage of their situation to reach a more desirable agreement with other parties.
The factors that affect bargaining power are as follows:
Having an alternative – if one party does not need to deal with other parties, because they have an alternative, then they have a larger bargaining power. This is because they present risks because they can leave an agreement without causing too many problems for themselves.
If one party does not have an alternative, then they have a little bargaining because other negotiators can threaten to leave the agreement, leave them in unfavorable situations.
Easily switch to other alternatives – Likewise, a party that has a greater bargaining power if there is a little problem in it will easily switch to other alternatives, and vice versa.
Lack of needs / interest – if one party in negotiations can leave an agreement without experiencing any consequences, either due to lack of needs or interests to stop the agreement, then they have a greater bargaining power.
Again, this is because it indirectly threatens other parties by losing a business, so they must offer a better ‘bargain’.
Relevant knowledge – Having knowledge in the relevant field also provides greater bargaining power to the parties. This is because they are less vulnerable to making an unfavorable agreement because of lack of information or wrong information.
What influence is the increase in bargaining power on market targets?
Price pressure
The natural consequences of business with high bargaining power are increasing prices. If you have no choice but to pay more for the thing you want, you have to charge these fees to your customers to keep the profit margin stable.
In this case, the effect on the target market is a higher price for the same product. If the market does not support these prices, you may have to bear the additional fees themselves and reduce the appropriate profits.
Supply problem
The lack of good and responsible suppliers not only increases their bargaining power, but can also reduce the number of products that you can produce.
If the quantity can produce suppliers remain, there may be a shortage of goods. This sometimes occurs during the holiday season when popular toys or the latest electronic goods are not produced in sufficient quantities to meet retail needs.
In this case, the effect on market targets can increase prices if it causes demand to skyrocket through the offer.
Quality problem
Suppliers with increased bargaining power can decide to save on quality for quantity to increase their profits while in this high leverage position.
It has a negative effect that is appropriate to the target market. This can lead to increased returns and customer complaints, or even leave products simultaneously because of poor product quality and do not meet their needs.
Turn into oligarchy
If bargaining power occurs because suppliers have rare resources or unmatched skills, suppliers can effectively inflate which prices or businesses can survive in the industry to serve the target market.
For example: if there is only one supplier producing a new graphics card (VGA) needed to create a game system on the market, the supplier will sell its products to decide who can survive in the industry.
Suppliers You can also choose to sell directly to customers, reduce your own offer.
Encourage alternatives
Supplier bargaining strength is an obstacle in the market, but does not last long. If the request is quite high, others will most likely enter the market to serve the target market. Business will also look harder to buy or develop alternatives to eliminate this check on their operations.
At some point, it becomes more cost-effective to develop a replacement for what suppliers offer or redesign your product to eliminate dependence on the material.
Diversification of your product line is another way to hedge the supplier of one particular item that is too strong on the market.
Why is bargaining power is important in business
If you have any kind of business, it is logical if you aim to generate as high as possible and reach the best deal you can. Bargaining Power can be a useful concept in helping you decide how to determine the price of products effectively and make an agreement.
Two important bargaining powers here belong to customers and business. To create optimal pricing strategies, this business must consider their own bargaining power as a seller
Make sure you have questions like:
- Do they provide unique products that don’t have alternatives?
- Does their business rely on sales of certain products or are they able to sell lower amounts with premium prices?
- Is the product important for buyers?
Regardless of what type of business you might have, using the concept of bargaining Pwer has a lot of different uses that might be useful for the strength of your business.
Conclusion
Bargaining Power is an important economic concept that measures the ability of parties in negotiations to influence each other. There are many different factors that can affect how much fresh power owned by individuals or groups, of the alternative quantities they have to the importance of the agreement.
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