This article is an excerpt from the Shortform book guide to "Competitive Strategy" by Michael Porter. Shortform has the world's best summaries and analyses of books you should be reading.
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Why is the importance of consumers for a business strategy? What influence do consumers have over a market?
According to Competitive Strategy by Michael Porter, influential buyers can impact what businesses offer, their pricing strategies, as well as overall market demand for products and services. For example, in the smartphone market, buyers exert significant influence due to their ability to readily switch brands.
Here are the multiple conditions that increase buyer influence over a market.
Condition 1) Availability of Many Sellers or Substitute Offers
According to Porter, when buyers have a wide range of options to choose from, they have the power to make purchases according to their preferences and budgets. (When shopping for moisturizers, buyers have a multitude of brands to choose from, as well as the option to explore cheaper substitute products like natural oils or homemade alternatives.) This is just one factor that explains the importance of consumers.
(Shortform note: One drawback of having many sellers and substitute offers is that buyers may experience “decision paralysis.” Rolf Dobelli (The Art of Thinking Clearly) explains that having an overwhelming number of choices leads to information overload that hampers the decision-making process. This makes it challenging for buyers to navigate and evaluate their options effectively, potentially resulting in suboptimal choices. For instance, when selecting a smartphone from numerous options, buyers may feel overwhelmed by the variety of features and brands available, find it difficult to select a phone that aligns with their requirements, and make a decision that leads to buyer’s remorse.)
Condition 2) Reliance on a Small Number of Buyers for Revenue
Porter argues that, when a market relies on a few retail chains or buyers for a significant portion of its revenue, sellers strive to maintain these relationships by granting buyers more power. (In the grocery industry, a few large retail chains generate a significant portion of the market’s overall revenue, which gives these chains the power to negotiate terms and conditions.)
(Shortform note: There is one way a seller can benefit from a market having only a few key buyers: It provides opportunities for sellers and buyers to collaborate more closely on product development, marketing strategies, and supply chain integration. This collaboration can result in joint innovation, improved product offerings, and shared growth opportunities, benefiting both parties.)
Condition 3) Low Costs Associated With Switching From One Seller to Another
Porter explains that buyers have more power when the effort and costs involved in switching from one seller to another are minimal—if they’re unhappy with your product or service, they can easily find a replacement. (Online platforms such as Amazon empower buyers to choose sellers that offer the best value for money by enabling them to compare prices and reviews for free.)
(Shortform note: Ken Blanchard and Sheldon Bowles (Raving Fans) suggest that businesses can counteract the influence of low switching costs by nurturing customer loyalty and trust. They argue that these emotional benefits hold greater significance in customers’ minds than the potential value gained from switching. According to them, the key to inspiring customer loyalty and trust lies in consistently creating personalized experiences that surpass customer expectations.)
Condition 4) Awareness of Supplier Costs and Market Prices
According to Porter, when buyers have access to market data, they can leverage this information to seek out the best deals. (With access to price comparison websites, buyers in the electronics industry are informed enough to negotiate cheaper prices or more favorable contracts.)
(Shortform note: While there’s no way to prevent customers from accessing market data, there is a way for businesses to leverage this data to establish customer trust: Adopt transparent pricing. This involves being open and honest about price trends, fluctuations, and factors influencing pricing decisions. By sharing this information, businesses show that they have nothing to hide, and they demonstrate their commitment to providing value to buyers.)
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