94 ENTREPRENEURSHIP
counts. The bases for these discounts are: (1) the threat to withhold the order and dis-
rupt production, (2) the lower per-unit costs of billing and shipping large orders, and
(3) the lower production costs resulting from long production runs.- Buyer’s Costs. If the products represent a significant share of the buyer’s total costs
or total income, the buyer becomes extremely price sensitive. When purchases are large,
small concessions in price produce large benefits for the buyer. Most consumers are fa-
miliar with this situation, because bargaining over the price of cars and homes is the pri-
mary consumer bargaining experience. The automobile and residential real estate indus-
tries allow people to bargain over the prices of these items because they know their cus-
tomers are price sensitive owing to the size of the purchase. Consumers bargain a little,
but they still pay enough to salvage the sellers’ margins.^31 - Similar Products. If the buyer is indifferent among sellers because the products
available for purchase are basically alike, the buyer has power. If buyers can procure alter-
natives, they naturally look for a reason to buy from a particular seller, and one good rea-
son is a lower price. The implication here is that the selling firm may believe it has a
product that should command a premium price because of its high quality and special
features. If these features are unimportant or not communicated to the buyer, the buyer
will still shop on price. - Switching Costs. If the buyer faces few switching costs and can shop for price or
quality without incurring high transaction costs, the buyer is powerful. Switching costs
are costs that lock the buyer into an ongoing relationship with the seller. An example is
frequent-flyer miles. Travelers will fly higher-priced, less-convenient air routes to accu-
mulate these miles. The cost of switching airlines is the loss of frequent-flyer miles.^32
Sometimes, high transaction costs also result from switching vendors or searching for
information. Faced with these costs, the buyer remains in the current relationship,
enabling the seller to maintain profitable margins. - Buyer Income. The buyer whose profits are low or who has a low income is price
sensitive. Price sensitivity increases when the buyer is short of funds, either personal
income (for consumers) or profits from operations (for industrial buyers). Rich people
sometimes haggle over a price, and purchasing agents of profitable companies search for
a penny-saving agreement. More often, though, for the buyer with enough funds, the
cost of negotiating a tough deal outweighs the minor savings derived from haggling
over price. - Threat of Integration. If the buyer firm chooses not to purchase in the open market
and can make a credible threat to fabricate a product or provide a service itself, it increas-
es its power by gaining bargaining leverage over the sellers in the industry. This factor
brings into play the classic make-or-buy decision, and it does so on a strategic level. If
the buyer firm can provide the entire product itself, that firm then constitutes a credible
threat for full backward integration. If it can provide some of the input, the process is
known as tapered integration. The reasons for increased buyer power are as follows:
(1) The buyer can make a take-it-or-leave-it offer to the seller with the full knowledge
that if the seller “leaves it,” the firm can still supply itself; (2) the buyer knows the actu-
al costs of producing the product or delivering the service and can thus negotiate more
effectively down to the seller’s reservation price. The major offsetting factor for the sell-