Strategic Responses to Buyer Power

Strategic Responses to Buyer Power - RespondingtoBuyerand...

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Responding to Buyer and  Substitute Power Manec 387 Economics of Strategy
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What can be done to neutralize  bargaining power of buyers? 1. Differentiate product  or service so that it uniquely responds to only  certain buyer needs 2. Create demand for complementary goods  that require your  product or service as an exclusive input 3. Discriminate on price  among buyers—charge different buyers a  different price for your product  4. Narrow the options of the buyer  through market consolidation or  exclusive alliances 5. Find new types of buyers  and/or alternative uses for your product 6. Create switching costs  for your buyers 7. Price at or below marginal cost  and produce large quantities so  that your product floods the market and attracts loyalty,  dependence, and dominant market share; then restrict supply and  raise price or add new revenue products or services (risky)
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1.  Differentiate Product Recall from last session that consumer  preferences vary If a firm can uniquely satisfy the preferences  of some particular group, it creates a steeper  demand curve and more flexibility in its  pricing By differentiating, the firm may, in effect,  create a “monopoly” within some particular  consumer segment
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Example: Differentiate Product “Big Bertha”  Golf clubs Wide hitting  face and superb  balance appeal  to less proficient  golfers q p Demand for  all golf clubs Demand for  Big Bertha- style clubs
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2.  Create Demand for Complementary  Goods Complementary goods are those that work  together with other products or services to create  joint value Example: Sign exclusive joint agreements with  complementary product companies or create  new goods outright and then help to stimulate  demand for that good; or Make your good or service an exclusive input  into the production of another good or service  and create demand for that good
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Example: Complementary Goods  Strategy Nutrasweet  brand on diet colas helped to sell  more cola and create demand for Nutrasweet “Intel inside”  campaign in which Intel’s brand is  stamped on complementary goods, thus creating  demand for those goods and selling more chips NextelDirect  – Motorola cell phone walkie-talkie  features are valuable only in the presence of  complementary direct connect services; sell  more phones by creating demand for the walkie- talkie service; Sell the service by creating  network-exclusive phones with Motorola
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3. Price Discrimination Price discrimination  is charging a higher price to  consumers with higher willingness to pay First degree:  price equals willingness to pay for every 
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Strategic Responses to Buyer Power - RespondingtoBuyerand...

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