Different industries can have radically different sets of buyers, ranging from a limited number of corporate customers to a wide-open consumer market. Moreover, the ways those customers relate to the product and the companies they are buying from can differ considerably. Porter’s Buyers force seeks to describe those characteristics, as in the following examples based on the airline industry.
1. How easy is it for buyers to switch among sellers? Consumers almost universally buy air tickets online, allowing them to choose effortlessly among carriers. This factor tends to force airlines to compete primarily on the basis of price, placing significant pressure on them in terms of profitability.
2. Is there a high degree of differentiation among providers? Air travel is perceived largely as a commodity product, although frequent flyer programs create some brand loyalty. Price therefore tends to be the key point of competition, placing further pressure on profitability.
3. How significant is the cost of the product to the buyer? Air tickets can be fairly costly, which can lead buyers to invest significant effort toward getting the best price possible.
However, buyer power has a lot to do with how complete the buyer’s information is. In the airline industry, it has historically been fairly complete – price, schedule, stops, cabin class – what more is there to know. How could you decrease the information available to the buyer?
That’s exactly what’s happening in the airline industry. Airlines are moving toward getting a larger and larger percentage of their revenue from fees: luggage, meals, seat choice, wi-fi, change fees. The fair you see on Expedia is getting farther and farther from the total air travel cost. Airlines are moving information away from the consumer. Porter predicts that this should drive up profits.
However, what one airline does is easy replicable by any other airline. There’s no barrier to dropping fairs and charging for bags. This intensity of rivalry means that total prices may again be driven down. The net result? Airlines will have simply come up with a much more complex way of charging the same amount.
By Sean Campbell
By Scott Swigart