Bargaining power of suppliers: drivers and examples

The bargaining power of suppliers is how much power the businesses you buy from have to raise prices, limit quality or service, or shift costs onto you. It is one of Porter's five forces. Powerful suppliers take margin out of any industry that cannot pass the extra cost on to its own customers.

Porter's example in his 2008 Harvard Business Review article is Microsoft raising prices on operating systems while PC makers, competing hard for customers who could easily switch, had little room to raise theirs. The squeeze is worst when your suppliers have power and your buyers do too.

What drives the bargaining power of suppliers

Porter lists six conditions. A supplier group is powerful when:

The more rows that apply, the less you control your own costs.

Google and Meta as suppliers of attention

For most small businesses the most powerful supplier is not a raw material vendor. It is the platform that sells them customers' attention.

The price of that attention is set in auctions, so it moves with how many rivals bid. But the rules are the platform's: ad formats, how much of the page carries ads, what targeting is allowed, what data you get back. You accept them or you do not advertise there.

Platforms face the same force from their own suppliers. When Apple changed its iOS privacy rules, Meta's chief financial officer said the change would cost Meta on the order of $10 billion in revenue in 2022, Fortune reported. If Apple can do that to Meta, assume Meta can do it to you.

Forward integration is the condition to watch most closely. A search engine that answers the question on its own results page, as Google's AI Overviews do for many queries, is a supplier doing part of your job and keeping the visit.

How to measure supplier power in your business

Concentration of acquisition. What share of new customers came from your single largest channel last quarter? If one platform brings most of them, it has real power over you, whatever its terms happen to be today.

Cost trend. Record your own average cost per click by quarter. If you do not advertise, note the top of page bid ranges for your ten main keywords in Google's Keyword Planner every quarter. Google describes the low and high range as roughly the 20th and 80th percentile of what advertisers have paid, based on the last 30 days, so one reading is a snapshot and the trend is the evidence.

Terms changes. Count the fee rises, policy changes and removed features each key supplier made in the last two years. Frequent one-sided changes are supplier power in action.

Time to replace. For each critical supplier, estimate how long it would take to replace it if it doubled its price tomorrow. Weeks is fine. A year is a dependency.

Rising ad costs can also mean a rival bidding harder, which is rivalry rather than supplier power. How to tell if a competitor is outspending you helps separate the two.

What to do about powerful suppliers

Keep a second source warm. A small, steady budget on a second platform keeps you competent there and gives you somewhere to go.

Build channels you own. An email list, repeat customers and referrals are not subject to anyone's auction.

Keep things portable. Store creative, customer lists and conversion data where you can take them with you, and avoid custom setups that only one vendor can run.

Use your own bargaining strength where it exists. For physical inputs, buying groups, longer contracts and prompt payment can earn better terms. With the big platforms you mostly cannot negotiate; you can only reduce how much you need them.

Common mistakes

Forgetting the less obvious suppliers. Labour counts, and so does any software vendor you could not easily leave. The supplier with the most power is often the one nobody thinks of as a supplier.

Treating platform terms as weather. They are a supplier's pricing decisions. Track them as you would a wholesaler's price list.

Diversifying into channels that do not work. Spreading budget thinly to reduce dependency can cost more than the dependency. Add a channel when it can pay its way, not just to feel safer.

The other forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers (the same relationship seen from the other side) and competitive rivalry.