Every company claims to be “Customer-centric”, and claims to make customer satisfaction their priority. Of course, everyone wants to keep their customers happy and maintain a good relationship with them. And in these brands-customers relationships, companies would rather see the power balance shifting towards them. It is easier said than done, even in the case of multi billion dollar businesses: customers as a whole sometimes have a lot of power over these massive companies. Some of us may remember Peloton, which was a massive success during Covid but faced customer backslash when they increased their prices and when alternatives became available again once the pandemic improved.
In business, consumers can influence a company’s decisions, strategies, and financial performance through their purchasing choices, feedback, and advocacy. To understand this concept, let’s first go over the economic power and review a couple of examples. Then, I’d like to discuss another type of power customers hold: social power. How customers can influence others through word-of-mouth, social media, and community engagement is especially relevant these days, even more so in the context of ecommerce.
The Bargaining Power of Buyers
I don’t spend enough time at home to justify purchasing an espresso machine. But I can see why some people who like a good coffee once in a while bought a Nespresso machine. Maybe they even received it as a gift. After all, the machine is pretty cheap and doesn’t take up too much space in the kitchen. The problem for consumers came when they had to buy coffee: they had no choice but to buy the expensive, proprietary Nespresso pods. If they wanted to use a different, maybe cheaper brand of coffee, they couldn’t use their Nespresso machine and had to buy a new one. This is a classic example of the razors and blades model: selling the coffee machines at a relatively low margin and achieving higher margins on the coffee pods.
Why am I telling you about espresso machines? Because this is a great example of a company imposing high switching costs on their customers, lowering their bargaining power. The customer is stuck with the brand unless they buy a new coffee machine. But that’s not the end of the story. After Nespresso’s patents for their coffee pods began to expire around 2012, the market saw a lot of third-party companies producing compatible coffee pods for Nespresso machines, often at a lower price and offered more options. This was a threat to Nespresso, consumers’ bargaining power increased due to them having more options.
Back in 1979, Harvard Business School professor Michael Porter developed his Five forces model to analyze the competitive environment of an industry and understand the dynamics at play. One of these five forces is the bargaining power of buyers. Despite being developed well before ecommerce was a thing, many of these concepts are still relevant today. Let’s go over some of the model principles when it comes to the bargaining power of buyers.
As we see with Nespresso’s example, buyers have more power when their switching costs are low. Conversely, their power is lower when switching costs are higher. Companies may want to increase these switching costs for buyers, to increase the lifetime customer value. That is why switching internet providers can be so difficult and annoying. How many of us gave up a few dollars in savings so we wouldn’t have to deal with the process? On the flip side, switching costs tend to upset customers, and regulators often have an eye on it.
Another very important factor is how price-sensitive customers are. When pricing is the main decision point, customers may buy from another company the second they offer a lower price. When brands’ only way to drive sales is to slash prices (and, as a result, their profit margins), customers have more power. This is especially true in commoditized markets (see my blog posts on selling commoditized products online).
Undifferentiated products are a good example of this, where customers will make decisions based on price. I would argue this is very relevant in the age of ecommerce, with new companies emerging every day, and more and more products becoming commodities. This process was, of course, sped up with Amazon and more recently Temu, and customers now have hundreds or even thousands of options for many products, compared to the few brands on their local store shelves.
The multiplication of offers online also led to more substitutes available. And the more substitutes available, the more bargaining power buyers have. Going back to my coffee machine example, if there are new ways to make coffee or if other options such as French presses or local coffee shops become more attractive (through better quality, lower prices, clever marketing…), Nespresso would have more intense indirect competition and consumers would have more bargaining power. Product search algorithms and new AI tools make it easier for customers to find substitute products online. They are also becoming more aware of their options, thanks to the millions of testimonials and advice on social media.
Finally, another factor in Porter’s framework that is still relevant today is the volumes purchased. Typically, in B2C ecommerce, each individual customer purchases low volumes of products, resulting in lower bargaining power. After all, losing one customer won’t break the business. However, with B2B ecommerce becoming more and more important, some companies may deal with fewer consumers placing larger orders. Obviously, the larger customers have more bargaining power.
The Social Impact of Consumers on Brands
In the 2020s, I believe there is now another huge area where customers can have power over brands. In an era where information flows so fast, in huge quantities, and where everyone can have a voice online, social power is real. More than the word of mouth that always existed, the internet and especially social media make a huge difference in the dynamics between brands and consumers.
Let’s start with saying that the social power of consumers depends heavily on the industry. People tend to talk more about some products than others, and tend to be more vocal about things they are passionate about. A new gym supplement that would shred fat without any side effects would instantly become a huge hit, information would spread like wildfire on social media. However, if the side effects were severe, backlash would be brutal. Fitness influencers would have a lot of power, and could make or break the company’s reputation. In other less “fun” industries, things would move more slowly. Companies manufacturing lawnmowers are less exposed to social media, although they are far from being immune.
Unlike with the economic power, where the volumes ordered mattered, the customer’s social influence and their reach is especially important. That is true for some individual customers, such as influencers who can post about a brand and impact sales directly. That is also the case for groups of customers and communities. Many brands have successfully built communities around their products or services, creating a sense of belonging among consumers. For example, there are people getting Harley Davidson tattoos, and consumers collecting and trading Monster energy drinks cans. These communities often share values, interests, and enthusiasm for the brand, acting as brand ambassadors. Their voice is also often respected by other consumers, who like to get information on the product from them. Brand loyalty matters, and brands with a loyal customer base and strong brand identity may be less susceptible to negative social influence, as their advocates can counterbalance negative opinions.
Lastly, social power exists in B2B and should not be ignored, although it is different from a B2C environment. Corporate buyers talk to each other and gather information through social networks such as LinkedIn, at tradeshows, conferences, and through case studies.
Conclusion
In our large interconnected ecommerce world, the power of customers over businesses has never been more evident. Social media and communities amplify customers’ voices, and access to information is easier than ever. No matter the business model or the industry, consumers’ voices must be respected and are a great source of feedback. Yet, classic economic forces still have an impact. Porter’s model is still relevant today, especially with many niches becoming extremely competitive. The power of consumers in the online world is an important force that drives innovation and transparency, and must be understood by companies to stay ahead.
