The ability to strategically negotiate with other companies drastically impacts the success of your business, both in closing individual deals and sustaining long-term business relationships. One of the most crucial elements of a successful negotiation is bargaining power. Accurately recognizing your bargaining power and the bargaining power of your negotiation partner and properly implementing it ensures you can reach the optimal outcome. It is absolutely essential that you understand how bargaining power works and can identify who holds the most bargaining power in a negotiation so you can utilize the right strategies and achieve the best results, even in the most difficult situations.
To learn more about bargaining power and its significance in negotiations, consult the information below, then contact Shapiro Negotiation Institute today to discuss how our negotiation training program can take your business to the next level. We offer the highest quality instruction customized to your business’s unique needs and can teach your team everything they need to know about conducting successful negotiations.
What Is Bargaining Power?
Bargaining power refers to the relative capacity of parties in a negotiation to influence, persuade or secure an agreement with terms that best suit their objectives. The bargaining power of each party rests on a number of factors and can shift over time due to changing circumstances. Virtually every negotiation involves two parties with different levels of bargaining power, and only in rare situations do both of them share equal bargaining power. Ideally, you will always have the strongest bargaining power in a negotiation, but this is never guaranteed. Although it is more difficult to enter a negotiation from the weaker position, it is possible to effectively negotiate and achieve a fair, mutually beneficial outcome.
How Does Bargaining Power Benefit Negotiators?
Bargaining power arguably serves as the single most important factor in a negotiation by:
Prompting Bold Action and Encouraging Risk-Taking
Extensive research has shown that having strong bargaining power in a negotiation enhances your determination as well as improving your opportunity to influence the result of the outcome and end up with a better deal for your business. When you enjoy stronger bargaining power in a negotiation, it emboldens you, enhances your enthusiasm for the deal, instills confidence, and allows you to be more proactive during the negotiation process.
Bargaining power increases the likelihood that you will consider entering into a negotiation in the first place, then alters your mindset during the negotiation, so you focus on seeing potential advantages rather than worrying about potential dangers. It enables you to make more ambitious offers, set higher prices, and seek the most value from the other party. When an obstacle arises, it leads to collaborative problem solving and creative solutions that ultimately benefit both parties.
Offering Protection Against the Other Party’s Tactics
Having more bargaining power than your negotiating partner offers protection against negative or manipulative tactics they may attempt to use to influence your decisions. Bargaining power improves your resilience during the negotiation, making you less likely to yield, make concessions, or otherwise conform to the other party’s wishes. When they display anger, solicit sympathy, or try to make you feel powerless, you are less vulnerable to these influences and can remain calm, composed, and professional rather than responding with equally charged emotions.
Keeping your cool protects you from the other party’s influence and enhances your focus. It prevents you from experiencing clouded judgment that could result in prematurely accepting unfair terms that work against your interests. This protection means you will not be swayed by their tactics and will only make concessions when offered equal advantages in return, not just to bring an end to an unpleasant situation.
What Is Bargaining Power Affected By?
The bargaining power of parties in a negotiation is affected by alternatives, information, status, and social capital.
- Alternatives – The strength of your BATNA or best alternative to a negotiated agreement. When you have strong, appealing offers from competing companies, you are less dependent on the negotiation partner to reach your goals and can place more pressure on them to meet your terms.
- Information – How much you know about the other party’s preferences, concerns, and restraints. The more information you have, the better informed you are to negotiate and the higher your chance of reaching the agreement that most benefits your business.
- Status – The extent to which you and your business are respected by others. Negotiators with higher status are viewed as more competent, are chosen as negotiation partners more often, and their requests are more likely to be granted.
- Social Capital – How widespread and influential your social network is and how successful it is at facilitating interactions. The more professional connections you have and the higher the quality of these connections, the higher your visibility and your chance of being viewed as credible and influential.
What Are the Signs of Strong or Weak Bargaining Power of Buyers?
Buyer bargaining power provides consumers the ability to impact industry margins by influencing suppliers to reduce the prices of their products or increase their quality. The fewer the number of buyers and the higher the amount of alternative options, the higher the buyer’s bargaining power becomes.
Signs of Strong Bargaining Power:
- Fewer buyers in comparison with the number of suppliers
- Product is not differentiated, or indistinct from those offered by the competitors
- Several alternatives are available, meaning the buyer depends less on that supplier
- Cost of switching is low
- Potential for backward integration, or merging multiple suppliers
- Buyer purchases many products from the seller or high volumes of the product
Signs of Weak Bargaining Power:
- More buyers in comparison with the number of suppliers
- Product is differentiated, or distinct from competing products
- Fewer alternatives available, meaning the buyer depends strongly on that supplier
- Cost of switching is high
- Little or no potential for backward integration or an inability to do effectively
- Buyer does not intend to purchase high volumes of product or multiple products
How Do I Know How Much Bargaining Power I Have?
Before you enter into a negotiation, ask yourself the following questions to determine how much bargaining power you have:
- How strong or appealing are my alternatives?
- Should I utilize these alternatives as reference points during the negotiation?
- Can I create a better alternative before the negotiation begins to gain more bargaining power?
- What information do I have about the other party, such as their goals, priorities, strengths, weaknesses, and time-related or financial constraints that may impact the negotiation?
- Can I predict the other party’s willingness to compromise or make concessions?
- Which negotiation techniques are most likely to succeed with this party?
- Do I have a reliable, trustworthy reputation from the other party’s perspective?
- Have I made any miscalculations or judgment errors that would have damaged my reputation among their company or their colleagues?
- If so, what can I do to improve their opinion of me or my company?
- Can I utilize my social status or network of influence to learn more information, persuade the other party to agree to my terms, or alleviate any constraints they may face?
How Do I Negotiate with a Strong Buyer?
If you find yourself in the weaker negotiating position, follow these tips to maximize your bargaining power and increase the likelihood of reaching the best outcome:
- Prepare for the negotiation by conducting comprehensive research on their position, interests, goals, values, and challenges.
- Determine why the other party is negotiating with you, what they hope to gain from the deal, and how desperately they want your services or products.
- Emphasize your value and your strengths, both through direct declaration and asking members of your network to validate your credibility and share positive feedback.
- Encourage conversation with the other party to foster trust and receptivity to your ideas, ask open-ended questions to communicate that you care about their perspective, and listen actively to their answers and any concerns they raise.
- Generate creative alternatives you can explore if the current opportunity does not work out, as this strengthens your resolve and leads to more ambitious offers.
- Know your limits and walk away when the other party attempts to take advantage of you with aggressive or unfair tactics.
Take Advantage of Your Bargaining Power Now
To learn more about bargaining power and how you can utilize yours to reach successful agreements, contact Shapiro Negotiations Institute today. Our comprehensive training program gives businesses proven methods to effectively conduct negotiations, increase the profitability of their deals, and resolve conflict that can interfere with the success of a negotiation. We teach people in industries of all kinds how to identify bargaining power and implement it to achieve the optimal result in their negotiations. We have facilitated over $2.5 billion in sales for our clients and would love the opportunity to improve your business.
Contact us today by visiting our website and completing the contact form, and our team will be in touch shortly to speak with you about our program.