Since suppliers depend on customers to generate revenue, suppliers must adhere to their customers’ pricing demands — or risk customers doing business with other suppliers.
On the flip side, if there are a ton of customers in your industry, the customers hold significantly less power. They must accept the prices suppliers set or else they won’t be able to buy any of the products or services.
Power of Customers Example
Every single baseball player needs an aluminum baseball to train and compete, so each supplier in the aluminum baseball bat industry has a huge potential customer base to market and sell to. Since there are few suppliers and so many customers in this market, the customers don’t hold enough power to drive the prices down.
- Threat of Substitute Products
Substitutes are products from different industries that consumers can use interchangeably, like coffee and tea, and they can significantly shape your industry.
If your product has cheaper or superior substitutes, you not only have to compete with other players in your industry, but you also have to compete with businesses in other industries
If your product doesn’t have cheaper or superior substitutes, though, the businesses who produce these substitutes don’t pose as much of a threat to you or your direct competitors. This low multi-market competition might only drop your prices and profits slightly.
Threat of Substitute Products Example
Instead of buying aluminum baseball bats, players could buy bats from suppliers who only manufacture wood bats, like Baum Bats, Old Hickory, and Sam Bat. But the odds of this happening are extremely low. Even though individual wood bats cost less than individual aluminum bats, wood bats break much more frequently.
For instance, one $250 aluminum bat can last longer than five $100 wood bats, so replacing aluminum bats with wood bats would actually cost more money. Players can also hit the ball farther with aluminum bats, which makes it the superior product.
Additionally, wood bat manufacturers make the most money by focusing on a specific market of baseball players who only use wood bats, like professional baseball players, summer college league players, and top-flight travel baseball players. In sum, there’s a low threat of substitutes in this industry.
Porter’s Five Forces Analysis
To conduct a Five Forces analysis, start by reflecting on how each force affects your business. Then, identify the strength and direction of each force — which also assesses your competitive position.
To get the ball rolling, ask yourself these questions:
- Are there a lot of suppliers in my industry?
- Is my buying power high or low?
- Is there a substitute for my product or service?
- Is it easy or difficult for new competitors to enter my market?
- Is competition high or low in my industry?
Next, write down each of the five forces, and note the size and scale of each, using your answers to guide you. You can also do this by downloading our Five Forces Model Template below.
Porter’s Five Forces Model Template