Buyer Power: When Customers Set the Terms

Two words get used in most write-ups as though they were one word, and they need pulling apart before anything else. One of them describes the shape of a list of customers. The other describes an outcome that somebody had to agree to. The two are measured on different objects, they answer different questions, and a reader who treats either as evidence for the other will reach a confident conclusion from a figure that never contained it.

A second fact decides where to look. Five things settle what a buyer can make a seller agree to, and four of them are facts about the buyer's own business rather than about the seller's. The four sit in nobody's statements. The fifth is different in kind: a seller had to agree to the terms already granted, an agreement leaves a document, and so the terms are recorded. The asymmetry is why buyer power is read off a payment period far more often than off a price.

What Is Buyer Power, and How Is It Different From Customer Concentration?

Start with a cart. A household that buys every vegetable it eats from one cart at the end of the street has a very concentrated list of suppliers, and that is a true and checkable fact about the household. Whether that household gets a better rate than the neighbour who splits her buying across three carts is a completely separate question, and no amount of staring at the concentration will answer it. She might get a better rate because she buys in bulk. She might get a worse one because everybody on the street knows she never goes anywhere else. The share gives the shape. The deal is not in it.

Turned round onto a seller, the same distinction gives the two words. Concentration answers how much of the year comes from how few names, and it is a share with a head count standing beside it. Power answers what those names can make the business agree to. A share describes the shape of a customer list and a power describes what was agreed, and neither of the two implies the other. A business can send 30.00 per cent of its year to one account and grant that account nothing whatever. A business can also grant a great deal to a party that never looks large in any column on any statement.

Buyer power is one of the five forces in Michael Porter's frame, set out in Competitive Strategy, 1980, and here the single force stands on its own rather than as part of the whole frame put to a market. Taken alone, buyer power gets measured with the wrong instrument more than any of the other four. People reach for the customer list because the customer list is the thing they can get.

What Does a Buyer's Power Actually Turn On?

There are five. Any list that never states its own length invites a sixth item to be quietly added later by whoever is writing the note, so the count is worth saying aloud.

One, how few buyers there are and how large each one is against the seller's year. Two, what else that buyer could buy, and from whom. Three, the cost to that buyer of moving, a subject in its own right that is covered separately under Switching Costs: Why Customers Stay Even When They Could Leave. Four, whether the buyer could simply do the thing itself instead of buying it. Five, how much the purchase matters inside the buyer's own costs. A buyer negotiates hardest over the lines it feels and barely notices the lines it does not.

Read the list again with attention to where each answer lives. The first item is in the seller's revenue ledger. Every single other item is a fact about a counterpartyThe other party to a transaction. Here it means the buyer at the far end of an invoice, whose own accounts and options are a separate business from the seller's. who is under no obligation to tell the seller anything. Only the first of the five is in the seller's own accounts, and the other four are facts about somebody else's business. The other four are not computed. Somebody asks for them, and if nobody asked, they are not held.

For the Sunrise Public School group the position is exactly that. The published figure is the first item and not one of the other four. Nothing on the record says what that group could buy instead, from whom, at what cost of moving, or whether it could produce registers in its own back office. The absence is a finding rather than a gap to be filled in with something plausible.

If Four of Those Five Sit Outside the Accounts, What Is Left Inside Them?

The terms are what is left, and the terms are not the power. The terms are the trace the power left behind.

A term is a thing a seller agreed to. How long the buyer takes to pay. The invoice's line on carriage. The treatment of a short delivery, and who eats the cost of it. Whether an order arrives as a firm purchase orderA document a buyer issues to place an order, setting quantity, specification and the conditions of the purchase before any goods move. A purchase order is the buyer's instrument rather than the seller's. or as a phone call. Every one of those is an outcome that somebody had to say yes to, and saying yes leaves paper. Power is invisible and the terms it won are not, so the terms are where to look first.

Exactness is needed about what a term buys and what it does not. A term buys a fact that can be checked without leaving the accounts, a genuinely rare thing in a subject where most of the evidence is outside them. A term shows what was agreed and never shows who wanted it, so it does not buy a conclusion. A tenant who pays rent three months in advance leaves a receipt every quarter, and the receipt is real, and the receipt cannot say whether the landlord asked for it or the tenant offered it to hold a flat she liked.

What Did Anjani Stationers' Largest Buyer Actually Take?

Anjani Stationers Private Limited makes hard-bound registers and sells them to 36 accounts, all of them schools and institutions, invoiced directly. The largest of those accounts is the Sunrise Public School group, an eleven year relationship. Four figures are already established about it, and they belong beside each other rather than worked out again. How a customer list is read step by step is set out separately under How to Analyse Customer Concentration and Dependence.

The third row is the one people skim. Read it slowly. The two shares do not come from the same object. One is a whole year of trading added up across twelve months. The other is a single evening's balance of trade receivablesAmounts a business is owed by its customers for goods already delivered and invoiced. How the total is built and what else it can be read for sits in the financial accounting notes., a photograph taken once. Neither is a second opinion about the other, and that is exactly why the distance between them carries information. The one account carries a bigger slice of what is owed than of what was earned, and a large slow-settling buyer looks exactly like that on a sheet.

The last pair is the day count. The Sunrise Public School group settles at 171.23 days. The rest of the gross bookThe whole of what customers owe a business at a date, added up before anything is taken off it. Here it is Rs 95,00,000/- and it is quoted, not built. settles at 110.08 days. The two published settlement speeds stay exactly where they are in all the arithmetic below.

Why Did the Charge Not Move at All?

Most write-ups of this force start at the margin, so start there too. In year one the contribution marginWhat is left out of a sale once the costs that move with the sale are taken off it. How it is built, and what else it can be read for, sits in the notes on cost behaviour. at Anjani Stationers stood at 42.75 per cent, and in year two at 42.78 per cent. The charge did not give way, not by so much as a tenth of a point, and the small movement it did make went the other way.

So whatever the Sunrise Public School group took, it did not take it off the price. Over the same book, the same year, the same relationship, that account settles at 171.23 days while the rest of the book settles at 110.08. A buyer that holds the terms does not have to touch the price, and a margin line has no column for days.

The distinction matters for a plain reason. The margin is the line everybody already has open, so almost every study of buyer power is a study of the margin. A buyer taking its power in time leaves that study looking completely clean. Consider a customer who never once argues about the rate and always pays in the fourth month. Nothing about the arrangement is what it was, and no price list anywhere records the change.

What Are the Extra Days Worth in Rupees?

Do not assert this one. Subtract it from amounts that are already on the record.

The rest of the book is Rs 1,89,00,000/- of sales and Rs 57,00,000/- still owed against them. The pair is the rate at which the other thirty five accounts settle, and it is published rather than worked out. Now apply that same rate to the Sunrise Public School group's own Rs 81,00,000/- of sales. At the rest of the book's rate the group would owe Rs 24,42,857.14/-. The group owes Rs 38,00,000/-. The difference is Rs 13,57,142.86/-.

Say what that number is with some care. The sentence naming it is the one people get wrong. The difference is not lost, it is not a cost and it is not an amount anybody has written off: it is Anjani Stationers' own money, already earned and already invoiced, sitting with one buyer for longer than the rest of the list holds it. The number is not a valuation, nothing has been set aside against it, and whether the money arrives is a separate question.

One technical point that is worth more than it looks. The subtraction runs on the four amounts and never on the day counts. 171.23 and 110.08 are each rounded to two places, and routing the arithmetic through them lands a few thousand rupees away from the answer above. A few thousand rupees of drift is precisely the sort of quiet mismatch a careful reader spots, and once they spot one they stop trusting the rest. Run the subtraction from the four amounts every time, never from the two day counts.

Does a Bigger Buyer Produce a Bigger Gap?

A silent assumption has probably formed by now, and it is worth catching before it hardens. The assumption is that the ten point distance is a measure of the buyer: that a buyer twice as large would open a distance twice as wide.

The ten point distance is not a measure of the buyer's power and it is not a measure of the buyer's size. The distance is what arises when one part of a book settles at one speed and the rest settles at another, and the two speeds here are fixed. Holding both of them exactly still and building a book in which the large buyer takes a different share of the year moves the distance anyway. At 2.00 per cent of the year it is 1.08 points. At the published 30.00 per cent it is 10.00 points. The distance reaches its largest anywhere at 11.00 points, at a share of 44.50 per cent, and then it comes back down. At 60.00 per cent it is 10.00 points again. At 90.00 per cent it is 3.33 points.

The distance rises, turns at eleven points and comes back down, so doubling the buyer does not double it. The reason is easier than the shape suggests. A distance between two shares only appears when two different settlement speeds are being mixed. At either end one speed is doing all the work and there is nothing to mix, so the distance has to be nothing at both ends and something in between.

Every share in that run except the published 30.00 per cent is a constructed book holding two published settlement rates still. A constructed book is arithmetic demonstrating a property of the measure, and it says nothing about how Anjani Stationers would trade at any other size.

Who Sets the Terms at a Business With Fifty Thousand Customers?

A force that only shows up in one shape of business is not a force, it is a coincidence. Take the same force, then, to a business shaped nothing like the first one.

Setu Bazaar, an invented marketplace, reaches 50,000 buyers spending about Rs 4,000/- each in a year, so a single buyer is 0.002 per cent of the year. Its heaviest 5,000 buyers together hold 40.00 per cent of the revenue, and that is a distribution spread across five thousand names rather than a dependence on any one of them. Nobody in that population can make anybody agree to anything, and there is no arithmetic to run.

Then comes the part worth sitting with. Setu Bazaar's buyers pay at the moment of buying. No credit is granted to anybody at all. Setu Bazaar has no terms to grant and therefore no record of any, so the one observable that showed the power at Anjani Stationers is not missing there. Nothing of it was ever there to go missing. An absent record is not evidence of an absent power. An absent record is an absent instrument.

Now look at the side that can actually walk away. Setu Bazaar carries 2,000 merchants, and a merchant can list the same goods on three marketplaces at once. Being on several at the same time is multi-homingBeing present on more than one platform at the same time, so that no single one of them is the only route to a customer. Why platforms behave this way sits in the notes on platform businesses.. A merchant on three marketplaces is a party with somewhere else to be. The merchant count is published and no split of it is, so nothing beyond the count can honestly be said about that side. Working out how concentrated a list is, and what an index of it would and would not establish, is settled separately under Herfindahl-Hirschman Index: Which Market Are You Measuring?

Why Can the Terms Show That Power Was Exercised and Never Show Who Wanted It?

Go back to the 171.23 days and ask the awkward question honestly. Who wanted that?

Three answers fit the figure exactly. An institutional buyerA customer that is an organisation rather than a person: a school, a hospital, a government office. Such a buyer buys through an approval process and pays through one, so its settlement behaviour is often unlike a household's. may have asked for a long period and refused to move. A seller may have offered one to hold an eleven year relationship. A habit may have started for a reason nobody wrote down and never been looked at since. All three produce 171.23 days, and the figure sitting on the sheet is identical in all three cases.

A term is evidence that something was agreed and it is not evidence of who wanted it. The same rule holds everywhere else in this subject: a set of accounts can rule a cause out and can never rule one in. Arithmetic would not settle the question at all. Settling it takes knowing what else the Sunrise Public School group could buy and from whom, what moving would cost it, and whether anybody has ever actually put the question to it. Nothing established anywhere answers any of the three, and saying so is a better answer than choosing one and writing it confidently.