Buyer Selection and Purchasing Strategy
Choose your customers strategically to improve margins and competitive position
Porter argues that buyer selection—choosing which customers to sell to and which to avoid—is a critical strategic variable that most firms neglect. Not all buyers are equally attractive. Some buyers have high bargaining power (large volume, low switching costs, price-sensitive), while others have structural characteristics that make them good customers (growing, less price-sensitive, high switching costs, low cost to serve).
The framework provides criteria for evaluating buyer attractiveness: purchasing needs relative to the firm's capabilities, growth potential, intrinsic bargaining power, price sensitivity, and cost of servicing. A firm can improve its overall strategic position by actively targeting the most favorable buyers and declining or de-emphasizing the least favorable ones. This is not just a sales tactic but a strategic choice that shapes the firm's competitive position over time.
Porter also inverts the analysis to provide a purchasing strategy framework for firms in their role as buyers. Just as seller strategy involves selecting favorable buyers, purchaser strategy involves finding suppliers with the least ability to exert bargaining power, spreading purchases to avoid supplier dependence, and creating credible threats of backward integration.
- Buyer selection is a strategic variable that directly shapes the intensity of buyer power a firm faces
- The most desirable buyers are those with the least bargaining power relative to the firm and the greatest need for the firm's specific capabilities
- Growing buyers are generally more desirable because their expanding needs reduce their incentive to bargain aggressively
- Purchasing strategy should mirror selling strategy in reverse: find suppliers with the least leverage and create conditions that reduce their power
- A firm can improve its structural position over time by deliberately shifting its customer mix toward more favorable buyer segments
- Evaluate buyer bargaining power segment by segmentApply the buyer power analysis from Five Forces to individual buyer segments rather than treating all buyers as a single group. Assess each segment's purchase volume, switching costs, backward integration threat, price sensitivity, and access to competitive information.Pro tipThe same product often serves buyer segments with vastly different power profiles. A component manufacturer selling to both large OEMs and small specialty shops faces radically different buyer dynamics in each segment.
- Assess buyer cost-to-serve and growth potentialBeyond bargaining power, evaluate the inherent cost of serving each buyer segment (order complexity, service requirements, delivery logistics, credit risk) and each segment's growth trajectory. Fast-growing segments with moderate service costs are typically more attractive than slow-growing segments even with lower unit margins.
- Match buyer needs to your capabilitiesIdentify buyer segments whose needs align most closely with your firm's distinctive capabilities. The ideal buyer values exactly what you do best and is willing to pay for it. When your unique strengths solve a buyer's most pressing problems, price sensitivity decreases and loyalty increases.
- Prioritize and allocate resources accordinglyRank buyer segments based on the combined assessment of power, cost-to-serve, growth, and fit. Allocate sales, service, and development resources disproportionately toward the most attractive segments. Consider de-emphasizing or exiting segments where buyer power is high and fit is poor.Pro tipThis may mean accepting lower total revenue in the short term in exchange for higher margins and better competitive position over time.WarningDo not confuse large buyers with good buyers. Your largest customer may be your least profitable relationship.
- Apply the mirror framework to purchasingWhen your firm is the buyer, apply the same analysis in reverse. Identify suppliers where your bargaining power is greatest, spread purchases to avoid dependence on any single supplier, invest in understanding supplier cost structures, and build credible backward integration threats where appropriate.
In the copier industry, small businesses were less price-sensitive than large corporations, had fewer alternative suppliers, required less customization, and were growing faster. Large corporate accounts demanded volume discounts, customized service level agreements, and had dedicated purchasing departments that systematically extracted concessions.
A manufacturer deliberately maintained two qualified suppliers for each critical input, even when single-sourcing would have yielded lower unit costs through volume concentration. The dual-source strategy kept each supplier's bargaining power in check and provided insurance against supply disruption.
Porter noticed that the Five Forces framework treated buyer power as a force acting on the firm, but firms were not passive recipients of this force. By choosing which buyers to serve, a firm could effectively modify the buyer power force it faced. This was one of the most practical and immediate applications of structural analysis—firms could improve their profitability simply by being more selective about their customer mix.
The insight came from observing that many firms poured resources into serving their largest customers, who were also their most powerful and demanding, while neglecting smaller customers who were less price-sensitive and more loyal. The framework provided an analytical basis for what the best sales leaders knew intuitively: not all revenue is equally valuable.