Porter's Five Forces & The Automation of Price Sensitivity

In Michael Porter’s framework Forces Driving Industry Competition, buyers pressure businesses to drop prices, demanding higher quality or more products/services.

Porter notes that this buyer power is determined by two key aspects:

  1. Intrinsic bargaining power

  2. Propensity to exercise this bargaining power in demanding low prices

Intrinsic bargaining power is the leverage that buyers can potentially exert over sellers, given their clout and alternative sources of supply available. This leverage may or may not be exercised, however, because buyers also differ in their propensity to exercise their bargaining power to force down a seller’s margins.

So, in some cases, although the buying groups actually have power and could lower the cost of products they buy....they aren’t using their power. Porter explains that some buyers don’t use their pressure because they simply are not sensitive to prices or they value other aspects of the products.

As Porter points out, this phenomenon is “crucial strategically, because unexercised power is a threat that can be unleashed by industry evolution.”

Technological progress is a key source of that “industry evolution” to which Porter alludes. Example: Personally, I may not be particularly price sensitive about the box of tissues that I buy. However, my automated robot shopper of the future can not only easily find all the potential stores, but also prioritize buying from the least expensive store. Even today, Amazon will first list the lowest overall price for a product, funneling buyers away from suppliers that may have historically “gotten away with” charging a premium to price insensitive shoppers. Effectively, Amazon and other shopping intermediaries are enforcing bargaining power on consumers’ behalf.

While this may be largely limited to consumer products today, it is easy to envision a future where one could ask Alexa to instantly suggest the best insurance provider to fit my needs. In this future, the algorithms behind the technology will take the “work” out of exercising your bargaining power. Comparing prices will be automated, driving price sensitivity (for relatively similar products and services) across all industries.

Today, consumers are price sensitive about only some products and services. In the future, everyone can effectively be considered price sensitive (across all industries). Because even if the human consumer doesn’t know the prices...the algorithms working on their behalf will.