Chapter 6

1. Chapter 6 Business Markets and Business Buyer Behavior

2. Business markets • Boeing, IBM, Caterpillar & Intel sell to other businesses (B-to-B) • Even consumer product companies sell to other businesses to further complete the supply chain. • Business-to-Business marketers must understand B-to-B markets to build strong relationships by satisfying their needs. • Many sets of business purchases are made to make only one set of consumer purchase. • In some ways business markets are similar to consumer markets i.e. both involve people assuming buying roles and making purchase decisions. • But they are also different many ways (next slide)

3. Business markets • Market Structure and Demand • Fewer but larger buyers than consumer markets • Black and Decker sells its power tools to millions of consumers but through THREE main retailers – Home Depot, Lowe’s and Wal-Mart. • Business market demand is derived demand. • Sometimes, B-to-B marketers promote their products directly to final consumers to increase business demand. • e.g. Intel advertising to consumers to boost demand for laptops as laptops use Intel Chips. • Business markets have inelastic demand. • Unaffected by price. • A drop in price of leather will not cause more leather demanded unless it affects the shoe-makers price to the consumers. • Business markets demands are more fluctuating • A small increase in consumer demand causes businesses to rise demands drastically.

4. Business markets • Nature of Buying Unit • Business purchases involve more decision participants and more professional purchasing efforts. • They know more about the seller than the seller knows itself. • Many companies are now upgrading their purchasing functions to • “supply management” • “supplier development” • A B-to-B company must have well trained marketers and sales-people to deal with such well-trained buyers (i.e. technical experts and managers).

5. Business markets • Types of Decisions and the Decision Process • More complex • More money and complex technical and economical considerations • Hence, they take longer to decide than a consumer does • More formal • Detailed product specifications • Written purchase orders • Careful supplier searches • Formal approval • Closely worked out • More dependent on each other • Work together during the stages of buying process from helping customers define problems to finding solutions to supporting after-sale operations. • New mantra– “supplier development”, not a purchasing department. • Systematic development of networks of supplier-partners to ensure an appropriate and dependable supply of products and materials for use in making products for reselling them.

6. Business markets Assignment Real Marketing IKEA: (Supplier Development) Working with Suppliers to Keep Customers Clamoring for More (Principles of Marketing, 12th Edition, Pages 154-155)

7. Business markets • Differences between consumer markets and business markets

8. Business BUYING BEHAVIOR • The figure on next slides shows the Business Buying Behavior Model • External Stimuli • Marketing stimuli (4 Ps) • Other stimuli (economic, political, technological, cultural & competitive) • Within the organization, buying activity consists of TWO major parts • The buying center (i.e. all the people involved in decision) • Buying decision process. • There are further other influences within the organization that affects the above-mentioned; • Internal organizational factors • Interpersonal factors • Individual factors • Resulting in: • Buyer responses • Choices regarding Product, supplier, quantity, delivery terms, service terms and payment

9. Business BUYING BEHAVIOR • Marketers of B-to-B companies must know the business buying behavior i.e. how the business buyers respond to various marketing stimuli.

10. Business BUYING BEHAVIOR • THREE Major Types of Buying Situations • Straight Rebuy • Modified Rebuy • New Task • Straight Rebuy – the buyer routinely re-orders something without any modifications • The “IN” suppliers try to maintain quality & propose automatic re-ordering systems to help purchaser make quicker decision. • The “OUT” suppliers try to find ways to add value or exploit dissatisfaction so that they are considered. • Modified Rebuy – the buyer wants to alter/change product specifications, prices, terms or suppliers. • The “IN” suppliers may become nervous & feel pressured to put their best effort forward to protect an account. • The “OUT” suppliers may see the modified rebuy as an opportunity to gain a new customer.

11. Business BUYING BEHAVIOR • THREE Major Types of Buying Situations • New Task – the buyer purchases a product or service for the first time • An opportunity for both “IN” and “OUT” suppliers • The greater the risk or cost, the larger the number of participants and greater their efforts to collect information. • Most decision are made in New Task decision. • Enough information about product specifications • Suppliers • Price limits • Payment terms • Order quantities • Delivery times • Service terms • Many business buyers prefer a packaged solutionto a problem i.e. instead of buying & putting all the components together, the buyer may ask the seller to supply the components and assemble the package or system (System Selling).

12. Business BUYING BEHAVIOR • THREE Major Types of Buying Situations • System Selling is a TWO-STEP process; • First, the supplier sells a group of interlocking products e.g. glue with applicators and dryers. • Second, the supplier sells a system of production, inventory control, distribution and other services to meet the buyers’ need for a smooth running operation. • System selling is a key marketing strategy for winning and holding accounts. • The best example of system selling (next slide)

13. Business BUYING BEHAVIOR • Indonesian government requested bids to build a cement factory near Jakarta. • An American firm’s proposal included; • Choosing the site • Designing the cement factory • Hiring the construction crews • Assembling the materials & equipment • Turning the finished factory over to the Indonesian government • A Japanese firm’s proposal included: • All the above services • Hiring & training workers to run factory • Exporting the cement through their trading companies • Using the cement to build some needed roads & office buildings in Jakarta. • Although the Japanese cost more, but won the contract. • They saw the real problem (i.e. helping the economy) not just running a factory. • This is True System Selling.

14. Business BUYING BEHAVIOR • Participants in the Business Buying Process • The buying center – all the individuals and units that play a role in the purchase decision-making process. It is not fixed or formally identified. It is a set of buying roles assumed by people in org. • It includes all who play any of the FIVE Roles in the purchase decision process; • Users • Influencers • Buyers • Deciders • Gatekeepers • Users • The employees who will actually use the purchased product/service. • Influencers • They often help define the specifications and provide information for evaluating alternatives e.g. technical personnel.

15. Business BUYING BEHAVIOR • Participants in the Business Buying Process • The buying center (continued) • Buyers • They have the formal authority to select & negotiate with the supplier & arrange terms of purchase. • More complex situation involve high-level officers participating in negotiations. • Deciders • They have formal or informal power to select or approve the final suppliers. • In routine buying, the buyers are often the deciders. • Gatekeepers • People in the organization’s buying center who control the flow of information to others. • e.g. purchasing agents have the authority to prevent salespersons from seeing users or deciders. Other keepers include technical personnel & even personal secretaries.

16. Business BUYING BEHAVIOR • Major Influences on Business Buyers • When suppliers offers are very similar, business buyers have little basis for strictly rational choice. Hence; • Because they can meet their organizational goal with any supplier, they allow personal factors (emotions) to play a larger role in their decisions. • However, when competing brands differ greatly, then economic factors (better price) can defeat all odds.

17. Business BUYING BEHAVIOR • These are the major factors influencing the business buyer’s decision;

18. Business BUYING BEHAVIOR • Major Influences on Business Buyers • Environmental Factors • Economic changes e.g. level of primary demand, interest rates, inflation, GDP and GNP. • Shortage of materials • Technological, political and competitive developments. • Culture and customs of the buyer • Organizational Factors • Objectives • Policies (regarding buying and other policies too) • Procedures (buying procedures) • Structure and systems (hierarchy, departments, authorities) • A B-to-B marketer must understand the above about his/her customer.

19. Business BUYING BEHAVIOR • Major Influences on Business Buyers (continued) • Interpersonal Factors • The buying center has many participants who influence each other. • Hence, it is the interpersonal influence upon the buying process. • However, it is difficult to asses such factors or group dynamics. • Participants may influence the buying decision because; • They control rewards & punishments • Are well-liked • Have special expertise • Have a special relationship with other important participants • A marketers job is to understand these factors and design strategies that take them into account. • Individual Factors • Each participant brings in personal motives, perceptions and preferences. • These individual factors are affected by personal characteristics e.g. • Age, income, education, professional identification, personality and attitudes toward risk.

20. Business BUYING BEHAVIOR • The Business Buying Process

21. Business BUYING BEHAVIOR • The Business Buying Process • Need/Problem Recognition • Internal stimuli (company needs materials for its new product) • External stimuli (see an ad, visit a trade show, receive a call from a salesperson) • e.g. Kodak’s ad says “complexity becomes clarity” about hospital imaging • General Need Description • Quantity • Description • Standard items, this process is easy; but for • Complex items, the buyer may consult engineers, users, consultants etc. • Then, the team may rank the importance of the following; • Reliability • Durability • Price etc. • An alert marketer should help the buyers define their needs and provide enough information about product characteristics and differentiation.

22. Business BUYING BEHAVIOR • The Business Buying Process (continued) • Product specifications • To develop products technical product specification • Value Analysis is carried out by the buyer– an approach to cost reduction in which components are studied carefully to determine if they can be redesigned, standardized or made by less costly methods. • Sellers can use Value Analysis also to offer more customized solutions and gain an account. • Supplier Search • Buyer makes a small list of suppliers by reviewing trade directories, doing computer search or phone other companies for recommendations • Internet offers the small companies the same advantage as big ones • The newer the buying task and more complex & costly the item, the greater amount of time the buyer will spend searching for the supplier • Marketers should enlist their companies in major directories, have a website • Sales-force should look for the companies who might need assistance

23. Business BUYING BEHAVIOR • The Business Buying Process (continued) • Proposal Solicitation • The buyer invites qualified suppliers to submit proposals. • Some sellers submit catalog or a salesperson. • Complex and costly items usually requires a detailed written proposal or formal presentation • Marketers must be good in researching, writing and presenting proposals • Supplier Selection • The buyer reviews proposals/other literature and selects a supplier • A list of desired suppliers is made out of the available and are weighed on the basis of; • Quality products & services • On-time delivery • Ethical corporate behavior • Honest communication • Competitive prices • Other characteristics include, repair & services, technical aid, geographic location, performance history and reputation.

24. Business BUYING BEHAVIOR • The Business Buying Process (continued) • Order-Routine Specification • Final orderwith the chosen one • List of item such as; • Technical specifications • Quantityneeded • Expected time of delivery • Return policies • Warrantees • In the case of maintenance, repair and operating, the buyer may use blanket contracts rather than periodic purchase orders. • Blanket Contract – a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed prices for a set period of time • Many large firms now practice vendor-managed inventory; • the buyer turns over the ordering and inventory responsibilities to their supplier • The buyer must share sales and inventory information directly with the key supplier

25. Business BUYING BEHAVIOR • The Business Buying Process (continued) • Performance Review • The buyer assesses the performance of the supplier • They may ask the users or others involved about the satisfaction levels • The buyer may decide to; • Continue • Modify or • Drop the arrangement • The seller must also keep an eye on the same factors to rate the satisfaction of the buyer.

26. Business BUYING BEHAVIOR • E-procurement • Company’s own website or external links • HP’s website is considered one of the best • It provides; • Product overviews • Detailed technical information • Purchasing solutions • E-newsletters • Live chats with sales staff • Online classes • Real-time customer support • Most products bought online are MRO materials (maintenance, repair & operations) • More than MRO are the airplane parts, computer systems & steel tubing.

27. Business BUYING BEHAVIOR • Institutional & government markets • Institutional markets – schools, hospitals, rehabilitation centers, nursing homes & prisons etc. • Government markets – government units; federal, state & local • Both these buyers share most of the characteristics and behaviors with the B-to-B buyers; however, some additional special features are as follow; • Institutional markets • Low budgets & captive patrons • The customers don’t have a choice • Food is part of the total service package • Bad quality can be as harmful as bad doctors • Thus, they go for quality and price • e.g. Heinz produces, package & prices its ketchup, canned soups, frozen desserts, pickles and other products differently to better serve the hospitals needs • Heinz gets 20% of its sales from institutional markets

28. Business BUYING BEHAVIOR • Institutional & government markets (continued) • Government markets • Government is a major buyer • The marketer should identify the key decision maker, factors affecting buyer behavior & the decision process e.g. • Government organizations usually require suppliers to submit bids & the lowest price wins it. • Government usually tend to favor domestic suppliers over foreign ones • Government buyers are also affected by environmental, interpersonal, organizational, & individual factors • Uniqueness of government markets • They are watched by public, media because they are interested to know the fate of the taxes • Governments usually provide a detailed guide describing how to sell to the government • Business Service Centers provide marketers with information and education on how and where to locate institutional and government buyers

29. Business BUYING BEHAVIOR • Institutional & government markets (continued) • Government markets • Non-economic criteria also affects the process • Government buyers are often asked to favor depressed business firms & areas, small business firms& minority-owned firms • Marketing doesn’t matter much in this market because • Government budget is fixed and can’t be affected by marketing efforts • Its all about price and specifications, so differentiation is not much of a use • Several companies, hence, establish their own government marketing department