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Analyzing Business Markets
What is Organizational Buying?
Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making
process by which formal organizations establish the need for purchased products and services
and identify, evaluate, and choose among alternative brands and suppliers.
The Business Market versus the Consumer Market
The business market consists of all the organizations that acquire goods and services used in the
production of other products or services that are sold, rented, or supplied to others. The major
industries making up the business market are agriculture, forestry, and fisheries; mining;
manufacturing; construction; transportation; communication; public utilities; banking, finance,
and insurance; distribution; and services.
More dollars and items change hands in sales to business buyers than to consumers. Consider the
process of producing and selling a simple pair of shoes. Hide dealers must sell hides to tanners,
who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers,
who finally sell them to consumers. Each party in the supply chain also buys many other goods
and services to support its operations.
Given the highly competitive nature of business-to-business markets, the biggest enemy to
marketers here is commoditization. Commoditization eats away margins and weakens customer
loyalty. It can be overcome only if target customers are convinced that meaningful differences
exist in the marketplace, and that the unique benefits of the firm’s offerings are worth the added
expense. Thus, a critical step in business-to-business marketing is to create and communicate
relevant differentiation from competitors.
Business marketers face many of the same challenges as consumer marketers. In particular,
understanding their customers and what they value is of paramount importance to both. A survey
of top business-to-business firms identified the following as challenges they faced:
1. Understanding deep customer needs in new ways;
2. Identifying new opportunities for organic business growth;
3. Improving value management techniques and tools;
4. Calculating better marketing performance and accountability metrics;
5. Competing and growing in global markets, particularly China;
6. Countering the threat of product and service commoditization by bringing innovative offerings
to market faster and moving to more competitive business models;
7. Convincing C-level executives to embrace the marketing concept and support robust
marketing programs.
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Business marketers contrast sharply with consumer markets in some ways, however:
Fewer, larger buyers. The business marketer normally deals with far fewer, much larger buyers
than the consumer marketer does, particularly in such industries as aircraft engines and defense
weapons. The fortunes of Goodyear tires, Cummins engines, Delphi control systems, and other
automotive part suppliers depends on getting big contracts from just a handful of major
automakers.
Close suppliercustomer relationship. Because of the smaller customer base and the
importance and power of the larger customers, suppliers are frequently expected to customize
their offerings to individual business customer needs. Business buyers often select suppliers that
also buy from them. A paper manufacturer might buy from a chemical company that buys a
considerable amount of its paper.
Professional purchasing. Business goods are often purchased by trained purchasing agents, who
must follow their organizations’ purchasing policies, constraints, and requirements. Many of the
buying instrumentsfor example, requests for quotations, proposals, and purchase contracts
are not typically found in consumer buying. Professional buyers spend their careers learning how
to buy better. Many belong to the Institute for Supply Management, which seeks to improve
professional buyers’ effectiveness and status. This means business marketers must provide
greater technical data about their product and its advantages over competitors’ products.
Multiple buying influences. More people typically influence business buying decisions. Buying
committees consisting of technical experts and even senior management are common in the
purchase of major goods. Business marketers need to send well-trained sales representatives and
sales teams to deal with the well-trained buyers.
Multiple sales calls. A study by McGraw-Hill found that it took four to four and a half calls to
close an average industrial sale. In the case of capital equipment sales for large projects, it may
take many attempts to fund a project, and the sales cyclebetween quoting a job and delivering
the productis often measured in years.
Derived demand. The demand for business goods is ultimately derived from the demand for
consumer goods. For this reason, the business marketer must closely monitor the buying patterns
of ultimate consumers. Pittsburgh-based Consol Energy’s coal business largely depends on
orders from utilities and steel companies, which, in turn, depend on broader economic demand
from consumers for electricity and steel-based products such as automobiles, machines, and
appliances. Business buyers must also pay close attention to current and expected economic
factors, such as the level of production, investment, and consumer spending and the interest rate.
In a recession, they reduce their investment in plant, equipment, and inventories. Business
marketers can do little to stimulate total demand in this environment. They can only fight harder
to increase or maintain their share of the demand.
Inelastic demand. The total demand for many business goods and services is inelasticthat is,
not much affected by price changes. Shoe manufacturers are not going to buy much more leather
if the price of leather falls, nor will they buy much less leather if the price rises unless they can
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find satisfactory substitutes. Demand is especially inelastic in the short run because producers
cannot make quick changes in production methods. Demand is also inelastic for business goods
that represent a small percentage of the item’s total cost, such as shoelaces.
Fluctuating demand. The demand for business goods and services tends to be more volatile
than the demand for consumer goods and services. A given percentage increase in consumer
demand can lead to a much larger percentage increase in the demand for plant and equipment
necessary to produce the additional output. Economists refer to this as the acceleration effect.
Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent
rise in business demand for products in the next period; a 10 percent fall in consumer demand
may cause a complete collapse in business demand.
Geographically concentrated buyers. For years, more than half of U.S. business buyers have
been concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New
Jersey, and Michigan. The geographical concentration of producers helps to reduce selling costs.
At the same time, business marketers need to monitor regional shifts of certain industries.
Direct purchasing. Business buyers often buy directly from manufacturers rather than through
intermediaries, especially items that are technically complex or expensive such as mainframes or
aircraft.
Buying Situations
The business buyer faces many decisions in making a purchase. How many depends on the
complexity of the problem being solved, newness of the buying requirement, number of people
involved, and time required. Three types of buying situations are the straight rebuy, modified
rebuy, and new task.
Straight rebuy. In a straight rebuy, the purchasing department reorders supplies such as office
supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list.
The suppliers make an effort to maintain product and service quality and often propose automatic
reordering systems to save time. “Out-suppliers” attempt to offer something new or exploit
dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their
purchase share over time.
Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices,
delivery requirements, or other terms. This usually requires additional participants on both sides.
The in-suppliers become nervous and want to protect the account. The out-suppliers see an
opportunity to propose a better offer to gain some business.
New task. A new-task purchaser buys a product or service for the first time (an office building, a
new security system). The greater the cost or risk, the larger the number of participants, and the
greater their information gatheringthe longer the time to a decision.

Unformatted Attachment Preview

Analyzing Business Markets What is Organizational Buying? Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers. The Business Market versus the Consumer Market The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. More dollars and items change hands in sales to business buyers than to consumers. Consider the process of producing and selling a simple pair of shoes. Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also buys many other goods and services to support its operations. Given the highly competitive nature of business-to-business markets, the biggest enemy to marketers here is commoditization. Commoditization eats away margins and weakens customer loyalty. It can be overcome only if target customers are convinced that meaningful differences exist in the marketplace, and that the unique benefits of the firm’s offerings are worth the added expense. Thus, a critical step in business-to-business marketing is to create and communicate relevant differentiation from competitors. Business marketers face many of the same challenges as consumer marketers. In particular, understanding their customers and what they value is of paramount importance to both. A survey of top business-to-business firms identified the following as challenges they faced: 1. Understanding deep customer needs in new ways; 2. Identifying new opportunities for organic business growth; 3. Improving value management techniques and tools; 4. Calculating better marketing performance and accountability metrics; 5. Competing and growing in global markets, particularly China; 6. Countering the threat of product and service commoditization by bringing innovative offerings to market faster and moving to more competitive business models; 7. Convincing C-level executives to embrace the marketing concept and support robust marketing programs. Business marketers contrast sharply with consumer markets in some ways, however: Fewer, larger buyers. The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does, particularly in such industries as aircraft engines and defense weapons. The fortunes of Goodyear tires, Cummins engines, Delphi control systems, and other automotive part suppliers depends on getting big contracts from just a handful of major automakers. Close supplier–customer relationship. Because of the smaller customer base and the importance and power of the larger customers, suppliers are frequently expected to customize their offerings to individual business customer needs. Business buyers often select suppliers that also buy from them. A paper manufacturer might buy from a chemical company that buys a considerable amount of its paper. Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow their organizations’ purchasing policies, constraints, and requirements. Many of the buying instruments—for example, requests for quotations, proposals, and purchase contracts— are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better. Many belong to the Institute for Supply Management, which seeks to improve professional buyers’ effectiveness and status. This means business marketers must provide greater technical data about their product and its advantages over competitors’ products. Multiple buying influences. More people typically influence business buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Business marketers need to send well-trained sales representatives and sales teams to deal with the well-trained buyers. Multiple sales calls. A study by McGraw-Hill found that it took four to four and a half calls to close an average industrial sale. In the case of capital equipment sales for large projects, it may take many attempts to fund a project, and the sales cycle—between quoting a job and delivering the product—is often measured in years. Derived demand. The demand for business goods is ultimately derived from the demand for consumer goods. For this reason, the business marketer must closely monitor the buying patterns of ultimate consumers. Pittsburgh-based Consol Energy’s coal business largely depends on orders from utilities and steel companies, which, in turn, depend on broader economic demand from consumers for electricity and steel-based products such as automobiles, machines, and appliances. Business buyers must also pay close attention to current and expected economic factors, such as the level of production, investment, and consumer spending and the interest rate. In a recession, they reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of the demand. Inelastic demand. The total demand for many business goods and services is inelastic—that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less leather if the price rises unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost, such as shoelaces. Fluctuating demand. The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this as the acceleration effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand. Geographically concentrated buyers. For years, more than half of U.S. business buyers have been concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. The geographical concentration of producers helps to reduce selling costs. At the same time, business marketers need to monitor regional shifts of certain industries. Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive such as mainframes or aircraft. Buying Situations The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. Three types of buying situations are the straight rebuy, modified rebuy, and new task. Straight rebuy. In a straight rebuy, the purchasing department reorders supplies such as office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain product and service quality and often propose automatic reordering systems to save time. “Out-suppliers” attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time. Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business. New task. A new-task purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering—the longer the time to a decision. Name: Description: ...
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