Unit 4 – Business Markets &

Buyer Business Behaviour

Lecture #4February 2, 2012Text Reference: Kotler, P.

Armstrong, Gary Principles of Marketing:

14th Edition, 2012Prentice Hall Inc.,

New Jersey

Learning Objectives

At the end of this unit students should be able to:

1. List the characteristics of business markets 2. Outline the model of business buyer behavior 3. Identify the steps of the business buying

process 4. Discuss reseller buyer behavior 5. Compare and contrast business markets,

institutional markers and government markets

Business Buyer Behaviour

“The buying behaviour of the organizations that buy goods and services for use in the production of other products and services for:

that are sold, rented, or supplied to others. the behaviour of reselling or renting them to

others for profit” Kotler, & Armstrong

Business Buying Process

“The decision process by which businesses buyers determine which products and services their organizations need to purchase and then find, evaluate, and chose among alternative suppliers and brands.”

Kotler, P. &Armstrong (2012)

GOODyear Tires

MANUFACTURERS

RUBBER

EQUIPMENT

RETAILERS

CONSUMERS

STEEL

Characteristics of Business Markets

Market Structure and demand

Nature of the Buying Unit

Types of decision and Decision making

Market Structure and Demand

• Contains fewer but larger buyers.

• Business buyer demand is derived from final consumer demand.

• Demand in many business markets is more inelastic – not affected as much in the short run by price changes.

• Demand in business markets fluctuates more, and more quickly

Market Structure and Demand

Market Structure Businesses eg Black & Decker

sells through 3 retail customers – Home depot

Lowe’s & Wal-Mart a/c for > half of its sales

Derived Demand

Business that ultimately comes from (derives from) the demand for consumer goods.

HP & Dell buy Intel micro processor chips to operate the computers they manaufacture.

Nature of the Buying Unit

• Business purchases involve more buyers.

• Business buying involves a more professional purchasing effort.

Types of Decisions and Decision Process

• Business buyers usually face more complex buying decisions.

• The business buying process is more formalized

• In business buying, buyers and sellers work more closely together and build close long-run relationships.

Table 6.1 -Prin. of Marketing Kotler & Armstrong - 14th Edition

Characteristics of Business MarketsSummary

Business markets compare with Consumer markets along the following lines:

Fewer larger buyers

Relationship with suppliers is much closer and long lasting

Purchasing activities are embraced by professionals

Buying process is influenced by a larger number of persons

Inelastic demand in the short run

Multiple sales calls

Geographically concentrated buyers

Direct purchasing from manufacturers

Characteristics of Business MarketsSummary

Business-to-business (B-to-B) marketers must do their best to understand business markets and business buyer behaviour.

The business market is huge and involve far more dollars and items than do consumer markets.

Business Buying Center or Decision Making Unit (DMU)

The decision-making unit of a buying organization is called its buying centre: all the individuals and units that participate in the business decision-making process.

The buying center includes all members of the organization who play a role in the purchase decision.

Business Buying Center or Decision Making Unit (DMU)

This group includes:• the actual users of the product or service,• those who make the buying decision,• those who do the actual buying, • those who control buying information.

• The buying center includes all members of the organization who play any of the five roles in the purchase decision process.

What buying decisions do business buyers make?

Who participates in the buying process ? What are the major influences on buyers

? How do business buyers make their

buying decisions?

Major Types of Buying Situations

There are three types of buying situations.

At one extreme is the straight rebuy, which is a fairly routine decision.

At the other extreme is the new task, which may call for thorough research.

In the middle is the modified rebuy, which requires some research.

Straight Rebuy the buyer reorders something without any

modifications.

It is usually handled on a routine basis by the purchasing department.

Based on past satisfaction, the buyer simply chooses from the various suppliers on the list.

Major Types of Buying Situations

Straight rebuy – “In” suppliers try to maintain product and service quality.

They often propose automatic reordering systems so that the purchasing agent will save reordering time.

“Out” suppliers try to offer something new or exploit dissatisfaction so that the buyer will consider them.

Modified rebuy – the buyer wants to modify the product specifications, prices, terms, or suppliers. The modified rebuy usually involves more decision participants than does the straight rebuy.

Major Types of Buying Situations

Straight rebuy –Modified rebuy – The “in” suppliers may become nervous and feel

pressured to put their best foot forward to protect an account.

The “out” suppliers many see the modified rebuy situation as an opportunity to make a better offer and gain new business.

Major Types of Buying Situations New-task situation – a company buying a product or a service for the

first time faces a new-task situation.

In such cases, the greater the cost or risk, the larger the number of decision participants and the greater their efforts to collect information will be.

The new-task situation is the marketer’s greatest opportunity and challenge. The marketer not only tries to reach as many key buying influences as possible but also provides help and information.

Major Types of Buying Situations

The buyer makes the fewest decisions in the straight rebuy and the most in the new-task decision.

In the new-task situation, the buyer must decide on product specifications, suppliers, price limits, payment terms, order quantities delivery times, and service terms. The order of these decisions varies with each situation, and different decision participants influence each choice.

Major Types of Buying Situations Many business buyers prefer to buy a packaged

solution to a problem from a single seller.

Instead of buying and putting all the components together, the buyer must ask sellers to supply the components and assemble the package or system.

The sale often goes to the firm that provides the most complete system meeting the customer’s needs. This is referred to as systems selling.

Major Types of Buying Situations

Systems selling is buying a packaged solution to a problem from a single seller, thus avoiding all the separate decisions involved in a complex buying situation.

System selling is often a key business marketing strategy for winning and holding accounts.

Sellers have recognized that buyers like this method and

have adopted systems selling as a marketing tool.

E.g. Nikon – digital market worked with UPS to develop a distribution strategy

Participants in the Business Buying Process

Influencers

often help define specifications and also provide information for evaluating alternatives.

Technical personnel are particular important influencers.

Buyers – have formal authority to select the supplier and arrange terms of purchase.

Buyers may help shape product specification, but their major role is in selecting vendors and negotiating.

Participants in the Business Buying Process

Users Members of the

organization who will actually use the purchased product or service.

People in an organization’s buying centre who have formal or informal power to select or approve the final suppliers.

Deciders People in an organization’s

buying centre who have formal or informal power to select or approve the final suppliers.

Gatekeepers People in an organization’s buying

centre who control the flow of information to others

Model of Business Buyer Behaviour

EnvironmentMarketing Stimuli

• 4 Ps

Other Stimuli Economic

• Technological• Political• Cultural

• Competitive

Buying Organization

• The buying center

• Buying decision process

• Interpersonal and individual Influences

(Interpersonal & individual

Influences)

The Environment, Buying Organization and Buyer Responses

Buyer Response

•Product or service choice

•Supplier choice

•Order quantities

•Delivery terms and times

•Service terms

•Payment

Business Buyer Process

Gen need description

Proposal solicitation

Product Specification

Supplier Search

OrderRoutine

specification

Performance Review

Supplier selection

Problem Recognition

The Business Buying Process

Fisher (1976) tabled that the following represents the nature of the decision making process in an organization ( in certain buying situations some of the steps may be omitted):

i. Problem Recognition - Recognition of a need or problem that can be met by acquiring a good or service. It can result from internal or external stimuli. For example, a machine may break down and need new parts.

ii. General Need Description - Determination of characteristics, specifications and quantity needed.

The Business Buying Process

iii. Product Specification – value analysis (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 of production. The team decides on the best product, characteristics and specifies them accordingly.

iv. Supplier Search - search for and qualification of potential sources. It is finding the best vendors through various research resources such as trade directories, internet, computer search, referrals, telephone directories etc.

The Business Buying Processv. Proposal Solicitation

Acquisition and analysis of proposals. The buyer invites qualified suppliers to submit proposals.

vi. Supplier Selection - Evaluation of proposals and selection of supplier or suppliers. The buyer reviews proposals and selects a supplier or suppliers.

v. Order-Routine Specification selection of order routine. The buyer writes the final order with the supplier chosen.

v. Performance Review –performance feedback and evaluation. The buyer assesses the performance of the supplier and decides to continue, modify, or drop the arrangement.

E – procurement Purchasing through

electronic connections between buyers and sellers – usually online

E procurement can be done by:

Reverse auction (putting purchases online and invite suppliers to bid)

Trading exchanges eg Office Depot

Summary

Business markets and consumer markets are alike in some key ways.

Both include people in the buying roles who make purchase decisions to satisfy needs. But business markets also differ in many ways from consumer markets. The business market is enormous, far larger than the consumer market.

As compared with consumer markets, business markets usually have fewer, larger buyers who are more geographically concentrated.

Business demand is: derived, largely inelastic, and more fluctuating.

Summary More buyers are usually involved in the buying

decision, and business buyers are better trained and more professional than are consumer buyers.

Business purchasing decisions are more complex,

and the buying process is more formal than consumer buying.

Business buyers make decisions that vary with three types of buying situations: straight rebuys, modified rebuys and new tasks.

Reseller Buyer Behaviour

The reseller market consists of all the individuals and organizations who acquire goods for the purpose of reselling or renting them to others at a profit.

Instead of producing form utility, resellers produce time, place, and possession utility.

Resellers are more geographically dispersed than producers but more concentrated than consumers.

Resellers purchase goods for resale and goods and services for conducting operations.

Reseller Buyer Behaviour

Resellers handle a vast variety of products for resale, indeed everything produced except the few cases of goods that producers sell directly to final consumers.

Suppliers should view resellers as purchasing agents for their customers, not selling agents for the suppliers.

Suppliers will be successful to the extent they can help the resellers serve the buyers they represent.

Reseller Buyer Behaviour Reseller buying decisions. Resellers have to make the following purchase

decisions:

• What assortments to carry?• What vendors to buy from?• What prices and terms to negotiate?

The assortment decision is primary and positions the reseller in the marketplace.

Wholesalers and retailers can choose one of four assortment strategies:

Reseller Buyer Behaviour

Reseller buying decisions.• Exclusive assortment: carrying the line of only one

manufacturer.

• Deep assortment: carrying a product family in depth, drawing on many producers’ outputs

• Broad assortment: carrying several product lines that fall within the normal scope of the reseller’s type of business

• Scrambled assortment: carrying many unrelated product lines.

Reseller Buyer Behaviour

Reseller buying decisions.• Exclusive assortment: a camera store might

carry only Kodak (bankrupcy) cameras.

• Deep assortment: many brands of camera

• Broad assortment: cameras, tape recorders, radios, and stereophonic equipment

• Scrambled assortment: cameras, tape, recorders, radios, stoves, refrigerators and washing machine.

Reseller Buyer Behaviour

Reseller buying decisions.• The reseller’s chosen assortment will influence its

customer mix, marketing mix and supplier mix .

Reseller buying situations.a. The new-item situation describes the situation

where the reseller is offered a new item. The reseller will give a yes-no answer, depending on how good the item looks. This differs from the new-task situation faced by producers who definitely have to purchase the needed item from someone.

Reseller Buyer Behaviour Reseller buying situations.b. The best-vendor situation faces the reseller

who needs an item and must determine the best supplier. This occurs in two situations:

• When the reseller does not have the space to carry all the available brands

• When the reseller is seeking someone to produce a private brand.

For e.g. Sears sells a substantial numbers of items under their own name, therefore most of their buying operations consists of vendor selection.

Reseller Buyer Behaviour Reseller buying situations.c. The best-terms situation arise when the

reseller wants to obtain better terms from current suppliers.

In some countries, legally, suppliers are prevented from granting different terms to different resellers in the same reseller class unless they reflect cost differences, distress sales, or other special conditions.

Nevertheless, resellers will press their suppliers for preferential treatment, such as more service, easier credit terms, and large volume discounts.

Reseller Buyer Behaviour

Who participates in the Reseller Buying Process?

Who does the buying for wholesale and retail organizations?

• In small “mom and pop” firms, the owner usually takes care of merchandise selection and buying.

• In large firms, buying is a specialized function and full-time job. Buying is carried out in different ways by department stores, supermarkets, drug wholesalers, and so on and differences cab be found in each type of enterprise.

Reseller Buyer Behaviour Who participates in the Reseller Buying

Process? In some supermarket chains, buying is carried

out by specialist buyers sometimes called merchandise managers – who will have the responsibility for developing brand assortments and listening to new brand presentations by salespersons.

In some chains, these buyers have the authority to accept or reject new items.

In some chain-store there is a buying committee who decides what to buy and who to buy from – the seller.

Reseller Buyer Behaviour Who participates in the Reseller Buying

Process? Sellers stand the best chance when they can

report strong evidence of consumer acceptance, present a well-designed advertising and sales promotion plan, and provide strong financial incentives to the retailer.

The role of supermarket buyers, buying committees, and store managers characterize, with some variation, the buying organizations of other reseller enterprises.

Reseller Buyer Behaviour Who participates in the Reseller Buying

Process? Large department- store chains use buyers who

specialize by line of merchandise and have a lot of authority to select the merchandise to be featured.

These buyers are aided by assistant buyers, who carry out a preliminary search and also do clerical tasks involved in ordering.

The buyers might perform other functions such as demand forecasting, stock control, and merchandising. Individual store managers or their staff usually have some freedom with respect to which goods to order as well as which to display prominently.

Reseller Buyer Behaviour What are the Major Influences on Reseller

Buyers? Environmental Organizational Interpersonal Individual• The seller has to note these influences and develop

strategies that help resellers make money or reduce costs.

• The individual buyer’s buying style should be taken into account. Dickinson has distinguished seven buyer types:

Reseller Buyer Behaviour What are the Major Influences on Reseller

Buyers?• Dickinson seven buyer types:• Loyal buyer: this buyer remains loyal to a source

year after year.

• Opportunistic buyer: this buyer selects those vendors who will further his or her long-term interests and drives the best bargain possible.

• Best-deal buyer: this buyer selects the best deal available at a given point of time.

• Creative buyer: this buyer tells the seller what he or she wants in the way of a product, services, and prices.

Reseller Buyer Behaviour• Dickinson seven buyer types:• Advertising buyer: this buyer attempts to

obtain advertising as part of every deal.

• The chiseler: this buyer constantly negotiates extra concessions in price. He accepts the vendor offering the greatest discount from the price he feels that other vendors might charge.

• Nuts-and-bolts buyer: This buyer seeks merchandise that is the best constructed.

• For new items, resellers use roughly the same buying process described for the industrial buyer.

• For standard items, resellers simply reorder goods when the inventory gets low. The orders are placed with the same suppliers as long as their terms, goods and services are satisfactory.

• Buyers will try to renegotiate prices if their margins erode owing to rising operating costs.

How Do Resellers Make Their Buying Decisions?

Reseller Buyer Behaviour How Do Resellers Make Their Buying

Decisions?• Resellers are improving their buying skills over

time. They are mastering the principles of demand forecasting, merchandise selection, stock control, space allocation and display.

• Resellers are making increased use of computers to keep current inventory figures, compute economic order quantities, prepare orders, and generate printouts of dollars spent on vendors and products. They can easily tell whether carrying a particular product is profitable.

How Do Resellers Make Their Buying Decisions?

• Vendors are facing increasingly sophisticated buying on the part of resellers, and this accounts for some shifting of the power from manufacturers to resellers.

• Vendors need to understand the resellers’ changing requirements and to develop competitively attractive offers that help resellers serve their customers better.

• There are several marketing tools used by vendors to improve the attractiveness of their offer to resellers:

Vendor marketing Tools Used With Resellers?

• Cooperative advertising – where vendor agrees to pay a portion of the reseller’s advertising costs for the vendor’s product

• Preticketing – where the vendor places a tag on each product listing its price, manufacturer, size, identification number, and color; these tags help the reseller reorder merchandise as it is sold.

• Stockless purchasing – where the vendor carries the inventory and delivers goods to the reseller on short notice.

Reseller Buyer Behaviour Vendor marketing Tools Used With Resellers?• Automatic reordering systems – where the vendor

supplies forms and computer links for the automatic reordering of merchandise by the reseller.

• Advertising ads – such as glossy photos, broadcast scripts.

• Special prices – for storewide promotion.• Return and exchange privileges for the reseller.• Allowances for merchandise markdowns by the

reseller.• Sponsorship of in-store demonstrations.

Business, Institutional and Government Markets

Lecture 4Part 2

Business, Institutional and Government Markets

Organizational buying has focused largely on the buying behaviour of business buyers but much of the principles can be applied to the buying practices of institutional and government buying.

The characteristics of the business, institutional and government markets differ as they have unique and special features.

For Class Discussion

Compare the institutional and government markets and explain how institutional and government buyers make their buying decisions.

Institutional and Government Markets

The Institutional Market.• Consists of schools, hospitals, nursing homes,

prisons, and other institutions that provide goods and services to people in their care.

• Institutions differ from one another in their sponsors and in their objectives. For e.g. some hospitals are run for profit whereas a not-for-profit hospital provides health care to the poor or persons with special needs such as HIV positive persons.

Institutional and Government Markets The Institutional Market.• Many institutional markets are characterized by

low budgets and captive patrons. For example, hospital patients have little choice but to eat whatever food the hospital supplies. A hospital purchasing agent has to decide on the quality of food to buy for the patients. Because the food is provided as part of a total service package, the buying objective is not profit. Nor is the strict cost minimization the goal – patients receiving poor quality food will complain to others and damage the hospital’s reputation.

Institutional and Government Markets The Institutional Market.• Thus the hospital purchasing agent must search

for institutional-food vendors whose quality means or exceeds a certain minimum standard and whose prices are low.

• Many marketers set up separate divisions to meet the special characteristics and needs of institutional buyers. For example, Heinz produces, packages, and prices its ketchup and other products differently to better serve the requirements of hospitals, colleges, and other institutional markets.

Institutional and Government Markets Government Markets.• The government market offers large opportunities

for many companies, both big and small. In most countries, government organizations are major buyers of goods and services.

• Government market consist of government units – federal, state and local – that purchase or rent goods for carrying out the main functions of government.

• Government buyers purchase products and services for defense, education, public welfare, and other public needs.

Institutional and Government Markets Government Markets.• Government buying and business buying are similar in

many ways. But there are also differences that must be understood by companies that wish to sell products and services to governments.

• To succeed in the government market, sellers must locate key decision makers, identify the factors that affect buyer behaviour and understand the buying-decision process.

• Government organizations typically requires suppliers to submit bids, and normally they award the contract to the lowest bidder.

Government Markets.

• In some cases, allowance is made for the supplier’s superior quality or reputation for completing contracts on time.

• Governments will also buy on negotiated contract basis, primarily in the case of complex projects involving major R&D costs and risks, and in cases where there is little competition.

• Government organizations tend to favor domestic suppliers over foreign suppliers.

Government Markets.

• Like consumer and business buyers, government buyers are affected by environmental, organizational, interpersonal and individual factors.

• One unique thing about government buying is that it is carefully watched by outside publics, ranging from the Contractor General,(OCG) congress to a variety of private groups interested in how government spends taxpayers’ money.

Government Markets.• Because their spending decisions are subject to

public review, government organizations require considerable paperwork from suppliers, who often complain about excessive paperwork, bureaucracy, regulations, decision-making delays, and frequent shifts in procurement personnel.

• Most governments provide would-be suppliers with detailed guides describing how to sell to the government.

Government Markets.• Non-economic criteria also plays a growing role in

government buying. Government buyers are asked to favor depressed business firms and areas;

• small business firms; minority-owned firms; and business firms that avoid race, gender, and age discrimination.

• Sellers need to keep these factors in mind when deciding to seek government business.

• Many companies that sell to the government have not been marketing oriented for a number of reasons:

Government Markets.a. Total government spending is determined by

elected officials rather than by any marketing effort to develop this market.

b. Government buying has emphasized price, making suppliers invest in their effort in technology to bring costs down.

c. When the product’s characteristics are specified carefully, product differentiation is not a marketing factor. Nor do advertising or personal selling matter much in winning bids on an open-bid basis.

Institutional and Government Markets

Government Markets.• Several companies, however have established

separate government marketing departments, including General Electric, Kodak and Goodyear.

• These companies anticipate government needs and projects, participate in product specification phase, gather competitive intelligence, prepare bids carefully and produce stronger communications to describe and enhance their companies’ reputations.

Institutional and Government Markets Government Markets.• Other companies have set up customized marketing

programs for government buyers. For eg. Dell Computer has specific business units tailored to meet the needs of federal, as well as, state and local government buyers.

• Dell offers its customers tailor-made Premier Dell.com Web pages that include special pricing, online purchasing, and service and support for each city, state, and federal government entity.

• During the past decade, some of government’s buying has gone online. Internet systems are used to eliminate much of the hassle sometimes found in dealing with government purchasing.

• .

•Product Decisions

•The Product Life-Cycle

•Product Life Cycle Strategies

•Test Marketing

NEXT WEEK WE WILL LOOK AT