Understanding Organizational Markets and Buying Behavior Chapter 5 Understanding Organizational Markets and Buying Behavior McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Who Is the Customer? A comparison of organizational versus consumer markets The crucial differences from a marketing viewpoint are: The motivations of the buyer: what the organization will do with the product and the benefits it seeks to obtain. The demographics of the market. The nature of the purchasing process and the relationship between buyer and seller.

Who Is the Customer? Purchase motives—Derived demand Demand for industrial goods and services is: Derived from the demand for consumer goods and services. Relatively inelastic. More erratic because small increases or decreases in consumer demand can, over time, strongly affect the demand for manufacturing plants and equipment. More cyclical.

Who Is the Customer? Market demographics: Organizational buyers, when compared with buyers of consumer goods, are: Fewer in number. Larger. Geographically concentrated.

Who Is the Customer? Purchasing processes and relationships –Organizational markets are characterized by the following: Use of professional buying specialists following prescribed procedures. Closer buyer–seller relationships. Presence of multiple buying influences. More apt to buy on specifications.

Who Is the Customer? Companies selling to organizational markets needs to keep one eye on: Possible changes in organizations’ buying behavior for its product. Trends in the underlying consumer markets. Organizational marketers tend to: Use direct selling. Be heavy users of “high-involvement” media.

Who Is the Customer? Participants in the organizational purchasing process: Users Influencers Gatekeepers Buyers Deciders

Who Is the Customer? The organizational buying center The individuals in this group share knowledge and information relevant to the purchase of a particular product or service. Marketing implications Which individuals to target. How and when each should be contacted. What kinds of information and appeals each is likely to find most useful and persuasive.

How Organizational Members Make Purchase Decisions Types of buying situations A straight rebuy involves purchasing a common product or service the organization has bought many times before. A modified rebuy occurs when the organization’s needs remain unchanged, but buying center members are not satisfied with the current product or the supplier. New-task buying occurs when an organization faces a new and unique need or problem.

The Organizational Decision-Making Process for New-Task Purchases

How Organizational Members Make Purchase Decisions Marketing implications of different purchasing situations Extensive purchasing process applies primarily to new-task purchases. Such situations are relatively favorable to potential new suppliers who have never sold to the organization. At the other extreme is the straight rebuy. “In,” suppliers have a major competitive advantage. “Out” suppliers must attempt to interest the buyer in modifying the purchase criteria.

How Organizational Members Make Purchase Decisions Developing long-term buyer–supplier relationships Trust between supplier and customer develops person-to-person Conditions favoring trust and commitment A firm is more likely to trust and develop a long-term commitment to a supplier when that supplier makes dedicated, customer-specific investments.

How Organizational Members Make Purchase Decisions Government markets Government organizations tend to require more documentation and paperwork. Typically require bids, and contracts are usually awarded to the lowest bidder. Negotiated or “cost-plus” contract basis. Standard marketing strategies and tools are less relevant.

Selling Different Kinds of Goods and Services to Organizations Raw materials Purchased primarily by processors and manufacturers, they are inputs for making other products. The two types are natural products and farm products Implications for marketing decision makers The limited supply of most natural products gives producers the power to limit supplies and administer prices.

Selling Different Kinds of Goods and Services to Organizations Natural materials Generally bulky and low in unit value –producers try to minimize handling and transportation costs. Distribution channels for natural materials tend to have few middlemen. Agricultural products Distribution is a key function. There is usually little promotional activity.

Selling Different Kinds of Goods and Services to Organizations Component materials and parts Purchased by manufacturers as inputs for making other products. Component materials have been processed to some degree before they are sold. Component parts are manufactured items assembled as part of another product without further changes in form.

Selling Different Kinds of Goods and Services to Organizations Implications for marketing decision makers Most components are bought in large quantities – they are usually sold direct. Sellers must ensure a steady, reliable supply, especially when a just-in-time (JIT) management system is used by the buyer. Competitive bidding by suppliers can provide some of the cost saving benefits of JIT systems without the time and effort necessary to build close cooperation.

Selling Different Kinds of Goods and Services to Organizations Installations Buildings and major capital equipment that manufacturers and service producers use. Implications for marketing decision makers Many installations are custom-made. Long period of negotiation. Firms usually provide many postsale services. Promotional emphasis on personal selling. High-caliber, well-trained salespeople.

Selling Different Kinds of Goods and Services to Organizations Accessory equipment Includes industrial machines and tools that manufacturers, services producers, and governments use to carry out their operations. Accessory consists of tools and machines with relatively short lives and small price tags. Implications for marketing decision makers Emphasis on personal selling. Advertising, brand name promotions, and company Web sites are also important.

Selling Different Kinds of Goods and Services to Organizations Operating supplies They do not become a part of the buyer’s product or service, nor are they used directly in producing it. They facilitate the buying organization’s day-to-day operations. Implications for marketing decision makers Wholesale middlemen are typically used to distribute these supplies. Price is usually the critical decision variable.

Selling Different Kinds of Goods and Services to Organizations Business services Implications for marketing decision makers The supplier’s qualifications, past performance, and reputation are critical determinants. Price is less important. Price often serves as an indicator of quality. Personal selling and negotiation are important.

Take-Aways While organizational customers are different in some ways from consumers, marketers need to answer a similar set of questions to develop a solid foundation for their marketing plans. Who are our target customers? What are their needs, wants, and preferences? How do those customers decide what to buy and what suppliers to buy from?

Take-Aways Organizations buy things for one of three reasons: To facilitate the production of another product or service, For use by the organization’s employees in carrying out its operations, or For resale to other customers.

Take-Aways Organizations are social constructions. Therefore, “organizations” do not buy things. Individual employees make purchase decisions on the organization’s behalf. Understanding the personal motivations of these individuals, and their influence on different stages of the purchasing process, is essential for marketing success.

Take-Aways The Internet is simultaneously encouraging two opposing trends in organizational purchasing: The growing use of short-term spot market contracts via Web-based auctions and The strengthening of long-term buyer–supplier relationships via the sharing of sales and inventory data and the development of supply chain alliances.

Take-Aways The mutual interdependence of organizational buyers and their suppliers makes long-term cooperative relationships crucial for customer retention and marketing success. Building trust and commitment at multiple levels in both firms can be a key factor in establishing and maintaining profitable long-term customer relationships.