BUSINESS MARKETS AND BUYING BEHAVIOR:Market structure and demand

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Principles of Marketing MGT301

Lesson 16

Lesson overview and learning objectives:

In last Lesson we discussed the Consumer Buying behavior. Today

We will discuss business buyer behaviour, types of buying situations, participants in the business

buying process, and major influences on business buyers so our today's topic is:

BUSINESS MARKETS AND BUYING BEHAVIOR

The business market includes firms that buy goods and services in order to produce products and

services to sell to others. It also includes retailing and wholesaling firms that buy goods in order to

resell them at a profit. Because aspects of business-to-business marketing apply to institutional

markets and government markets, we group these together. The business marketer needs to know the

following: Who are the major participants? In what decisions do they exercise influence? What is

their relative degree of influence? What evaluation criteria does each decision participant use? The

business marketer also needs to understand the major environmental, interpersonal, and individual

influences on the buying process.

A. What is a Business Market?

The business market comprises all the organizations that buy goods and services for use in the

production of other products and services that are sold, rented, or supplied to others. It also

includes retailing and wholesaling firms that acquire goods for the purpose of reselling or renting

them to others at a profit. In the business buying process business buyers determine which

products and services their organizations need to purchase, and then find, evaluate, and choose

among alternative suppliers and brands. Companies that sell to other business organizations must

do their best to understand business markets and business buyer behavior.

B. Characteristics of Business Markets

In some ways, business markets are similar to consumer markets. Both involve people who assume

buying roles and make purchase decisions to satisfy needs. However, business markets differ in

many ways from consumer markets. The main differences, are in the market structure and demand,

the nature of the buying unit, and the types of decisions and the decision process involved.

Business markets also have their own characteristics. In some ways, they are similar to consumer

markets, but in other ways they are very different. The main differences include:

1. Market structure and demand.

Business markets typically deal with far fewer but far larger buyers. They are more geographically

concentrated. Business markets have derived demand (business demand that ultimately comes from

or derives from the demand for consumer goods). Many business markets have inelastic demand; that

is, total demand for many business products is not affected much by price changes, especially in

the short run. A drop in the price of leather will not cause shoe manufacturers to buy much more

leather unless it results in lower shoe prices that, in turn, will increase consumer demand for shoes.

Finally, business markets have more fluctuating demand. The demand for many business goods and

services tends to change more--and more quickly--than the demand for consumer goods and

services does. A small percentage increase in consumer demand can cause large increases in

business demand. Sometimes a rise of only 10 percent in consumer demand can cause as much as a

200 percent rise in business demand during the next period.

Principles of Marketing MGT301

Nature of the Buying Unit:

Compared with consumer purchases, a business purchase usually involves more decision

participants and a more professional purchasing effort. Often, business buying is done by trained

purchasing agents who spend their working lives learning how to make better buying decisions.

Buying committees made up of technical experts and top management are common in the buying

of major goods. Companies are putting their best and brightest people on procurement patrol.

Therefore, business marketers must have well-trained salespeople to deal with well-trained buyers.

Types of Decisions and the Decision Process

Business buyers usually face more complex buying decisions than do consumer buyers. Purchases

often involve large sums of money, complex technical and economic considerations, and

interactions among many people at many levels of the buyer's organization. Because the purchases

are more complex, business buyers may take longer to make their decisions. The business buying

process tends to be more formalized than the consumer buying process. Large business purchases

usually call for detailed product specifications, written purchase orders, careful supplier searches,

and formal approval. The buying firm might even prepare policy manuals that detail the purchase

process.

Finally, in the business buying process, buyer and seller are often much more dependent on each

other. Consumer marketers are often at a distance from their customers. In contrast, business

marketers may roll up their sleeves and work closely with their customers during all stages of the

buying process--from helping customers define problems, to finding solutions, to supporting

after-sale operation. They often customize their offerings to individual customer needs. In the

short run, sales go to suppliers who meet buyers' immediate product and service needs.

C. Business Buyer Behavior

The model in Figure suggests four questions about business buyer behavior: 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?

a. A Model of Business Buyer Behavior

At the most basic level, marketers want to know how business buyers will respond to various

marketing stimuli. Figure shows a model of business buyer behavior. In this model, marketing and

other stimuli affect the buying organization and produce certain buyer responses. As with

consumer buying, the

marketing stimuli for

M a rrk e ttiin g a n d

M a ke ng and

business buying consist

P ro d u c t

O tth e rr S ttiim u llii

E c o n o m ic

O he S m u

of the four Ps: product,

P ric e

T e c h n o lo g i c a l

P la c e

P o lit ic a l

price,

place,

and

P r o m o t io n

C u lt u r a l

promotion.

Other

stimuli include major

T h e B u y iing O rr ga n iiza tt ion

T h e B u y n g O g a n z a io n

In t e r p e r s o n a l

O r g a n iz a t io n a l

forces

the

T h e B u y in g C e n te r

a n d In d iv id u a l

In f lu e n c e s

B u y in g D e c is io n

In f lu e n c e s

environment: economic,

P ro c e s s

technological, political,

cultural,

and

D e liv e r y T e r m s

competitive.

These

P ro d u c t o r S e r v ic e

B u y e rr''s R e s p o n s e

B uye s R esponse

a n d T im e s

C h o ic e

stimuli

enter

the

S e r v ic e T e r m s

S u p p lie r C h o ic e

organization and are

P a ym en t

O r d e r Q u a n t it ie s

turned

into

buyer

responses: product or service choice; supplier choice; order quantities; and delivery, service, and

payment terms. In order to design good marketing mix strategies, the marketer must understand

what happens within the organization to turn stimuli into purchase responses.

Principles of Marketing MGT301

Within the organization, buying activity consists of two major parts: the buying center, made up of

all the people involved in the buying decision, and the buying decision process. The model shows

that the buying center and the buying decision process are influenced by internal organizational,

interpersonal, and individual factors as well as by external environmental factors.

b. Major Types of Buying Situations

There are three major 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.

In a straight rebuy the buyer reorders something without any modifications. It is usually handled

on a routine basis by the purchasing department. Based on past buying satisfaction, the buyer

simply chooses from the various suppliers on its list. "In" suppliers try to maintain product and

service quality.

In a modified rebuy, the buyer wants to modify product specifications, prices, terms, or suppliers.

The modified rebuy usually involves more decision participants than the straight rebuy. The in

suppliers may become nervous and feel pressured to put their best foot forward to protect an

account. Out suppliers may see the modified rebuy situation as an opportunity to make a better

offer and gain new business.

A company buying a product or 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.

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.

c. Participants in the Business Buying Process

The decision-making unit of a buying organization is called its buying center: all the individuals and

units that participate in the business decision-making process. The buying center includes all

members of the organization who play any of five roles in the purchase decision process.

· Users are members of the organization who will use the product or service. In many cases,

users initiate the buying proposal and help define product specifications.

· Influencers often help define specifications and also provide information for evaluating

alternatives. Technical personnel are particularly important influencers.

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

may help shape product specifications, but their major role is in selecting vendors and

negotiating. In more complex purchases, buyers might include high-level officers

participating in the negotiations.

· Deciders have formal or informal power to select or approve the final suppliers. In

routine buying, the buyers are often the deciders, or at least the approvers.

· Gatekeepers control the flow of information to others. For example, purchasing agents

often have authority to prevent salespersons from seeing users or deciders. Other

gatekeepers include technical personnel and even personal secretaries.

The buying center is not a fixed and formally identified unit within the buying organization. It is a

set of buying roles assumed by different people for different purchases. Within the organization,

the size and makeup of the buying center will vary for different products and for different buying

situations. Business marketers working in global markets may face even greater levels of buying

center influence. The buying center concept presents a major marketing challenge. The business

marketer must learn who participates in the decision, each participant's relative influence, and what

Principles of Marketing MGT301

evaluation criteria each decision participant uses. The buying center usually includes some obvious

participants who are involved formally in the buying decision.

Major Influences on Business Buyers

Business buyers are subject to many influences when they make their buying decisions. Some

marketers assume that the major influences are economic. They think buyers will favor the supplier

who offers the lowest price or the best product or the most service. They concentrate on offering

strong economic benefits to buyers. However, business buyers actually respond to both economic

and personal factors. Far from being cold, calculating, and impersonal, business buyers are human

and social as well. They react to both reason and emotion.

Today, most business-to-business marketers recognize that emotion plays an important role in

business buying decisions. When suppliers' offers are very similar, business buyers have little basis

for strictly rational choice. Because they can meet organizational goals with any supplier, buyers

can allow personal factors to play a larger role in their decisions. However, when competing

products differ greatly, business buyers are more accountable for their choice and tend to pay more

attention to economic factors. Figure lists various groups of influences on business buyers--

environmental, organizational, interpersonal, and individual.

Major Influences on Business Buyers

· Environmental Factors

Business buyers are influenced heavily by factors in the current and expected economic environment,

such as the level of primary demand, the economic outlook, and the cost of money. As economic

uncertainty rises, business buyers cut back on new investments and attempt to reduce their

inventories.

An increasingly important environmental factor is shortages in key materials. Many companies now

are more willing to buy and hold larger inventories of scarce materials to ensure adequate supply.

Business buyers also are affected by technological, political, and competitive developments in the

environment. Culture and customs can strongly influence business buyer reactions to the

marketer's behavior and strategies, especially in the international marketing environment. The

business marketer must watch these factors, determine how they will affect the buyer, and try to

turn these challenges into opportunities.

Organizational Factors

Each buying organization has its own objectives, policies, procedures, structure, and systems. The

business marketer must know these organizational factors as thoroughly as possible. Questions such

Principles of Marketing MGT301

as these arise: How many people are involved in the buying decision? Who are they? What are their

evaluative criteria? What are the company's policies and limits on its buyers?

Interpersonal Factors

The buying center usually includes many participants who influence each other. The business

marketer often finds it difficult to determine what kinds of interpersonal factors and group dynamics

enter into the buying process. Participants may have influence in the buying decision because they

control rewards and punishments, are well liked, have special expertise, or have a special

relationship with other important participants. Interpersonal factors are often very subtle.

Whenever possible, business marketers must try to understand these factors and design strategies

that take them into account.

Individual Factors

Each participant in the business buying decision process brings in personal motives, perceptions,

and preferences. These individual factors are affected by personal characteristics such as age,

income, education, professional identification, personality, and attitudes toward risk. Also, buyers

have different buying styles. Some may be technical types who make in-depth analyses of

competitive proposals before choosing a supplier. Other buyers may be intuitive negotiators who

are adept at pitting the sellers against one another for the best deal.

D. The Business Buying Process

There are eight stages of the business buying process. Buyers who face a new-task buying situation

usually go through all stages of the buying process. Buyers making modified or straight rebuys may

skip some of the stages. We will examine these steps for the typical new-task buying situation.

a. Problem Recognition

The buying process begins when someone in the company recognizes a problem or need that can

be met by acquiring a specific product or service. Problem recognition can result from internal or

external stimuli. Internally, the company may decide to launch a new product that requires new

production equipment and materials. Or a machine may break down and need new parts. Perhaps

a purchasing manager is unhappy with a current supplier's product quality, service, or prices.

Externally, the buyer may get some new ideas at a trade show, see an ad, or receive a call from a

salesperson who offers a better product or a lower price. In fact, in their advertising, business

marketers often alert customers to potential problems and then show how their products provide

solutions.

b. General Need Description

Having recognized a need, the buyer next prepares a general need description that describes the

characteristics and quantity of the needed item. For standard items, this process presents few

problems. For complex items, however, the buyer may have to work with others--engineers,

users, consultants--to define the item. The team may want to rank the importance of reliability,

durability, price, and other attributes desired in the item. In this phase, the alert business marketer

can help the buyers define their needs and provide information about the value of different

product characteristics.

c. Product Specification

The buying organization next develops the item's technical product specifications, often with the

help of a value analysis engineering team. Value analysis is 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. Sellers, too, can use value analysis as a tool to help secure a new

account. By showing buyers a better way to make an object, outside sellers can turn straight rebuy

situations into new-task situations that give them a chance to obtain new business.

d. Supplier Search

The buyer now conducts a supplier search to find the best vendors. The buyer can compile a small

list of qualified suppliers by reviewing trade directories, doing a computer search, or phoning other

companies for recommendations. Today, more and more companies are turning to the Internet to

Principles of Marketing MGT301

find suppliers. For marketers, this has leveled the playing field--smaller suppliers have the same

advantages as larger ones and can be listed in the same online catalogs for a nominal fee:

The newer the buying task, and the more complex and costly the item, the greater the amount of

time the buyer will spend searching for suppliers. The supplier's task is to get listed in major

directories and build a good reputation in the marketplace. Salespeople should watch for

companies in the process of searching for suppliers and make certain that their firm is considered.

e. Proposal Solicitation

In the proposal solicitation stage of the business buying process, the buyer invites qualified

suppliers to submit proposals. In response, some suppliers will send only a catalog or a

salesperson. However, when the item is complex or expensive, the buyer will usually require

detailed written proposals or formal presentations from each potential supplier.

Business marketers must be skilled in researching, writing, and presenting proposals in response to

buyer proposal solicitations. Proposals should be marketing documents, not just technical

documents. Presentations should inspire confidence and should make the marketer's company

stand out from the competition.

f. Supplier Selection

The members of the buying center now review the proposals and select a supplier or suppliers.

During supplier selection, the buying center often will draw up a list of the desired supplier

attributes and their relative importance. In one survey, purchasing executives listed the following

attributes as most important in influencing the relationship between supplier and customer: quality

products and services, on-time delivery, ethical corporate behavior, honest communication, and

competitive prices. Other important factors include repair and servicing capabilities, technical aid

and advice, geographic location, performance history, and reputation. The members of the buying

center will rate suppliers against these attributes and identify the best suppliers.

As part of the buyer selection process, buying centers must decide how many suppliers to use. In

the past, many companies preferred a large supplier base to ensure adequate supplies and to obtain

price concessions. These companies would insist on annual negotiations for contract renewal and

would often shift the amount of business they gave to each supplier from year to year.

Increasingly, however, companies are reducing the number of suppliers. There is even a trend

toward single sourcing, using one supplier. With single sourcing there is only one supplier to

handle and it is easier to control newsprint inventories. Using one source not only can translate

into more consistent product performance, but it also allows press rooms to configure themselves

for one particular kind of newsprint rather than changing presses for papers with different

attributes.

Many companies, however, are still reluctant to use single sourcing. They fear that they may

become too dependent on the single supplier or that the single-source supplier may become too

comfortable in the relationship and lose its competitive edge. Some marketers have developed

programs that address these concerns.

g. Order-Routine Specification

The buyer now prepares an order-routine specification. It includes the final order with the chosen

supplier or suppliers and lists items such as technical specifications, quantity needed, expected time

of delivery, return policies, and warranties. In the case of maintenance, repair, and operating items.

h. Performance Review

In this stage, the buyer reviews supplier performance. The buyer may contact users and ask them

to rate their satisfaction. The performance review may lead the buyer to continue, modify, or drop

Principles of Marketing MGT301

the arrangement. The seller's job is to monitor the same factors used by the buyer to make sure

that the seller is giving the expected satisfaction.

We have described the stages that typically would occur in a new-task buying situation. The eight-

stage model provides a simple view of the business buying decision process. The actual process is

usually much more complex. In the modified rebuy or straight rebuy situation, some of these

stages would be compressed or bypassed. Each organization buys in its own way, and each buying

situation has unique requirements. Different buying center participants may be involved at

different stages of the process. Although certain buying process steps usually do occur, buyers do

not always follow them in the same order, and they may add other steps. Often, buyers will repeat

certain stages of the process.

E. Institutional and Government Markets

So far, our discussion of organizational buying has focused largely on the buying behavior of

business buyers. Much of this discussion also applies to the buying practices of institutional and

government organizations. However, these two nonbusiness markets have additional

characteristics and needs. In this final section, we address the special features of institutional and

government markets.

a. Institutional 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. 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 patients. Because the food is provided as a part of a total service package, the

buying objective is not profit. Nor is strict cost minimization the goal--patients receiving poor-

quality food will complain to others and damage the hospital's reputation. Thus, the hospital-

purchasing agent must search for institutional-food vendors whose quality meets 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.

b. 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

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 behavior, and understand the buying decision process.

Government organizations typically require suppliers to submit bids, and normally they award the

contract to the lowest bidder. In some cases, the government unit will make allowance for the

supplier's superior quality or reputation for completing contracts on time. Many companies that

sell to the government have not been marketing oriented for a number of reasons. Total

government spending is determined by elected officials rather than by any marketing effort to

develop this market. Government buying has emphasized price, making suppliers invest their

effort in technology to bring costs down. 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.

Principles of Marketing MGT301

Key Terms

Business Markets:

The business market includes firms that buy goods and services in order to

produce products and services to sell to others.

Straight Re-buy

the buyer reorders something without any modifications.

Modified Re-buy

the buyer wants to modify product specifications, prices, terms, or

suppliers.

New Task Buying

A company buying a product or service.

Users are members of the organization who will use the product or service. In many cases, users

initiate the buying proposal and help define product specifications.

Influencers

Often help define specifications and also provide information for evaluating

alternatives. Technical personnel are particularly important influencers.

Buyers

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

Deciders

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

Gatekeepers control the flow of information to others.

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