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.4

1. 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. Any firm that supplies components for products is in the business-to-business marketplace. Some of the major industries making up the business market are aerospace; agriculture, forestry, and fisheries; chemical; computer; construction; defense; energy; 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.5

A broad spectrum of materials and material combinations are used today in shoe manufacturing. Leathers, synthetics, rubber and textile materials are counted among the basic upper materials. Each ma­terial has its own specific character and they differ not only in their appearance but also in their physical properties, their service life and treatment needs. The choice of shoe material significantly influences the life of the footwear, and in many cases dictates its use.

For leather 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.6 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. Here is how Siemens has improved its marketing to better compete in recent years:7

SIEMENS Although mammoth in size, with over $100 billion in revenue and approximately 336,000 employees in 190 countries, German engineering giant Siemens was still not well known in its largest market, the United States, which draws almost $20 billion in revenue. With a goal to establish “who we are, what we are about, and what we look like,” the company launched the “Answers” campaign in 2007 to unify its diverse units—which design and manufacture products ranging from trains to diagnostic imaging systems to wind turbines—into one brand identity. Developed by communication agency partner Ogilvy, the campaign was thoroughly integrated across media. Over time, ads became more emotional and human in nature, focusing on how Siemens has solutions that impact customers, society, the environment and the economy. The advertising touched on Siemens’ job generation, productivity and work to ensure a sustainable society. Sustainability solutions were reflected in approximately one-third of its revenue. Due to the severe economic recession, there was a strong “buy American” push. The “Siemens Answers” advertising program also helped Siemens reinforce its American credentials. With a focus on the number one Siemens market—the United States—and new emerging markets like China, Siemens began to hit its financial stride again.

Business marketers face many of the same challenges as consumer marketers, especially understanding their customers and what they value. The well-respected Institute for the Study of Business Markets (ISBM) notes that the three biggest hurdles for B-to-B marketing are: (1) building stronger interfaces between marketing and sales; (2) building stronger innovation-marketing interfaces; and (3) extracting and leveraging more granular customer and market knowledge.

Four additional imperatives cited by ISBM are: (1) demonstrating marketing’s contribution to business performance; (2) engaging more deeply with customers and customers’ customers; (3) finding the right mix of centralized versus decentralized marketing activities; and (4) finding and grooming marketing talent and competencies.8

Business marketers contrast sharply with consumer markets in some ways, however. They have:

  • Multiple buying influences. More people typically influence business buying decisions. Buying committees that include technical experts and even senior management are common in the purchase of major goods. Business marketers need to send well-trained sales representatives and teams to deal with these equally 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. For 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—can even take years.10
  • 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 end users. Pittsburgh-based Consol Energy’s coal and natural gas business largely depends on orders from utilities and steel companies, which, in turn, depend on consumer demand for electricity and for steel-based products such as automobiles, machines, and appliances. Business buyers must also pay close attention to economic factors like the level of production, investment, and consumer spending and the interest rate. Business marketers can do little to stimulate total demand. They can only fight harder to increase or maintain their share of it.
  • 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 less if the price rises unless they 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. Demand for plant and equipment is more vola­tile because it reflects the normal year-to-year replacement demand as well as the need to satisfy increased or decreased consumer demand. 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 as replacement needs drop considerably.
  • 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 such as the automobile industry, which is no longer con­centrated around Detroit.
  • Direct purchasing. Business buyers often buy directly from manufacturers rather than through intermediar­ies, especially items that are technically complex or expensive such as servers or aircraft.

2. 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.11

  • Straight rebuy. In a straight rebuy, the purchasing department reorders items like 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.12

The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situ­ation. Over time, new-buy situations become straight rebuys and routine purchase behavior.

New-task buying is the marketer’s greatest opportunity and challenge. The buying process passes through several stages: awareness, interest, evaluation, trial, and adoption. Mass media can be most important during the initial awareness stage; salespeople often have their greatest impact at the interest stage; and technical sources can be most important during evaluation. Online selling efforts may be useful at all stages.

In the new-task situation, the buyer must determine product specifications, price limits, delivery terms and times, service terms, payment terms, order quantities, acceptable suppliers, and the selected supplier. Different participants influence each decision, and the order in which these decisions are made varies.

Because of the complicated selling required, many companies use a missionary sales force consisting of their most effective salespeople. The brand promise and the manufacturer’s name recognition will be important in establishing trust and persuading the customer to consider change. The marketer also tries to reach as many key participants as possible with information and assistance.

Once a customer has been acquired, in-suppliers are continually seeking ways to add value to their market offer to facilitate rebuys. EMC has successfully acquired a series of computer software leaders to reposition the company to manage and protect—not just store—information, helping companies to “accelerate their journey to cloud com­puting” in the process. Where one hardware product once made up 80 percent of its sales, the company now gets about 60 percent of its revenue from software and services.13 Oracle has also made a number of strategic acquisi­tions to expand its offerings.14

ORACLE Business-software giant Oracle became an industry leader by offering a range of products and services to satisfy customer needs for enterprise software. Originally known for its flagship database management systems, Oracle spent $30 billion in recent years to buy 56 companies, including $7.4 billion for Sun Microsystems, doubling its revenue to $24 billion and sending its stock soaring in the process. To become a one-stop shop for all kinds of business customers, Oracle now sells everything from server computers and data storage devices to operat­ing systems, databases, and software for running accounting, sales, and supply-chain management. At the same time, the company has launched “Project Fusion” to unify its applications so customers can consolidate solutions to their software needs, as reinforced by their company slogan, “Hardware and Software, Engineered to Work Together.” Oracle’s market power has sometimes raised both criticism from customers and concerns from government regula­tors. At the same time, its many long-time customers speak to its track record of product innovation and customer satisfaction.

Source: Kotler Philip T., Keller Kevin Lane (2015), Marketing Management, Pearson; 15th Edition.

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