Business Buying Behavior Tutorial
Business Buying Behavior
The business market is comprised of organizations that, in some form, are involved in the manufacture, distribution or support of products or services sold or otherwise provided to other organizations. The amount of purchasing undertaken in the business market easily dwarfs the total spending by consumers. Because the business market is so large it draws the interest of millions of companies worldwide that market exclusively to business customers. For these marketers understanding how businesses make purchase decisions is critical to their organizations’ marketing efforts.
In some ways understanding the business market is not as complicated as understanding the consumer market. For example, in certain business markets purchase decisions hinge on the outcome of a bidding process between competitors offering similar products and services. In these cases the decision to buy is often whittled down to one concern – who has the lowest price. Thus, unlike consumer markets, where building a recognizable brand is very important, for many purchase situations in the business market this is not the case.
However, in many other ways business buying is much more complicated. For instance, the demand by businesses for products and services is affected by consumer purchases (called derived demand) and because so many organizations may have a part in creating consumer purchases, a small swing in consumer demand can create big changes in business purchasing. Automobile purchases are a good example. If consumer demand for cars increases many companies connected with the automobile industry will also see demand for their products and services increase (we will later refer to these companies as supply chain members). Under these conditions companies will ratchet up their operations to ensure demand is met, which invariably will lead to new purchases by a large number of companies. In fact, it is conceivable that an increase of just one or two percent for consumer demand can increase business demand for products and services by five or more percent. Unfortunately, the opposite is true if demand declines. Trying to predict these swings requires businesses to not only understand their immediate customers but also the end user, which as we will discuss, may be well down the supply chain from where the business operates.
This section of our highly detailed Principles of Marketing Tutorials discusses the unique characteristics of the business market. We will see that marketers must appeal to business customers in ways that are distinct from how they would approach consumers. While marketers selling to other businesses operate with most of the same marketing tools used by marketers of consumer products, how they employ these tools to reach their marketing objectives may be quite different.
Who Makes Up the Business Market
There are millions of organizations worldwide selling their products and services to other businesses. They operate in many industries and range in size from huge multinational companies with thousands of employees to one-person small businesses. With such a large number of organizations and industries contained within the business market, a marketer can obtain a better picture of who is involved by looking at popular business classification systems set up by international governments, such as the North American Industrial Classification System (NAICS), which covers Canada, Mexico and the United States and the International Standard Industrial Classification (ISIC), which is widely used in Europe. These reports provide descriptions of hundreds of industry classifications. For instance, the table below shows how US operators of "Golf Pro Shops" are listed in the NAICS coding system. Note the numeric sequence that occurs as one "drills down" in order to locate individual industry groups.
|Subsector||451||Sporting Goods, Hobby, Book, and Music Stores|
|Industry Group||4511||Sporting Goods, Hobby, and Musical Instrument Stores|
|Industry||45111||Sporting Goods Stores|
|US Industry||451110||Golf Pro Shops|
Once industry codes are known these can be used within various government and industry research reports to locate specific industry information such as number of firms operating in the industry, total industry sales, number of employees and more.
For the purposes of this tutorial, however, we will use a broader approach to categorizing businesses choosing to categorize based on the general business function an organization performs rather then by industry. We break the business market down into two broad categories - Supply Chain Members and Business User Markets.
Business User Markets
Besides selling final products and services to supply chain companies, several additional user markets also make purchases either for their own consumption or they buy with the intention of redistributing to others. In these purchase situations the buyer generally does not radically change the product from its form when it was purchased from a Product Manufacturer. While technically these markets are also part of the supply chain, members of the business user market do not, in most cases, engage or directly assist in production activities.
|Market||What They Do||Considerations When Buying||What They Buy|
|Government||Made up of Federal, State, Local and International governments. They use purchases to assist with the functioning of the government that may include redistributing to others.||Mostly require suppliers to be approved, meet specifications and to bid for purchases.||Defense equipment, heavy equipment for public works projects, office supplies, pharmaceuticals, etc.|
|Not-For-Profit||Organizations whose tax structure precludes earning profits from operations and whose missions tend to be oriented to assisting others.||Look for purchases that will fit within tight budgetary restrictions and also within the mission of the organization.||Office equipment and supplies, office rental, professional services, etc.|
|Reseller||Also called distributors, these companies operate in both the consumer and the business markets. Their function involves purchasing large volumes of products from manufacturers (and sometimes from other resellers) and selling these products in smaller quantities. Includes wholesalers, retailers and industrial distributors.||Seek products that are of interest to the reseller’s customers. Other issues include how delivery is handled and whether the supplier offers incentives to help the reseller promote the product.||Consumer and industrial products to be redistributed to other businesses and consumers.|
Supply Chain Market
The supply chain consists of mostly for-profit companies engaged in activities involving product creation and delivery. Essentially the chain represents major steps needed to manufacture a product that will eventually be sold as a final product. Each member of the supply chain purchases products and services enabling them to carry out its business objectives. When making purchase decisions supply chain members may be motivated by such factors as: product cost, return on investment (i.e., benefits obtained exceed price paid), assurance of consistent supply (i.e., product is available and delivery is on-time), reciprocity with supplying firm (i.e., we buy from you and you buy from us), and much more. Examples of purchasing occurring in the supply chain include: manufacturing and plant equipment, information technology, office supplies, professional business services, etc.
In the table below we arbitrarily identify five main categories of supply chain members primarily based on the stage at which they contribute to the manufacturing process. However, it is conceivable that these categories can be further divided in order to flush out more specific activities.
|Supply Chain Member||What They Do||Example|
|Raw Material Suppliers||These companies are generally considered the first stage in the supply chain and provide basic products through mining, harvesting, fishing, etc., that are key ingredients in the production of higher-order products.||Copper is mined and extracted from copper ore. Copper is then refined to remove impurities.|
|Processed Materials or Basic Component Manufacturers||Firms at this level use raw materials to produce more advanced materials or products contained within more advanced components.||Copper is purchased by electrical wire manufacturers.|
|Advanced Component Manufacturers||These companies use basic components to produce products that offer a significant function needed within a larger product.||Electrical wire is purchased by a manufacturer of electrical power supplies.|
|Product Manufacturers||This market consists of companies that purchase both basic and advanced components and then assemble these components into a final product designated for a user. These products may or may not be sold as stand-alone products. Some may be included within larger products.||Power supplies are purchased by manufacturers of desktop computers.|
|Support Service Firms||These companies offer services at almost any point in the supply chain and also to the business user market. Some services are directly related to the product while others focus on areas of the business not directly related to production.||Distribution companies, such as truck firms and storage facilities, assist in moving products from one supply chain member to another. However, in most cases they do not take ownership of products that pass through the supply chain.|
Business vs Consumer Markets
For marketers, the selling environment of business markets present uniquely different circumstances when compared to selling to consumers. At the beginning of this tutorial we saw two ways in which consumer and business markets differ: 1) business markets are more likely to be price driven than brand driven, and 2) demand in business markets tends to be more volatile than consumer markets. However, the two markets are dissimilar in other ways requiring marketers to take a different approach when selling to business customers than to consumers. These differences include:
- How Decisions Are Made
- Existence of Experienced Purchasers
- Time Needed to Make Buying Decision
- Size of Purchases
- Number of Buyers
- Type of Promotional Effort Needed to Reach Buyer
A further discussion of each of these differences is presented below:
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