The business market is comprised of organizations involved in the manufacture, distribution, or support of products 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 buying behavior and how they 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 items, a small swing in consumer demand can create significant changes in overall business purchasing. Automobile purchases offer 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 use marketing research to know the conditions facing their direct customers (e.g., retail stores, other businesses) as well as customers to whom they do not sell directly (e.g., final consumer).
In this tutorial we discuss 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 systems 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.
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Once industry codes are known, these can be used within various government and industry research reports to locate specific industry information, such as the 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.
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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 purchases occurring in the supply chain include: manufacturing and plant equipment, information technology, office supplies, professional business services, etc.
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.
Raw Material Suppliers
These organizations 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. Example: a copper mine that extracts and refines copper from copper ore.
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. Example: an electrical wire manufacturers that purchases copper.
Advanced Component Manufacturers
These companies use basic components to produce products that offer a significant function needed within a larger product. Example: a manufacturer of electrical power supplies purchases electrical wire.
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. Example: a smartphone manufacturers purchases electrical power suppliers.
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. Example: a trucking company moves products from one supply chain member to another.
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 purchased form. 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.
The business user market includes:
They use purchases to assist with the functioning of the government, including purchasing for own use, such as public works projects and military equipment, and for redistribution to others (e.g., medical supplies). In most cases, governments require suppliers to be approved, meet specifications and to bid for purchases. Examples: federal, state, local and international governments.
This category includes organizations whose tax structure precludes earning profits from operations and whose missions tend to be oriented to assisting others. In most cases, these organizations look for purchases that will fit within tight budgetary restrictions and also within the mission of the organization. Examples: educational institutions, charities, hospitals, and industry associations.
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. Mostly, resellers seek products that are of interest to the reseller’s customers, though they also make purchases to support their own operations (e.g., a retailer outfitting a new retail store). Examples: wholesalers, retailers and industrial distributors.
Differences Between Business and 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:
- Business markets are more likely to be price driven than brand driven, and
- 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 they do when selling to consumers. These differences include:
How Decisions Are Made
In the consumer market, a large percentage of purchase decisions are made by a single person. As we discussed in the Consumer Buying Behavior tutorial, there are situations in which multiple people may be involved in a consumer purchase decision, such as a child influencing a parent to choose a certain brand of cereal or a husband and wife deciding together to buy a house, but most of the time purchases are individual decisions. The business market is significantly different. While single person purchasing is not unusual, especially within a small company, a significant percentage of business buying, especially within larger organizations, requires the input of many (see Buying Center Roles).
Businesses often employ purchasing agents or professional buyers whose job is to negotiate the best deals for their company. Unlike consumers, who often lack information when making purchase decisions, professional buyers are generally as knowledgeable about the product and the industry as the marketer who is selling to them.
Depending on the product, business purchase decisions can drag on for an extensive period. Unlike consumer markets, where impulse purchasing is rampant, the number of people involved in business purchase decisions results in decisions taking weeks, months or even years.
Size of Purchases
For products that are regularly used and frequently purchased, businesses will often buy a larger volume at one time compared to consumer purchases. Because of this, business purchasers often demand price breaks (e.g., discounts) for higher order levels.
Number of Buyers
While there are several million organizations worldwide operating in the overall business market, within a particular market the number of businesses may be relatively small. For instance, within some industries, buyers are highly concentrated in a few geographic clusters (e.g., pharmaceutical and biotech clusters) and may number less than a few hundred. Consequently, compared to consumer products, where millions of customers make up a market, marketing efforts for the business market may be confined to a smaller targeted group.
Types of Promotion
Companies that primarily target consumers often use mass advertising methods to reach an often widely dispersed market. For business-to-business marketers, the size of individual orders, along with a smaller number of buyers, makes person-to-person contact by sales representatives a more effective means of promotion.
Roles in the Buying Center
In the business market, those associated with the purchase decision are known to be part of a Buying Center, which consists of individuals within an organization that perform one or more of the following roles:
- Buyer – responsible for dealing with suppliers and placing orders (e.g., purchasing agent)
- Decider – has the power to make the final purchase decision (e.g., CEO)
- Influencer – has the ability to affect what is ordered, such as setting order specifications (e.g., engineers, researchers, product managers)
- User – those who will actually use the product when it is received (e.g., office staff)
- Initiator – any Buying Center member who is the first to determine that a need exists
- Gatekeeper – anyone who is in a position to control access to other Buying Center members (e.g., administrative assistant)
For marketers selling in the business market, it is important to first identify who plays what role. Once identified, the marketer must address the needs of each member, which may differ significantly. For instance, the Decider, who may be the company president, wants to make sure the purchase will not negatively affect the company’s bottom line while the Buyer wants to be assured the product will be delivered on time. The way each Buying Center member is approached and marketed to requires careful planning in order to address the unique needs of each member.
Types of Business Purchase Decisions
While it would appear business customers face the same four purchase situations that are faced by consumers (Minor New Purchase, Minor Repurchase, Major New Purchase, Major Repurchase), marketers targeting business buyers often see little value in pursuing business customers undertaking minor purchases (e.g., small orders) compared to consumer marketers who may actively pursue such customers. Consequently, while minor purchases certainly do occur in the business market, especially within small businesses, few suppliers choose to direct significant selling efforts to this type of purchase due to the low potential for generating enough revenue to offset marketing expense. Instead, suppliers focus on purchase situations that offer greater opportunity. For this reason, the types of business purchase decisions of interest to marketers are:
These business purchase decisions involve routine ordering. In most cases, buyers simply reorder the same products or services that were previously purchased. In fact, many larger companies have programmed repurchases into an automated ordering system that initiates electronic orders when inventory falls below a certain predetermined level. For the supplier benefiting from the repurchase, this situation is ideal since the purchaser is not looking to evaluate other products. For competitors, who are not getting the order, it may require extensive marketing efforts to persuade the buyer to consider other product or service options.
These purchases occur when products or services previously considered a straight re-purchase are now under a re-evaluation process. There are many reasons why a product is moved to the status of a Modified Repurchase. Some of these reasons include: end of purchase contract period, change in who is involved in making the purchase; supplier is removed from an approved suppliers list; mandate from top level of organization to re-evaluate all purchasing; or strong marketing effort by competitors. In this circumstance, the incumbent supplier faces the same challenges they may have faced when they initially convinced the buyer to make the purchase. For competitors, the door is now open and they must work hard to make sure their message is heard by those in charge of the purchase decision.
New Task Purchases
As the name suggests, these purchases are ones the buyer has never or rarely made before. In some ways, New Task Purchases can be considered as either minor or major depending on the total cost or overall importance of the purchase. In either case, the buyer will spend considerably more time evaluating alternatives. For example, if faced with a major New Task Purchase involving a complex items, such as computer systems, buildings, robotic assembly lines, etc., the purchase cycle from first recognizing the need to placement of the order may be months or even years. For marketers, the goal when selling to a buyer facing a New Task Purchase is to make sure to be included in the set of evaluated products as discussed in Step 2 of the business purchasing process.
How Businesses Buy
To cap our discussion of the business market, we now look at how purchasing decisions are made. Business purchasing follows the same five-step buying process faced by consumers. While the steps are the same as consumer purchasing, the activities occurring within each step are quite different as we discuss below.
Step 1: Need Recognition
In a business environment needs arise from just about anywhere within the organization. The Buying Center concept shows that Initiators are the first organizational members to recognize a need. In most situations, the Initiator is also the User or Buyer. Users are inclined to identify the need for new solutions (i.e., new products) while Buyers are more likely to identify the need to repurchase products. But marketers should also understand that more companies are replacing human involvement in repurchase decisions with automated methods, which makes it more challenging for competitors to convince buyers to replace currently purchased products. In Straight Repurchase situations, whether there is human intervention or not, the purchasing process often jumps from Step 1 to Step 4 since little search activity is performed.
As part of this step, a specifications document may be generated laying out the requirements of the product or service to be purchased. Several members of the Buying Center may be involved in creation of the specifications. For the marketer, establishing close contact with those who draw up the specifications may help position the marketer’s product for inclusion in the search phase.
Step 2: Search for Information
The search for alternatives to consider as potential solutions to recognized needs is one of the most significant differences between consumer and business purchasing. Much of this has to do with an organization’s motive to reduce costs. While a consumer will probably not search hard to save two cents a gallon on gas, a company that has a large fleet of cars or trucks certainly will. In fact, this step in the purchase process is where professional buyers make their mark. The primary intention of their search efforts is to identify multiple suppliers who meet product specifications and then, through a screening process, offer a selected group the opportunity to present their products to members of the Buying Center. Although, in some industries, online marketplaces and auction websites offer buyers access to supplier information without the need for suppliers to present to the Buying Center.
For suppliers, the key to this step of the purchase process is to make sure they are included within the search activities of the Buyer or others in the Buying Center. In some instances, this may require that a supplier work to be included within an approved suppliers list. In the case of online marketplaces and auction websites, suppliers should work to be included within relevant sites.
Step 3: Evaluate Option
Once the search has produced options, members of the Buying Center may then choose among the alternatives. In more advanced purchase situations, members of the Buying Center may evaluate each option using a checklist of features and benefits sought by the buyer. Each feature/benefit is assigned a weight that corresponds to its importance to the purchase decision. In many cases, especially when dealing with Government and Not-For-Profit markets, suppliers must submit bids with the lowest bidder often being awarded the order, assuming products or services meet specifications.
Step 4: Purchase
To actually place the order may require the completion of paperwork (or electronic documents), such as a purchase order. Acquiring the necessary approvals can delay the order for an extended period. And for extremely large purchases, such as buildings or large equipment, financing options may need to be explored.
Step 5: After-Purchase Evaluation
After the order is received, the purchasing company may spend time reviewing the results of the purchase. This may involve the Buyer discussing product performance issues with Users. If the product is well received, it may end up moving to a Straight Repurchase status, which eliminates much of the evaluation process on future purchases.