What is organizational Market and Their Buying Behavior

Understanding Organizational Markets and Buying Behavior

Who Is the Customer?

A Comparison of Organizational versus Consumer Markets

Organizations – including manufacturing firms, service producers, wholesalers, retailers, farms and nonprofit organizations all buy things. They buy many of the same goods and services as households, such as computers, office supplies, cars, airline tickets, and telephone service. Thus, what distinguish organizational markets from consumer markets is often not the kinds of products being purchased. Instead, the crucial differences from a marketing viewpoint are (1) the motivations of the buyer: what the organization will do with the product and the benefits it seeks to obtain, (2) the demographics of the market, and (3) the nature of the purchasing process and the relationship between buyer and seller.

Purchase Motives – Derived Demand

Individual consumers and households buy goods and services for their own personal use and consumption. Organizational buyers purchase things for one of three reasons: (1) to facilitate the production of another product or service. (2) For use by the organization’s employees in carrying out its operations. (3) For resale to other customers.

Market Demographics

Another major difference between consumer and organizational markets is the number, size, and geographic dispersion of customers. Organizational markets tend to have fewer potential customers, but on average they buy much larger volumes than consumers do. In many industries, the largest organizations also tend to cluster in one or a few geographic areas.

Purchasing Processes and Relationships

Because of the complexity of many of the goods and services and of the large volumes typically involved, organizational purchase decisions often involve evaluation processes focused on detailed, formally specified criteria. These processes are typically carried out by specialized purchasing managers with a great deal of input and influence from other members of the organization.

The Organizational Customer Is Usually a Group of Individuals

Organizations are social constructions. Organizations do not buy things. Rather, individual members, usually more than one, make purchase decisions on the organization’s behalf. Similarly, organizations do not form relationships with other organizations. Relationships are built and maintained among their individual members. Consequently, to understand how organizational purchasing decisions are made, the marketer must first understand the roles performed by different individuals within the organization and their personal interests and concerns.

Participants in the Organizational Purchasing Process

Organizational purchasing often involves people from various departments. These participants in the buying process can be grouped as users, influencers, gatekeepers, buyers, and deciders.

Users : The people in the organization who must use or work with the product or service often have some influence on the purchase decision.

Influencers : Influencers provide information for evaluating alternative products and suppliers. They are usually technical experts from various departments within the organization. Influencers help determine which specifications and criteria to use in making the purchase decision.

Gatekeepers : Gatekeepers control the flow of information to other people in the purchasing process. Buyers : The buyer is usually referred to as a purchasing agent or purchasing manager

Deciders : The decider is the person with the authority to make a final purchase decision.

The Organizational Buying Centre

For routine purchases with a small dollar value, a single buyer or purchasing manager may make the purchase decision. For most high value organizational purchases, several people from different departments participate in the decision process. The individuals in this group, called a buying center, share knowledge and information relevant to the purchase of a particular product or service.

Marketing Implications

Because employees of a customer’s firm may be active at different stages of the purchase process and have different interests and concerns, an important part of planning a marketing programme aimed at organizational customers involves determining which individuals to target, how and when each should be contacted, and what kinds of information and appeals each is likely to find most useful and persuasive.

How Organizational Members Make Purchase Decisions

organizational purchase decisions often involve extensive information search and evaluation processes similar to those consumers use when buying high involvement items. As with individual consumers,

Types of Buying Situations

organizations encounter three kinds of buying tasks or situations: the straight rebuy, the modified rebuy, and new task buying.

A straight rebuy involves purchasing a common product or service the organization has bought many times before. Such purchases are often handled routinely by the purchasing department with little participation by other departments.

The Purchase Decision-Making Process

The stages in the organizational purchase decision-making process – at least for modified rebuy and newt ask purchases – correspond quite closely with consumers’ highinvolvement purchases. However, the exhibit also suggests that some activities at each stage and their execution differ.

More people are involved in organizational purchase decisions; the capability of potential suppliers is more critical; and the post purchase evaluation process is more formalized. We examine other unique features of each stage of the organizational purchase decision process next.

Recognition of a Problem or Need

The organizational purchasing process starts when someone in the firm recognizes a need that can be satisfied by buying some good or service. As we have seen, though, while consumers may buy things impulsively to satisfy psychological or social needs, most of an organisation’s needs are derived from the demand for the goods or services they produce or resell to their own customers.

Requirements Planning

Instead of simply monitoring inventories and reordering when they run low, some firms attempt to forecast future requirements so as to plan their purchases in advance. Requirements planning governs the purchase of raw materials and fabricating components as well as supplies and major installations. One result of such planning is often the signing of longterm purchase contracts, particularly for products projected to be in short supply or to increase in price.

Determining Product Specifications

The need for particular goods and services is usually derived from a firm’s production or operation requirements and, therefore, must meet specific technical requirements. Technical experts from the firm’s R&D, engineering, and production departments are often involved early in the purchase decision. When the firm needs a unique component or piece of equipment, it might even seek help from potential suppliers in setting the appropriate specifications.

Search for Information about Products and Suppliers

Once specifications for the desired product/service are developed, purchasing (and possibly other departments) performs a value analysis. This systematic appraisal of an item’s design, quality, and performance requirements helps to minimize procurement costs. It includes an analysis of the extent to which the product might be redesigned, standardized, or processed using less expensive production methods.

Make-or-Buy Decisions

Sometimes a firm has the option of producing some components and services internally (advertising, marketing research) or buying them from outside suppliers. Economic considerations typically dominate such decisions, although in the long run other factors may be important (for instance, overdependence on a single supplier).

Information about Potential Suppliers

Because many firms evaluate a supplier’s performance on a regular basis, there is often considerable information about that supplier’s quality of performance on file. Where new suppliers are involved, the purchasing department typically engages in an in-depth investigation before qualifying that firm as a potential supplier.



Evaluation and Selection of Suppliers

The criteria used and the relative importance of each attribute vary according to the goods and services being purchased and the buyer’s needs.

Vendor Analysis

Some purchasing departments construct quantitative ratings of potential suppliers to aid in the selection process. These ratings look very much like the multi-attribute, compensatory attitude model we discussed for individual consumers.

What If the Customer Makes Unethical Demands of Its Suppliers?

A supplier’s ethics can have a direct effect on its success in the marketplace because organizational buyers are more likely to purchase from firms they consider ethical. Ethical behavior plays a crucial role in establishing the trust and cooperation necessary for the development and maintenance of long-term relationships with customers.

The Purchase

The purchase agreement between a supplier and an organizational customer can take several forms, ranging from individual spot contracts on the open market, to long-term purchasing contracts covering a year or more, to ongoing informal

Performance Evaluation and Feedback

When a purchase is made and the goods delivered, the buyer’s evaluation of both product and supplier begins. The buyer inspects the goods on receipt to determine whether they meet the required specifications. Later, the department using the product judges whether it performs to expectations. Similarly, the buyer evaluates the supplier’s performance on promptness of delivery and post-sale service. In many organization’s this process is done formally through reports submitted by the user department and other persons involved in the purchase. This information is used to evaluate proposals and select suppliers the next time a similar purchase is made.

Developing Long-Term Buyer–Supplier Relationships

From a supplier’s perspective, developing logistical alliances and computerized reorder systems can help tie major customers to the firm and increase the proportion of purchases they make from the supplier.

Trust between Supplier and Customer Develops Person-to-Person

Such complex relationships not only involve a great deal of cooperation between the parties, but they also require mutual trust .

Organizations develop trust through the actions of individual members of the firm. Therefore, company salespeople, account teams, logistics managers, and customer service personnel often play crucial roles in winning customer trust and loyalty. Unfortunately, this can make buyer–supplier relationships vulnerable to personnel turnover. Suppliers can minimize such problems by (1) developing effective corporate policies and performance standards with respect to customer service, (2) instituting training programs and succession planning for customer contact personnel, and (3) fostering and rewarding a strong customer orientation within the corporate culture.

Conditions Favoring Trust and Commitment

While mutual trust is important for the development and maintenance of long-term commitments between suppliers and their organizational customers, it is not always easy to develop. First, trust tends to build slowly. Thus, the parties must have some history of satisfying experiences with one another to provide a foundation for trust. It also helps if each party brings an established reputation for fair dealing within its industry.

Purchasing Processes in Government Markets

Federal, state, and local governments and their various agencies are major buyers of many goods and services. However, a government’s purchasing processes tend to be different in some respects from those of a business organization. For one thing, government organizations tend to require more documentation and paperwork from their suppliers because their spending decisions are subject to public review. Thus, although most governments provide would be suppliers with detailed guides describing their procedures and requirements, some suppliers complain about excessive bureaucracy, costly paperwork, and red tape.

Another difference is that government organizations typically require suppliers to submit bids, and contracts are usually awarded to the lowest bidder who meets the minimum standards specified in the contract. In some cases, though, a government unit will make allowances for a supplier’s superior product quality or customer service. They also sometimes purchase on a negotiated or ‘costplus’ contract basis, particularly when the product being purchased will require a lengthy development period (a hydroelectric dam) or major and uncertain R&D investments (a new weapons system), or when there are few alternative suppliers to compete for the contract. These differences in governmental purchasing processes make many standard marketing strategies and tools less relevant and effective than in other organizational markets.

Selling Different Kinds of Goods and Services to Organizations

Requires Different Marketing Programs Organizational buying processes tend to vary dramatically depending on what is being bought. Different types of goods and services require sellers to employ varying marketing strategies and actions to be successful in organizational markets. Marketers commonly classify industrial goods according to the uses made of the product by organizational purchasers. With this in mind, six categories of industrial goods and services can be identified: raw materials, component materials and parts, installations, accessory equipment, operating supplies, and business services

Raw Materials

Raw materials are goods receiving little or no processing before they are sold, except what is necessary for handling and shipping. Purchased primarily by processors and manufacturers, they are inputs for making other products.

Implications for Marketing Decision Makers

The supply of most natural products is limited; in recent decades, there have been some shortages. Often only a few large firms produce particular natural products, and in some countries those producers have been nationalized.

Natural materials are generally bulky and low in unit value; therefore, producers try to minimize their handling and transportation costs. Distribution channels for natural materials tend to have few middlemen; most materials are marketed directly to processors and manufacturers.

The marketing problems associated with natural products are quite different from those of agricultural products, which are produced by many relatively small farms located far from consumer markets.

Component Materials and Parts

As with raw materials, component materials and parts are purchased by manufacturers as inputs for making other products. Component materials differ, though, in that they 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.

To avoid disrupting production runs, sellers must ensure a steady, reliable supply of materials and parts, especially when a JIT management system is being used by the buyer. This system’s objective is to eliminate inventories at the customer’s manufacturing site, which requires the delivery of 100 per cent quality (zero-defect) products.

Installations

Installations are the buildings and major capital equipment that manufacturers and service producers use to carry out their operations. They are expensive and long-lived; examples are factory buildings constructed for a manufacturer, office buildings built for government agencies, computers and presses used by an automobile manufacturer.

Implications for Marketing Decision Makers

The marketing of installations presents a real challenge because there are few potential customers at any one time, and the average sale is very large. Many installations are custom-made to fit a particular customer’s needs; therefore, sellers must provide some engineering and design services before making a sale.

Often a long period of negotiation precedes the final transaction. Firms selling installations must usually provide many post sale services, such as installing the equipment, training the customer’s personnel in its use, providing maintenance and repair services, and sometimes financing.

Accessory Equipment

As with installations, accessory equipment includes industrial machines and tools that manufacturers, services producers, and governments use to carry out their operations. The difference is that although installations determine the scale of operations of the firms that buy and use them, accessory equipment has no such impact since it consists of tools and machines with relatively short lives and small price tags. They consist of such goods as personal computers, desks, file cabinets, and hand tools.

Implications for Marketing Decision Makers

Because this product category includes a wide range of specific items, it is hard to generalize about the most common or appropriate marketing strategies for accessory equipment.

Personal selling, either by the producer’s or a distributor’s sales force, remains the most important promotional method for accessory equipment, but because most products in this category are standardized and not technically complex, advertising, brand name promotions, and company websites are also important.

Operating Supplies

Operating supplies do not become a part of the buyer’s product or service, nor are they used directly in producing it. Instead, these supplies facilitate the buying organization’s day to day operations. They are usually low-priced items purchased frequently with a minimum of decision-making effort. Examples include heating fuel, floor wax, typing paper, order forms, paper clips, and pencils.

Business Services

Many business services producers, or facilitating agencies, have special areas of expertise used and paid for by other organizations. These include security and guard services, janitorial services, equipment repair services, public warehouses, transportation agencies, consulting and marketing research services, advertising agencies, and legal and accounting services.

Implications for Marketing Decision Makers

Services are intangible and are purchased before they can be evaluated by the buyer. Thus, the supplier’s qualifications, past performance, and reputation become critical determinants of the success of the marketing effort. Price is less important in selling business services because a lawyer or consultant with an outstanding reputation can often charge much more for a given service than one who is less well known.


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