Chapter 6: B2B Markets and Business Buying Behavior

Introduction

B2B marketing, simply stated, includes all marketing activities conducted between organizations. Therefore, B2B marketing includes all activities and all types of commercial transactions that take place among the members (organizations) in the value chain of a company, from suppliers, to manufacturers, original equipment manufacturers (OEM’s), parts assemblers, logistics firms, advertising firms, wholesalers, retailers, financial institutions, government organizations, etc. On the other hand, business to consumer (B2C) marketing only takes place at the very last stage of the value chain. In the value chain, from raw materials stage up until the retailer stage, all activities conducted are B2B; only the activities involved between the retailer and the consumer are B2C (see Figure 6.1).

Definition of Business Markets and B2B Marketing

Before looking over at B2B marketing, it is important to understand the different types of markets. When examining the types of markets, in general, there are two main types of markets: consumer markets and business (organizational) markets. The consumer market is composed of individuals who buy products for their personal needs or for the needs of their household. The business market , on the other hand, is made up of organizations that buy products to use in manufacturing other products (for example, raw materials, components and parts), to resell to other organizations (for example, products sold to wholesalers and retailers) or to facilitate the activities conducted in the business itself (for example, press machines used in the factory, PC’s used in the offices). Business markets are comprised of manufacturers, resellers, the government and non-profit organizations (such as institutions, hospitals, schools, etc.).

B2B marketing may be defined simply as marketing activities that take place among businesses/organizations. One of the earliest definitions of B2B marketing was made by Webster stating that B2B marketing is “the marketing of goods and services to industrial and institutional customers”. Morris defines B2B marketing as “the performance of business activities that facilitate exchange processes between producers and organizational customers”.

Characteristics of B2B Markets

Although marketing in B2B markets has similarities with marketing in B2C markets, there are also some major differences (see Table 6.1). These are:

• Fewer, larger buyers
• Geographic concentration
• Derived demand
• Fluctuating demand
• Inelastic demand
• Joint demand
• Direct purchasing
• Professional purchasing
• Close supplier-customer relations
• Group decision making

In B2B markets there are fewer but larger buyers as compared to consumer markets. When you think of Turkey, the population is about 80 million people, hence there are roughly 80 million final consumers. On the other hand, there are only a few thousand textile and apparel producers in Turkey. Thus, although B2B buyers are few as compared to B2C buyers, they buy in very large amounts.

Consumers in a certain country are scattered all over its lands, but B2B buyers are in general concentrated in certain geographic areas . This is mainly due to the reason that B2B buyers are located close to the sources of raw materials or close to the market or close to cheap labor force, etc.

Perhaps the most important feature of B2B markets is derived demand because this is a trait that only pertains to B2B markets. Derived demand means that the demand for a B2B product depends on the demand for the finished product in the B2C market. This is because B2B products are used either directly or indirectly to manufacture consumer goods, hence they become a part of the good, its component or is used in the production process. Hence, the demand for B2B products depend on the demand for consumer products.

Due to the derived demand characteristic in the B2B markets, the demand for products also fluctuate meaning that the demand is not stable, it increases and decreases sharply. In other words, big amounts are bought in certain times, no purchasing is done in other times, and again big amounts are bought, etc. Even if there is a slight increase of demand in the consumer market, this results in a much higher increase of demand in the B2B market. The same is also true for the decrease of demand.

Another characteristic of B2B markets is that the demand for B2B products is highly inelastic. In other words, the demand for B2B products is insensitive to price. That is, even if there is a price increase/decrease for B2B products, the demand will not be highly affected and will remain almost at the same level. This is because if the producer has to produce a certain amount of B2B products, price changes in raw materials and/or components will not alter the amount produced unless the demand for the finished product changes.

B2B markets are also known as having joint demand. Joint demand is when the demand for a certain product is related to the demand of other products. For example, the demand for casings in computers is highly related to the availability of disk drives. If one is unavailable, the other is of no use to the producer as the two components work together.

In B2B markets, buyers often prefer to buy products directly from the manufacturer and do not use any intermediaries. This is because the products purchased are often complex and need to be customized according to the needs of the buyers.

Due to the complexity of the purchasing process in B2B markets, most firms have professional purchasing teams who are highly trained and experienced in buying and negotiations, and also whose responsibility is to make sure that the best purchasing procedure is administered.

A major characteristic of B2B marketing is that, it involves close customer-supplier relations. This is because the buyer needs to buy products from suppliers on a regular basis to conduct its business, and if both parties are satisfied in time, this leads to interdependency between the buyer and the seller. The buyer becomes dependent on the supplier because of the need to regularly procure different types of goods (raw material, parts, components, etc.) to continue manufacturing. The supplier, on the other hand, is also dependent on the seller because of the limited number of buyers in B2B markets.

Another characteristic of B2B marketing is that the purchase decision is commonly made by a group of employees , not by a single person. The products bought in B2B markets are usually highly complex and expensive. Additionally, the B2B buyer does not have the luxury to make a mistake in the buying decision as a wrong decision may cause a very big loss for the company. Therefore, especially for risky purchases, a group of people take place in the buying decision. It is highly common that for major decisions this group of people includes technical experts as well as senior management. This group is called the buying center.

The Buying Center Concept and Roles in B2B Buying

The buying center “refers to the group of individuals that consists of all organizational members who are involved in any way, to any extent, in any phase of a specific buying decision.” In other words, the buying center is all the individuals or groups of people who contribute to the buying decision, who share a common goal and who also share all risks included in the buying process. It should be noted that the buying center is not the same as the purchasing department; it includes more than the purchasing department and is made up of people working in the organization who are in different departments and who work at different levels in the organization.

The individuals in the buying center take on some roles and act accordingly. The roles that exist in organizational buying are:

• Initiators
• Users
• Influencers
• Deciders
• Buyers
• Gatekeepers

Initiators: Anyone in the organization that recognizes a need and requests a purchase. For example, a worker in the factory may request that the machine he is using is replaced with a newer technology that will allow him to be more effective.

Users: The people who will be using the new purchased product directly. Usually the initiator is also the user, but sometimes it may be someone else. When a university purchases new desks to be used in classrooms, the users in this case are the students.

Influencers: The people who have an influence on other people and the decider in the buying center. These people may influence others due to their expertise on a certain subject, for example an engineer who provides information about a supplier’s technical capability, or an accountant who informs the buying center on the effect of the product being considered on return of investment, or someone who has specific information about the product/supplier.

Deciders : The people who make the final decision and who determine “whether to buy, what to buy, how to buy or where to buy.” Typically, these people are senior managers or specialists who take place in the buying center.

Buyers: The people who make the actual purchase. In general, the buyer is someone in the purchase department. Buyers are the people who decide on the supplier/seller from whom the product is going to be bought and they are involved in all types of negotiations with the seller in the buying process.

Gatekeepers: The people who control access of information into the buying center and the sharing of information among the members in the buying center. For example, someone form the purchasing department or the assistant/secretary of a CEO may act as a gatekeeper by not allowing the seller to contact the decider, the influencer or the user in the buying center, hence preventing the flow of information to them.

In the buying center more than one person may undertake a certain role or a single person may act out more than one role.

B2B Product Classification

Just as different business markets have an effect on B2B marketing strategies, so does the type of product/services and their characteristics. One approach to this classification is by identifying what type of a role the product/service has on the production process and the cost level. From this perspective, B2B products/services can be divided into three basic categories where two subcategories exist in each basic category (see Figure 6.2):

1. Entering Goods

a. Raw Materials

b. Manufactured Materials and Parts

2. Foundation Goods c

c. Installations

d. Accessory Equipment

3. Facilitating Goods

e. Supplies (MRO-Maintenance, Repair and Operating Supplies)

f. Services

Entering Goods : These products and services become part of other products and/or the finished product.

Raw Materials : This category includes all types of farm products and natural products such as mining and mineral products, coal and iron ore. These products are usually commodities. Some examples of raw materials are: potatoes for a company that produces potato chips; sand for a glass producer; rye, barley and wheat for a bread producer, metallic ores for an automobile producer, etc.

Manufactured Materials and Parts: These products also become part of the finished product, but unlike raw materials, manufactured materials and parts go under some processing. For example, the textile that a furniture producer buys in order to cover the sofas, chairs, etc.

Foundation Goods : These products are used to make other products but they do not become part of the finished product. Foundation goods are capital items, and thus, when they get old and are worn out, they can be depreciated from expenses.

Installations: These items cannot be easily removed from the office/manufacturing building. For example, cranes, elevators, escalators, blast furnaces, turbines, presses, safes, etc. The buildings themselves, lands, supercomputer systems, airplanes of an airline company, oil tankers of an energy company, etc. are also examples of installations. Installations are considered fixed assets of the company and are depreciated in time.

Accessory Equipment: These products are usually smaller pieces of equipment that are less expensive than installations and can easily be removed from buildings. For example, hand tools workers use in the factory, fork lifts, smaller motors, personal computers and laptops, furniture (tables, chairs, sofas, lighting equipment, etc.) used in the office, etc.

Facilitating Goods : These products/services help a company achieve its goals but they do not enter the product; they do not even get involved in the production process.

Supplies (MRO-Maintenance, Repair and Operating Supplies): These items are needed to run the machines and the office/factory buildings. Examples are, parts of capital goods, such as hydraulic oil, tyres for airplanes; toner, paper for printers; paint for buildings.

Services: All organizations purchase different types of services. These services may be manufacturing services (professional services used in manufacturing such as welding, casting, dying, etc.); business services (services used in the office such as maintenance and repair services, catering and food services, cleaning service, etc.); and professional services (such as accounting, advertising, logistics, consulting, legal services, etc.).

Types of B2B Buying Situations

As seen in B2B product classifications, an organization needs many types of different products to continue production and to facilitate its operations. B2B purchase decisions may be classified into three different categories, from the most routine to the most risky:

• Straight Rebuy
• Modified Rebuy
• New Task

Straight Rebuy: Straight rebuy involves routine problem solving decision making where the organization has purchased the product before, is satisfied with it, and therefore decides to buy the same product from the same supplier again when the need occurs. In a straight rebuy situation, the purchase is routinely conducted by the purchasing department where an approved list of suppliers exists. For this type of buying situation, the most important issues for the buyer are delivery, performance and price.

Modified Rebuy: Modified rebuy occurs when the buying organization requires some type of change in the purchasing process of a product. This change may be due to changing needs of the organization, dissatisfaction with the current product/supplier, modifications in the product/production process or just to look out for better alternatives. Examples for this type of buying situation may be, the need to change the chromium-plated bolts with steel-plated ones; or the need for a technological upgrade of a computer system.

New Task: In a new task buying situation, the purchasing problem is completely new to the organization, the organization has no prior experience with the product/purchase situation, and thus is in need of a big amount of information. This type of buying situation typically occurs in an organization when a new product is produced or when the firm decides to enter a new product category (for example, when a furniture producer decides to open up a hotel).

The B2B Buying Process

Although there are a lot of models specifying the stages of the B2B buying process, the best known model is the Buygrid Framework developed by Robinson, Faris and Wind (see Table 6.2). For the new task buying situation, all stages are followed, whereas for modified rebuy and straight rebuy, some stages may be omitted by the buyer. Especially for risky purchasing situations such as the new task buying situation, organizations must try to follow each stage in the B2B buying process and implement the necessary steps in each stage in order to reach the best buying decision and not to make any mistakes. There are eight stages in the B2B buying process:

• Problem Recognition
• General Need Description
• Product Specification
• Supplier Search
• Proposal Solicitation
• Supplier Selection
• Order-Routine Specification
• Performance Review

Problem Recognition: As with all buying processes, the first stage of the B2B buying process is when a problem arises or a need occurs in the organization. The stimuli for the need may be internal or external to the organization. Internally, a machine in the production chain may break down; or a new product may be developed and new parts may be needed etc. Externally, the production manager may have heard about a new press machine that works much more effectively than the current one being used or the CEO of the organization may have met a supplier at a trade show and may want to try their new product etc.

General Need Description: Once a need occurs, the next step is to determine exactly what type of a product/service is needed, what general characteristics are required and the quantity needed. At the general need description stage, initially all types of information is collected to decide on the best basic solution. Once the basic solution is decided upon, detailed information about alternative products/services are collected to try and determine which one would be the most appropriate.

Product Specification: Product specification is a “precise statement of the specific characteristics and quantity required of some product or service.” In general, the production, R&D, or engineering sections/departments decide on the specific characteristics the organization requires in the product/service it wants to purchase. The product specification may be a short formal statement of the minimum requirements of a product (for example, the minimum required cleaning power of the cleaning detergent) or it may be a detailed report specifying all types of detail (for example, the powdered form of detergent that is completely white, with the heaviest cleaning power, packed in packets of 5 kilograms, etc.).

Supplier Search: Following the preparation of the product specification, at the next stage, the organization looks for qualified suppliers who may have the capability to meet the requirements of the product specification. This stage is important because the organization wants to find the best solution to its problem. Hence, it should be able to contact all suppliers that would be able to fulfill the product specification. Possible sources of information of potential suppliers are: salespeople, current suppliers, trade shows, exhibitions, advertisements, the Internet, trade news, word of mouth and professional conferences.

Proposal Solicitation: The fifth stage of the B2B buying process is the stage where the organization contacts qualified suppliers and asks them to prepare and submit their written proposals if they are interested. The proposal prepared by the seller may be a formal report giving specific details about the product offering; or it may be a price quoted by the salesperson; or it may be the presentation of different catalogs to the buyer. As this is the stage before a selection is made, sometimes the buyer may examine the proposals and invite a few of the best qualified suppliers for oral presentation and/or negotiations.

Supplier Selection: In general, the organization sets a certain date and time (a deadline) until when all proposals should be submitted. Once the date and time is reached, the members of the buying center begin to assess each proposal, comparing the proposals with the product specification. For the supplier selection procedure, the buying center usually specifies the attributes they desire in the supplier and/or the product and rank each supplier (proposal) according to these attributes. For example, if a copying machine is going to be bought, the most important attributes may be technical service, supplier flexibility and product reliability. On the other hand, for raw materials, quality and on time delivery may be the key issues.

Order-Routine Specification : Once the supplier is selected, negotiations are conducted until the order is finalized. By negotiating, the buyer aims to get the best agreement for the organization; in other words, better terms of payment, more appropriate delivery schedules and further benefits. When negotiations are finalized, a formal order is placed where typically a sales contract is signed by both parties. The sales contract typically includes a list of technical specifications, the quantity to be purchased, the total price, the delivery schedule, warranty issues, return policies, penalty provisions, etc.

Performance Review: The organization makes a postpurchase evaluation of the product and of the supplier. The benefits received may be compared to what has been promised before the purchase or a more formal procedure may be followed where the performance of the product and the supplier is evaluated according to some predetermined standards. At this stage, it is quite common for the organization to rate the supplier against some attributes using a weighted-score method, similar to the method used in the supplier selection stage.