BUSINESS MARKETINGDr. S. MANJUNATH

Module 1 and 2

What is Business Marketing?• Business marketing also referred to as “Industrial marketing” or

“B2B marketing” or “Organizational marketing”.

• Business marketing is the marketing of products & services to

business organizations.

• Business organizations include:

Manufacturing companies

Govt. undertakings

Private sector organizations

Educational institutions

Hospitals

Distributors / Dealers

Business organizations buy products & services to satisfy many objectives like production of other goods & services, making profits, reducing costs, & so on.

Consumer marketing is the marketing of products & services to individuals, families, & households. The consumers buy products & services for their own consumption.

NATURE OF THE BUSINESS MARKET

• Companies also buy services, such as legal, accounting,

office-cleaning, and other services.

• Some firms focus entirely on business markets.

• Example: Caterpillar, which makes construction and

mining equipment.

• Diverse market, everything from a box of paper clips to

thousands of parts for an automobile manufacturer.

COMPONENTS OF THE BUSINESS MARKET

• Four main components:

• Commercial market Individuals and firms that acquire

products to support, directly or indirectly, production of other goods and services.

• Largest segment of the business market.

• Trade industries Retailers or wholesalers that purchase

products for resale to others.

• Also called resellers, marketing intermediaries that

operate in the trade sector.

• Government—all domestic levels (federal, state, local) and foreign governments; also act as sellers—e.g., confiscated

goods.

• Public and private institutions, such as hospitals,

churches, colleges and universities, and museums.

B2B MARKETS: THE INTERNET CONNECTION

• More than 94 percent of all Internet sales are B2B

transactions.

• Opens up foreign markets to sellers.

• Largest segment of the business market.

DIFFERENCES IN FOREIGN BUSINESS MARKETS

• May differ due to variations in regulations and cultural

practices.

• Businesses must be willing to adapt to local customs and

business practices and research cultural preferences.

The Consumer Market (B2C) and the Business Market (B2B) at

B2B

Customers:

B2C

Individuals &

HouseholdsBusinesses

Global

Large corporations

Small & Medium

sized businesses

Institutions

Healthcare

Education

Government

Federal

State

Local

Selected

Products:

PCs

Printers

Consumer Electronics

Simple Service

Agreements

PCs

Enterprise Storage

Servers

Complex Service Offerings

Dell, Inc.

B2C and B2B

The Supply Chain

Source: Hutt, M.D. and Speh, T.W. (2004): Business Marketing Management: A Strategic View of Industrial and Organizational Markets, 8th Edition, p. 15.

Upstream Suppliers(USX, Du Pont)

Suppliers of

manufactured

materials and

parts such as

sheet metal or

plastic resin

Direct Suppliers(TRW, Johnson Controls)

Purchase input

used in creating

power-steering

systems (TRW) or

car seats (Johnson

Controls)

Auto Manufacturers(Ford, General Motors)

Purchase input

used in creating

automobiles

Auto Buyers(Consumers)

Purchase

automobiles

Business Marketing Business Marketing Consumer Marketing(Individuals, Households)

and

Business Marketing(Organisations such as

Fleet Buyers)

8

Identify the four majorcategories of

business market customers

Major Categories of Business Customers

9

Major Categories of Business Customers

Producers

Resellers

Governments

Institutions

OEMs (Original Equipment Manufacturers)

WholesalersRetailers

National PartyMunicipalLocal

Schools Hospitals Colleges

Churches Unions Fraternal groups

Civic Clubs Foundations

Nonbusiness organizations

10

OriginalEquipment

Manufacturers

Producers

OEMs.

Individuals and organizations that buy

business goods and incorporate them

into the products that they produce

for eventual sale to other producers

or to consumers.

REVIEW LEARNING OUTCOMEBusiness Market Customers

Business Marketing

InstitutionsResellers

Wholesalers

Retailers

Producers

OEMs

Governments

Federal

State

Municipal

County

Unions

CivicClubs

Other

Churches

Foundations

Nonprofits

12

Explain the major differences between business and

consumer markets

Business versus Consumer Markets

1. Nature of their markets

2. Market demand

3. Buyer behavior

4. Buyer-seller relationship

5. Environmental influences (competition, political, legal) and

6. Market strategy

• Due to these differences, business marketers need to understand how demand for industrial products and services differs from consumer demand.

Business and Consumer Marketing Differs In:

Characteristic

Demand

Volume

# of Customers

Location

Distribution

Nature of Buy

Buy Influence

Negotiations

Reciprocity

Leasing

Promotion

Business Market

Organizational

Larger

Fewer

Concentrated

More Direct

More Professional

Multiple

More Complex

Yes

Greater

Personal Selling

Consumer Market

Individual

Smaller

Many

Dispersed

More Indirect

More Personal

Single

Simpler

No

Lesser

Advertising

Business versus Consumer Markets

B2B Marketing vs. Consumer Marketing

Areas Industrial Markets Consumer Markets

1. Market characteristics • Geographically concentrated• Relatively fewer buyers

• Geographically distributed• Mass markets

2. Product characteristics • Technical complexity• Customized

• Standardized

3. Service characteristics • Service, timely delivery & availability is very important

• Service, timely delivery & availability is somewhat important

4. Buying behavior • Involvement of various functional areas in both buyer & supplier firms• Purchase decisions are mainly made on rational/performance basis•Technical expertise• Stable interpersonal relationship between buyers & sellers

• Involvement of family members

• Purchase decisions are mostly made on physiological / social / psychological needs• Less technical expertise• Non-personal relationship

New Work

Areas Industrial Markets Consumer Markets

5. Channel characteristics • More direct• Fewer intermediaries

• Indirect• Multiple layers of intermediaries

6. Promotional characteristics

• Emphasis on personal selling • Emphasis on advertising

7. Price characteristics • Competitive bidding & negotiated prices• List prices for standard products

• List prices or maximum retail price (MRP)

B2B Marketing vs. Consumer Marketing

Major Equipment

Accessory Equipment

Raw Materials

Component Parts

Processed Materials

Supplies

Business Services

Types of Business Products

Online

http://www.zzzzz.com

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Types of Business Products (Cont.)

Major Equipment

Accessory Equipment

Raw Materials

Component Parts

Processed Materials

Supplies

Business Services

MajorCategories of Business

Products

Classifying industrial goods by the following questions:

How does the good or service enter the production process?

How does it enter the cost structure of the firm?

Classifying Goods for the Business Market

Source: Adapted from Philip Kotler, Marketing Management: Analysis, Planning, and Control,4th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1980), p. 172, with permission of Prentice-Hall, Inc.

Classifying Business Goods & Services

3 Main Categories of Products

Entering Goods

Become part of the finished product

Cost assigned to the manufacturing process

Foundation Goods

Capital Items

Typically depreciated over time

Facilitating Products

Support organizational operations

Handled as overhead expenses

Classifying Business Goods & Services

Entering Goods

Raw Materials

Farm products & natural products

Only processed as necessary for handling & transport

Require extensive processing

Manufactured Materials & Parts

Any product that has undergone extensive processing prior to purchase

Component Materials require additional processing

Component Parts generally do not require additional processing

Classifying Business Goods & Services

Foundation Goods

Installations

Major long-term investment items

Buildings, land, fixed equipment, etc.

Accessory Equipment

Less expensive & short-lived

Not considered part of fixed plant

Portable tools, PC’s, etc.

Classifying Business Goods & Services

Facilitating Products

Supplies

Any supplies necessary to maintain the organization’s operations

Services

Maintenance & Repair support

Advisory support

Logistical support

REVIEW LEARNING OUTCOMETypes of Business Goods and Services

Aluminum ore:raw material

Extruded metal:processedmaterial

Propeller blade:component part

Extruding machine:

major equipmentTool cart:accessoryequipment

Uniforms:contracted

service

Paper:supply

Evaluative Criteria

1. Quality

2. Service

3. Price

New BuyA situation requiring the purchase of a product for the first time.

ModifiedRebuy

A situation where the purchaser wants some change in the original good or service.

StraightRebuy

A situation in which the purchaser reorders the same goods or services without looking for new information or investigating other suppliers.

Buying Situations

27

What is market segmentation?

Market segmentation is the partitioning of themarket into groups of customers (segments)

with similar needs and/or characteristics whoare likely to exhibit similar purchase behaviour.

Source: Weinstein, A. (1994) Market Segmentation, Chicago: Probus Publishing Company.

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Why market segmentation?

• To identify customer needs ( information).

• To cluster customers into groups to more efficiently and effectively satisfy their needs ( decision).

• To tailor the marketing strategy to the customers’ needs and thus to efficiently allocate marketing resources ( action).

Source:Hutt, Michael D. and Speh, Thomas W. (2004): Business Marketing Management: A Strategic View of Industrial and Organizational Markets, 8th Edition, p. 177-8.

29

Macro- and micro-segmentation

Source: Wind, Y. and Cardozo, R. (1974) Industrial Market Segmentation, Industrial Marketing Management, Vol. 3, March, p. 156.

Relevant market

Macro-SegmentationBasis: industry, region, size, etc.

Macro-segment1 Macro-segment2 ...

...

Micro-SegmentationBasis: buying centre structure, etc.

Micro-segment 1 Micro-segment 2

Level 1

Level 2/3

30

Source:Hutt, Michael D. and Speh, Thomas W. (2004): Business Marketing Management: A Strategic View of Industrial and Organizational Markets, 8th Edition, p. 180.

Bases for Macro-segmentation

31

Source:Hutt, Michael D. and Speh, Thomas W. (2004): Business Marketing Management: A Strategic View of Industrial and Organizational Markets, 8th Edition, p. 184.

Bases for Micro-segmentation

32

Quantitative Evaluation of Segments

• sales per segment

• turnover / profit per segment

• price (margin) per unit

• market share within the segment

• number of customers

• segment specific costs

Source: Guenter, Bernd (1990) Marktsegmentierung, TV Lehrbrief, Berlin, p. 28.

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Qualitative Evaluation of Segments

• growth potential (internal and external to the segment)

• domination by competitors

• entry barriers

• degree of customer retention

• know-how transfer

• innovation potential

Source: Hlavacek, J. D. and Reddy, N. M. (1986) Identifying Industrial Market Segments, European Journal of Marketing, Vol. 20, No. 2, p. 18.

34

The Market Segmentation Process

Identify the relevant market

Identify macro-segments based on

important organisational criteria

Evaluate acceptable macro-segments

and judge whether the are homogenous

in responding to marketing measures

Identify micro-segments based on

important buying centre criteria within

macro-segments

No

Evaluate and select the most attractive

micro-segments

Stop!

macro-segments =

market segments

Evaluate and select

the most attractive

macro-segments

Yes

Source: According to Wind, Y. and Cardozo, R. (1974) Industrial Market Segmentation, Industrial Marketing Management, Vol. 3, March, p. 156.

BUSINESS MARKET DEMAND

• Demand characteristics vary from market to market.

DERIVED DEMAND

• The linkage between demand for a company’s output and its

purchases of resources such as machinery, components, supplies, and raw materials.

• Example: Demand for computer microprocessor chips is

derived from demand for personal computers.

• Organizational buyers purchase two types of items:

• Capital items—long-lived business aspects that

depreciate.

• Expense items—items consumed within short time periods.

VOLATILE DEMAND

• Derived demand creates volatility.

• Example: Demand for gasoline pumps may be reduced if

demand for gasoline slows.

JOINT DEMAND

• Results when the demand for one business product is related

to the demand for another business product used in combination with the first item.

• Example: If lumber supply falls, then decrease in

construction will affect concrete market.

INELASTIC DEMAND

• Demand throughout an industry will not change significantly

due to a price change.

• Example: Construction firms will not necessarily buy

more lumber if prices fall unless overall housing demand also increases.

INVENTORY ADJUSTMENTS

• Just-in-time (JIT) inventory policies boost efficiency by

cutting inventory and requiring vendors to deliver inputs as they are needed.

• Often use sole sourcing, buying a firm’s entire stock of a

product from just one supplier.

• Latest inventory trend: JIT II, suppliers to place representatives at the customer’s facility to work as part of an integrated, on-site customer–supplier team.

• Inventory adjustments are also vital to wholesalers and

retailers.

NEW WORK

Derived Demand

The demand for industrial products & services does not exist

by itself. It is derived from the ultimate demand for

consumer goods & services.

Industrial customers buy goods & services for use in

producing other goods & services.

Joint Demand

Joint demand occurs when one industrial product is useful if

other product also exists.Demand for pen

Demand for ink

Cross-Elasticity Demand

Demand is „elastic‟ if the %age change in quantity demanded

is more than the %age change in price.

Cross elasticity of demand is the responsiveness of the sales

of one product to a price change in another product.

Demand for wood

Demand for

furniture

Demand for new homes

Price of Tea

Back

INDUSTRIAL DEMAND

Industrial Market & EnvironmentB

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Industrial distributors / dealers

Original equipment manufacturers

Users

Public sector units

Govt. undertakings

Public institutions

Private institutions

Manufacturing units

Non-manufacturing units

Intermediaries / middlemen, reselling to OEMs, users, Govt. firms

For Exide (battery manufacturer), Telco, is an OEM

For HMT, TVS-Suzuki is the ‘user’

BHEL, ONGC, IOL

Indian Railways, Defence units, State Elec. Boards

Govt. hospitals, prisons

Schools, colleges

Maharashtra Sugar Cooperative Society

Cooperative banks, housing cooperative societies

Ind

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Cap

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Raw materials

Manufactured materials

Component parts

Subassemblies

Light equipment or accessories

Installations or heavy equipment

Plant & building

Supplies

Services

Basic products like iron ore, crude oil, fish, fruits, vegetables

Acids, fuel oil, steel, chemicals

Semi-finished parts like bearings, tyres, small motors, batteries

Semi-finished goods like exhaust pipe in motorcycle

Hand tools, dies, computer terminals

Furnaces, machines, turbines

Offices, plants, warehouses, parking lots, real estate property

Operating & maintenance suppliers like fuels, packaging materials, lubricants, paints, elec. items

Legal, auditing, advertising, courier, marketing research agency

Industrial Market & Environment

Materials & Parts products, for large OEMs or users, selling is done directly from a

seller organization to a buyer organization.

For smaller volume OEMs & users, standard raw materials or components are sold

through industrial dealers or distributors as it is cost effective.

If the components are custom-made, considerable interaction takes place between

technical & commercial persons from both buyer & seller organizations. Selling is

direct.

Industrial salesman remain in close touch with various departments like purchase,

finance, R&D, marketing, production & quality of buyer organizations as they

influence the buying or payment releasing decisions.

Personal contacts, product leaflets/brochures help as industrial marketer in

communicating product & other information.

For standard products, the factors which influence buying decisions are:

Marketing Implications for Different Customer & Product Types

Product quality & performance

Delivery dependability

Price

Payment terms

Customer service

Customer rapport

THE BUSINESS BUYING PROCESS

• More complex than the consumer decision process.

• Takes place within formal organization’s budget, cost, and

profit considerations.

INFLUENCES ON PURCHASE DECISIONS

Environmental Factors

• Economic, political, regulatory, competitive, and

technological considerations influence business buying decisions.

• Example: Law freezing cable rates or introduction

of new product by a competitor will affect demand.

• Natural disasters, such as Hurricane Katrina.

• Example: Rising fuel prices prompted Viking Energy

Management to lock in fuel prices.

Organizational Factors

• Successful marketers understand their customers’

organizational structures, policies, and purchasing systems.

• Some firms have centralized procurement, others delegate it

throughout the units.

• Many companies use multiple sourcing to avoid depending too

heavily on a sole supplier.

Interpersonal Influences

• Many different people influence B2B buying decisions,

sometimes as individuals and sometimes as part of a committee.

• Marketers must know who the influencers are and understand

their priorities.

• Sales personnel must be flexible and have a good technical

understanding of their products.

The Role of the Professional Buyer

• Many organizations rely on professionals, often called

merchandisers, who implement systematic buying procedures.

• Firms usually buy expense items with little delay but

carefully consider capital purchases.

• May rely on systems integration, centralization of the

procurement function.

• Corporate buyers often use the Internet to identify sources

of supplies.

MODEL OF THE ORGANIZATIONAL BUYING PROCESS

Stage 1: Anticipate a Problem/Need/Opportunity and a General Solution

• Example: Need to provide employees with a good cup of

coffee to enhance productivity.

Stage 2: Determine the Characteristics and Quantity of a Needed Good or Service

• Example: Offering a coffee system that brews one cup of coffee at a time according to each employee’s preference.

Stage 3: Describe Characteristics and the Quantity of a Needed Good or Service

• Example: Firms need a simple system for

brewing a good cup of coffee; quantity requirements are easily correlated to the number of coffee drinkers.

Stage 4: Search for and Qualify Potential Sources

• Choice of supplier may be fairly straightforward or very

complex.

Stage 5: Acquire and Analyze Proposals

• May involve competitive bidding, especially if the buyer is

the government or a public agency.

Stage 6: Evaluate Proposals and Select Suppliers

• Buyers choose proposal best suited to their needs.

• Final choice may involve trade-offs between feature

such as price, reliability, quality, and order accuracy.

Stage 7: Select an Order Routine

• Buyer and vendor work out best way to process future

purchases.

Stage 8: Obtain Feedback and Evaluate Performance

• Buyers measure vendors’ performance.

• Larger firms are more likely to use formal evaluation

procedures.

• Some firms rely on outside organizations to gather quality

feedback and summarize results.

• Example: J. D. Power and Associates

CLASSIFYING BUSINESS BUYING SITUATIONS

• Business buying behavior involves degree of effort involved

in the decision and the levels within the organization in which these decisions are made.

Straight Rebuying

• A recurring purchase decision in which a customer reorders

a product that has satisfied needs in the past.

• Purchaser see little reason to assess competing options.

• Marketers who maintain good relationships with customers

can go a long way toward ensuring straight rebuys.

• High-quality products.

• Superior service.

• Prompt delivery.

Modified Rebuying

• Purchaser willing to reevaluate available options.

• May occur if supplier has let a rebuy circumstance

deteriorate because of poor service or delivery performance.

New-Task Buying

• First-time or unique purchase situations that require

considerable effort by the decision makers.

• Most complex category of business buying.

• Often requires purchaser to consider alternative offerings

and vendors.

Reciprocity

• Practice of buying from suppliers that are also customers.

• In U.S., Department of Justice and the Federal Trade

Commission view reciprocity as an attempt to reduce competition.

ANALYSIS TOOLS

• Value analysis—examines each component of a purchase in an

attempt to either delete the item or replace it with a more cost-effective substitute.

• Vendor analysis—an ongoing evaluation of a supplier’s

performance in categories such as price, EDI capability, back orders, delivery times, liability insurance, and attention to special requests.

THE BUYING CENTER CONCEPT

• Buying center Participants in an organizational buying

action.

BUYING CENTER ROLES

REVIEW LEARNING OUTCOMEBusiness Buying Behavior

Customer service

InitiatorInfluencerDecider GatekeeperPurchaserUser

Buying Center

Quality Service Price

EvaluativeCriteria

Buying Situations

New buyStraight rebuyModified rebuy

Environmental Analysis in Business MarketingEn

viro

nm

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t

Ecological & Physical

Internal

External

Air & water pollution, solid waste disposal, conserving natural resources

Water, power, skilled manpower, low-cost labor, transportation

Company location, R&D facilities, production facilities, HR, Financial resources, marketing effectiveness, reputation or image of the company

Micro

Macro

• Economic• Technological• Govt. & political, & legal• Cultural & social• Public-press, institutional investors,

shareholders, banks, public interest groups

• Customers & competitors• Suppliers

Strength & weaknesses analysis

Opportunity & threat analysis

Affects all firms

Affect a particular firm