MARKETING PLANNING & PROBLEM SOLVING CHAPTER 7 MARKETING PLANNING B2B CUSTOMER "FOCUS"B2B THEORY OF DERIVED DEMAND "The Land - to - Man - to - Hand Cycle" [Seminar in Marketing Management; MKTG. 600; Dr. Carter] LAND 4 >- MAN 4 HAND [Natural Resources] [Human Organization] [Human Consumption] Metal Extraction "Mining"] 0 Product Product Fabrication Service Consumption [Reclining] 4 Transportation, Logistics & Distribution Services - 4 Data, Information, & Communication Network Services - Utilities & Infrastructure Services - 4 Government & Legal Services - 4 I DisposaURecycle ["Feedback"]Webster and Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identity, evaluate, and choose among alternative brands and supplier^.^ The Business Market Versus the Consumer The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. More dollars and items are involved in sales to business buyers than to consumers. Consider the process of producing and selling a simple pair of shoes. Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who sell shoes to wholesalers, who sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also has to buy many other goods and services. Business markets have several characteristics that contrast sharply with those of con- sumer markets: @ Fewer, larger buyers. The business marketer normally deals with far fewer, much larger buyers than the consumer marketer does. The fate of Goodyear Tire Company and other part suppliers depends on getting contracts from a few major automakers. A few large buyers do most of the purchasing in such industries as aircraft engines and defense weapons. Although it should be noted that as a slowing economy has put a stranglehold on large corporations' purchasing departments, the small and midsize business market is offer- ng new opportunities for supplier^.^ See "Marketing Insight: Big Sales to Small Business," for more on this promising new B2B market, and see "Marketing Memo: Guidelines for Selling to Small Business" for some "do's and don'ts." Close supplier-customer relationship. Because of the smaller customer base and the importance and power of the larger customers, suppliers are frequently expected to cus- tomize their offerings to individual business customer needs. Business buyers often select suppliers who also buy from them. An example would be a paper manufacturer that buys chemicals from a chemical company that buys a considerable amount of its caper. Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow their organizations' purchasing policies, constraints, and require- ments. Many of the buying instruments-for example, reauests for quotations. proposals, and purchase Contracts-are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better. Many belong to the National Association of &chasing Managers Q?JAPMI, which seeks to improve professional buyers' effectiveness end st2tus. This means rha; business marketers have to provide greater technical data about their produci and its advantages over competitors' products. : Several buving influences. More oeople ~icw influence business buying decisions. Buvmg csirmittees consisringof ~ecimical experts and even senior management are com- . - - man ir. the purchase of major goods. Business marketers have to send well-trained sales representatives and sales teams to deal with the well-trained buyers. 3 Multiple sales calls. Because more people are involved in the selling process, it takes multiple sales calls to win most business orders, and some sales cycles can take years. A study by McGraw-Hill found that it takes four to four and a half calls to close an average indusmal sale. In the case of capitai equipment sales for large projects, it may take multiple attempts 10 fund 2 project, and the sales cycle-between quoting a job and delivering the product-is often measured in yea~s.~---- --- .- : : : What Is Organizational Buying? Derived demand The demand for business goods is ultimately derived from the demand for consumer goods. For this reason, the business marketer must closely monitor the buying patterns of ultimate consumers. For instance, the Big Three automakers in Detroit have been driving the boom in demand for steel-bar products. Much of that demand is derived from consumers' continued love affair with minivans and other light trucks, which consume far more steel than cars. Business buyers must also pay close atten- tion to current and expected economic factors, such as the level of production, invest- ment, consumer spending, and the interest rate. hi a recession, business buyers reduce their investment in plant, equipment, and inventories. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of demand. Â Inelastic demand. The total demand for many business goods and services is inelastic- that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less leather if the price rises, unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item's total cost, such as shoelaces. Â Fluctuutingdemand. The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output Economists refer to this as the accelemtwn effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for