Organizational Buying

There are three types of organizational market.

1. First, the “industrial market” concerns those companies that buy products and services to help them produce other goods and services. Industrial goods include raw materials, components and capital goods such as machinery.
2. Second, the “reseller market” comprises organizations that buy products and services to resell. Mail-order companies, retailers and supermarkets are examples of resellers. Manufacturers of consumer goods such as toys, groceries and furniture require an understanding of the reseller market since success depends on persuading resellers to stock their products.
3. Third, the “government market” consists of government agencies that buy products and services to help them carry out their activities. Purchases for local authorities and defense are examples. The activities concerned with marketing to such organizations are sometimes called business-to-business marketing.

An understanding of organizational buying behavior in all of these markets is a prerequisite for marketing success. One of the fascinating aspects of marketing to organizations is that different players in the buying company may be evaluating suppliers’ offerings along totally different choice criteria.

The key is to be able to satisfy these diverse requirements in a single offering. A product that gives engineers the performance characteristics they demand, production managers the delivery reliability they need, purchasing managers the value for money they seek and shop floor workers the ease of installation they desire is likely to be highly successful. This complexity of organizational buying makes marketing an extremely interesting task.

In the following headings we examine characteristics of organizational buying and marketing before examining the three key elements of buying: who buys, how they buy and what choice criteria they use.

For each element, the marketing implications will be addressed. Finally, some developments in purchasing practice—just-in-time purchasing, centralized purchasing, online purchasing and reverse marketing—will be discussed and their implications for marketing explored.

Characteristics of Organizational Buying

1.     Nature and size of customers

Typically the number of customers in organizational markets is small. The Pareto ruleOpens in new window often applies, with 80 per cent of output being sold to 20 per cent of customers, who may number fewer than 12.

The reseller market is a case in point where, in Europe, most countries have a small number of supermarkets dominating the grocery trade. In the industrial market the same situation is often found. For example, in the games console industry Microsoft, Sony and Nintendo are the dominant global players.

Clearly the importance of one customer is paramount. Consequently, when Microsoft decided to move to IBM for the processor that drives the Xbox 360, this was a major blow to Intel, which hitherto had powered almost everything that Microsoft had ever made.

The jet aircraft industry is even more concentrated, with only two key players. Airbus and Boeing. The implications are that the importance of a small number of large customers makes it sensible for suppliers to invest heavily in close, long-term relationships with them.

Dedicated sales and marketing teams under the title of ‘key account management’ are usually employed to service such large accounts. Supply is usually direct, dispensing with the services of intermediaries as large order sizes make it economical and customer importance makes it necessary to have face-to-face contact and to supply direct to them.

2.     Complexity of buying

Often, organizational purchases, notably those that involve large sums of money and that are new to the company, involve many people at different levels of the organization. The managing director, product engineers, production managers, purchasing managers and operatives may influence the decision as to which expensive machine to purchase. The sales task may be to influence as many of these people and may involve multilevel selling by means of a sales team, rather than an individual salesperson.

3.     Economic and technical choice criteria

Although organizational buyers, being people, are affected by emotional factors, such as like or dislike of a salesperson, organizational buying decisions are often made on economic and technical criteria. This is because organizational buyers have to justify their decisions to other members of their organization.

Also the formalization of the buying function through the establishment of purchasing departments leads to the use of economic rather than emotional choice criteria. As purchasing becomes more sophisticated, economic criteria came to the fore with techniques such as lifecycle cost and value-in-use analysis. Fleet buyers, for example, calculate lifecycle costs including purchase price, running and maintenance costs when considering which company car to buy.

4.     Risks

Industrial markets are sometimes characterized by a contract being agreed before the product is made. Further, the product itself may be highly technical and the seller may be faced with unforeseen problems once work has started. Thus, Scott-Lithgow won an order to build an oil rig for BP, but the price proved uneconomic given the nature of the problems associated with its construction. In the government market, a £12 billion upgrade of the UK’s National Health Service IT systems ran over budget, fell behind schedule by four years and saw the departure of two of the program’s four main contractors.

5.     Buying to specific requirements

Because of the large sums of money involved organizational buyers sometimes draw up product specifications and ask suppliers to design their products to meet them. Services, too, are often conducted to specific customer requirements, marketing research and advertising services being examples. This is much less a feature of consumer marketing, where a product offering may be developed to meet a need of a market segment but, beyond that, meeting individual needs would prove uneconomic.

6.     Reciprocal buying

Because an industrial buyer may be in a powerful negotiating position with a seller, it may be possible to demand concessions in return for placing an order. In some situations, buyers may demand that sellers buy some of their products in return for securing the order. For example, in negotiating to buy computers a company like Volvo might persuade a supplier to buy a fleet of Volvo company cars.

7.     Derived demand

The demand for many organizational goods is derived from the demand for consumer goods. If the demand for compact discs increases, the demand for the raw materials and machinery used to make the discs will also expand. Clearly raw material and machinery suppliers would be wise to monitor consumer trends and buying characteristics as well as their immediate organizational customers.

A further factor based upon the derived demand issue is the tendency for demand for some industrial goods and services to be more volatile than that for consumer goods and services. For example, a small fall in demand for compact discs may mean the complete cessation of orders for the machinery to make them. Similarly a small increase in demand if manufacturers are working at full capacity may mean a massive increase in demand for machinery as investment to meet the extra demand is made. This is known as the ‘accelerator principle’.

8.     Negotiations

Because of the existence of professional buyers and sellers, and the size and complexity of organizational buying, negotiation is often important. Thus supermarkets will negotiate with manufacturers about price since their buying power allows them to obtain discounts.

Car manufacturers will negotiate attractive prices from tire manufacturers such as Pirelli and Michelin since the replacement brand may be dependent upon the tire fitted to the new car. The supplier’s list price may be regarded as the starting point for negotiation and the profit margin ultimately achieved will be heavily influenced by the negotiating skills of the seller. The implication is that sales and marketing personnel need to be conversant with negotiating skills and tactics.

Key Differences between the Individual and Organizational Buying

There are several key areas of difference between the typical buying process of individuals and that of organizations. The first, and most apparent difference is the number of people involved in the buying process within organizations. Individual purchasers tend to consult or be influenced by other people when making some purchases but organizational purchases but organizational purchases almost always include decision making by several people, and the people involved often have different priorities.

This type of committee decision may also occur in consumer markets: for example, a holiday choice when members of a family have different priorities. Most purchase decisions in consumer markets, however, do not involve this type of decision-making unit.

A second difference is the greater formality of the organizational buying process, driven by the need to keep everybody informed and to arrive at a decision which is broadly acceptable to the people involved.

Thirdly, organizational decisions tend to be more rational than those made by consumers – and there is less room for impulsive or emotional purchases. The relative formality and rationality of organizational buying tend to make it easier to identify what is important to customers when undertaking a customer satisfaction measurement exercise.

The most obvious difference between individual and organization buying is that the organizational buyer is not spending his or her own money. (There is a widely held view that purchase decisions made by small, owner-managed businesses bear more resemblance to individual rather than organizational buying.) Achieving value for the organization is uppermost in the mind of the buyer. This increases the importance of customer satisfaction measurement since habit and loyalty will figure less prominently in the organizational buying process — the buyer will usually change supplier if he or she believes better value can be obtained for the organization by doing so.