Models Of Industrial Buying Behavior Marketing Essay

Industrial markets constitute one of the largest markets. The volume of transaction on the industrial markets is more than that of any other markets. Industrial Marketing also referred to as business or organizational marketing is the marketing of products and services to the business organizations. This includes manufacturing companies, government undertakings, private sector, educational institutions, hospitals, distributors. Business organizations buy products and services to satisfy many objectives like production of other goods and services, making profits, reducing cost and so on.

Another definition would be ” Industrial markets are those where if one manufacturer is selling its products to another business either in the form of raw materials ,component parts or selling its services for consumption, use, resale or value addition of the product”. (Hory Sankar Mukherjee, Industrial Marketing, copy right 2009, page 5)

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It’s an agreement between the companies for mutual benefits, which will lead to a term called Organizational Buying.

Organizational Buying is the decision making process by which formal organizations establishes the need for purchased products and services and identifies, evaluate and choose among alternative brands and suppliers. (Kotler, Marketing management, 13th edition, copy right 2009 , pages-174)

We can illustrate the same with an industry like automobile, computer or the mobile phone industry. All the component products are not manufactured by the company. They purchase some of the components, manufacture a few and assemble them to make it a final product. He we understand that companies are interlinked and they buy and sell product components with careful selection and evaluation process.

Fewer but Larger buyers:

Business marketer often deals with fewer but much larger buyers than the other markets like consumer markets.

The market share is more among the bulk buyers and negotiation is very common and hence the marketers have to look for the type of buyers and their demand. Unlike in the case of consumer products, in Industrial products and services, the marketing department alone is not enough. It needs total involvement from the supplier. Industrial marketing is a process where all important aspects of management and marketing will be applicable in so far as three types of industrial products and services are concerned:

Standard industrial products and services.

Fabricated or finished industrial products and services and

Plant equipment and other requirements.

Above discussion clarifies that the 6 P’s of marketing have to be tailored. Company specific relationships have to be developed on a long term basis, in mutual interest. This is because the company will have to spend lot of time in generating products and the supplier has to recover his benefits in stages- usually over a long period as per the contract.

Differences between Industrial and consumer marketing:

Characteristics

Industrial marketing

Consumer marketing

Competition

Few buyers.

Mass markets.

Demand

More volatile.

Less volatile.

Market size

Larger and has global perspective.

Smaller and local perspective.

Key accounts

Very important.

Doesn’t exist.

Buying behavior

Large orders with strong buying powers. Decision could be lengthy, complex

Small orders with weak buying powers, decisions are shorter and quicker.

Product & service mix

Service levels are high, so is quality.

Product knowledge and delivery is not very critical

Distribution

Short & direct .importance for product knowledge and delivery is crucial.

Longer channels and simple .product knowledge is not crucial.

price

Bidding, negotiation and leasing are very common. Promotional prices are less used.

Bidding, negotiation and leasing are not present. Promotional pricing is very common.

Promotions

Personal selling, trade shows, catalogues, direct mailers, editorial publicity is some examples.

Advertising for the mass is the most common form of promotion.

Table 1 (Hory Sankar Mukherjee ,Industrial Marketing, copy right 2009, pages-9)

Industrial Markets:

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Industrial markets can be mainly classified as:

Commodity markets: Markets of a handful of suppliers manufacturing a highly specific products offering and marketing them to the customers on a non-differentiated basis.

Differentiated markets: In this kind of markets large number of suppliers provides specialized technologies and products to the buyers.

Segmented markets: In such markets, a handful of suppliers offer a common but versatile technology to make different market segments on basis of the application of the products.

Fragmented markets: reflects a really large number of suppliers, each controlling a small market share but still retaining strong supplier or brand loyalty.

The Industrial customers can be classified into 3 ways:

Industrial customers

Commercial enterprises government agencies non profit institutions /societies

Commercial enterprises, like Maruti udyog, Telco, IBM purchase goods and services for their own use in the manufacture of the final product. There are OEM suppliers and then the replacement or after market. The aftermarket is huge as it market for products which as subjected to wear and tear, for example, tires, oil filters etc.

Government agencies are a major chunk in the Industrial market which buys for the developmental projects. Central govt, state govt, ministry of defense are all parts of the govt purchasing bodies. They buy everything from pin, paper to heavy machines and individual parts for these machines. They usually are with large number of decision makers, and regulations are tough.

Private and public institutions like schools, colleges, churches are another important classification. Some of them have rigid rules for purchasing and some are casual.

Models of Buying Behavior

Industrial buying is a completely innovative and exciting process or methodology as compared with that of consumer buying behavior, as illustrated in table 1. There are different methods to be followed and hence understanding the organizational buying process is crucial for understanding the Industrial business, where we can do business and how to reach the organizational buyers more efficiently.

Organizational Buying:

Organizational buying is a process which is has many policies to be looked at and many stages to pass through, and hence is never done by single person but a team of people who have their expertise in it. So we see two set of variables. One is that we have series of stages which affect the buying process, and the other is buying situations.

The Buying situations:

The business buyer has to take many decisions before he makes a final purchase. That number of decisions taken depends on the buying situation: that’s the complexity of the problem being attended to, whether the buying requirement is new, and number of people involved. Based on above situations, we can classify the buying situation as:

Straight Rebuy :

The most common method used by an Industry to buy any product. Owing to the quality and the service provided by the past / current supplier, the order is placed. Hence in this type of rebuy, there is a supplier list and the buyer will continue to buy from the same supplier unless the quality is compromised or there is a technological advancement is involved which is not catered by the present supplier. These are generally regular purchases like stationary items and are of low value.

There is been a change that has happened due to straight rebuy, that is the procurement is happening online which has reduced transactional costs and also is very easy to manage

Guidelines: The suppliers must be very careful about the advancements happening in the market and respond to them immediately. On time delivery and no compromise on quality is very much essential.

Modified Rebuy :

This is a situation where in the organization wishes to re-consider the decisions taken towards the purchase or the supplier, as the organization may have noticed a change in the quality of existing suppliers or the supplier may be quoting higher price than his competitor. The decision may become essential when business feels that it has to reduce costs, improve technology and quality.

Guidelines: The existing suppliers will have to be very careful to understand the needs and satisfying them completely or there may be loss of business.

New Task :

In this case, the purchaser may be making a purchase for the first time and hence if it involves great cost, then large is the number of participants and also greater will be the information that would be obtained regards to that task. When we observe the number of careful decisions taken, new task will have most of it unlike the straight rebuy. This could be because the company doesn’t have much experienced team for making that purchase or they want to keep the risk involved to a lower level.

New task is a great opportunity for making business and also a challenge to the supplier. The process of new task passes through many scrutiny stages like, awareness, interest, evaluation, trial and adoptation. The buyer will be most concerned about the pricing of the products, delivery time, service terms and payment terms. Because of all these stages the new task has to pass through, the decision making process is lengthy and difficult at times.

Guidelines: suppliers should immediately respond to the needs of the buyer and must have thorough product knowledge. Also they must be able to cater to the requirements of the buyer in a very acceptable delivery time, without compromising quality.

The Buying centre:

Named by Webster and Wind, Buying centre is the decision making unit of an organization. This is a team or a group of people whose expertise lies in the decision making towards the purchase of products by any business. All these people will usually have some common goals and risks that may arise from the decision taken.

There are about seven roles that can be played by any member of the organization, in the decision making process. There are:

Initiators: People of an organization, who use the product and hence raise the request for the need of the product.

Users: The End users of the product. These people behave as the Initiators.

Influencers: people who directly or indirectly influence the buying process. Many times, these people get the information of the requirements and also work on any alternatives in terms of suppliers.

Deciders: people who decide what product to be purchased, by taking initiator’s request also the suppliers by looking at all possible alternative.

Approvers: Once the decision is made about who would be the supplier, these are the people who approve the request, leading to the purchase of the products.

Buyers: people who are given authority to select the suppliers. Their major role is to select supplier and negotiate with them for pricing and terms and conditions.

Gatekeepers: are those members who control the flow of information between source and destination. They would withhold certain information and hence filter the information that reaches the decision makers. In decision making process, purchase teams are not of much importance and hence they act as strong gatekeepers, as they will be updated with the prices, sources and new trends.

Organizational buying process:

(Hory Sankar Mukherjee, copy right 2009, Industrial Marketing, page 83)

Specify requirement

Finding solutions after analyzing various choices and alternatives

Problem recognition

The alternative of MAKE or BUY, if make is alternative, process is terminated

New supplier

Existing supplier

Feedback on performance and supplier evaluation

Order routine is established

Selection of suppliers

Analyze the proposals from the suppliers

Searching for potential suppliers

Problem recognition:

As the name says itself, this refers to the situation where the company has a need for buying products. When there is a need, it is either internally raised or can be due to external stimuli. Internal need refers to situation where the company has planned for an expansion or adopts new technology for its own equipment or even if there is a breakdown of the equipment and needs parts or products to fulfill the need. Externally it is possible that the current supplier has compromised the quality or the price he has quoted is not competitive. In such cases company will raise a problem and looks for its solution in the ways feasible.

Quantity needed and product specifications:

After recognizing the problems, the company’s next step is to check the requirements of the product and its specification. For common commodities, the process is simple, but in case of goods where technology and great pricing is involved, the company will consult its expert team, for instance the research and development team, regards to price, durability and reliability.

Supplier search:

After the problem is recognized and needs are specified, the next step is to look for avenues. The company will invest most of its time to find out the suitable supplier to meet its requirements, as this decision has impact on the company and its productivity for years. Existing and alternate suppliers may be considered at this time depending on the need and the credibility of the supplier.

Soliciting proposals:

At this time, the company will advertise for the proposals from the suppliers. From the received proposals, the companies will shortlist few of them depending on the credibility and the need of the company. Since the decision has its impact on the

Company for a very long time, it may ask the suppliers for a very detailed proposal which should clarify all queries of the buyer.

Selection of suppliers:

A very thorough research is carried out on the proposals from the suppliers in terms of its reputation, product reliability, service offered, flexibility and price quoted. Once all the requirements of the company are satisfied, company finally announces the preferred suppliers out of all the proposals.

Order routines:

Once the preferred suppliers are announced, company will continue to negotiate with the suppliers for the best deal. Mainly the company will look at the pricing, warranty terms and the return policy, delivery time and if at all there are more advantages over a long period. It’s the final check of the company before concluding the deal.

Performance review:

The company or the buyer will check the performance of the supplier(s) regularly for its consistency and credibility. The process can be formal or informal, that will help the company to understand the worthiness of the supplier , which helps the company to decide if it wants to continue with the same supplier or change them in the next term.

Models of Buying Behavior:

Dr. Jagdish Sheth’s Model of Industrial buying behavior:

Life style

Role orientation

Specialized educationDr. Jagdish Sheth (1973) conceived a concept of Industrial buying behavior / decisions through a model. There are few variables that he postulated regards to the buying behavior.

Situational factors

Satisfaction with the past purchase

Background of the individual

Active search

Information sources

Exhibition trade shows

Direct mail

Press release

Journal advertising

Technical conference

Word of mouth

Trade news

Others

Supplier and brand choice

Autonomous decisions

Expectations of

-purchase agents

-engineers

-users & others

Industrial buying process

Conflict resolution

-problem solving

-persuasion

-bargaining

-politicking

Joint decisions

Company specific factors

Perceptual distortion

Product specific factors

Type of purchase

Perceived risk

Time pressure

Organization size degree of

Orientation centralization

(Dr.PK Ghosh, Industrial Marketing ,copy right 2006, page 139)

Dr. Sheth postulated 4 factors:

Situational factors:

When a company makes any purchase, there is possibility that the purchase may be ad hoc than a systematic one. This can happen due to the economic conditions of the company and the society too, for example, Recession, strikes in the company, machine breakdowns etc.

Expectations of the people involved:

The decision making process in any Industrial buying constitutes various people, they could be sales men, research and development team members, users ,or anybody directly or indirectly involved in the process. These expectations can be due to:

The background or the lifestyle or task orientation and their beliefs of the individuals.

Source of information collected during the information search during the decision making, can make lot of developments in the minds of those involved in the buying. The information received could be biased or may be partial towards the supplier or the brand itself.

Level of satisfaction the people would have received during their past transaction with the supplier / brand can also create varied expectations.

Product specific factors:

When Industry buyer makes decision of a product, he has to be very careful to choose the right product, to avoid the consequences of making a wrong choice. Type of product to be purchased is yet another very important decision. He needs to be very careful when he is buying a product for a very long period, hence the information gathering will be extensive and the collective decision making comes into picture. A third noticeable thing is the pressure of time, if the buyer is making his decision under pressure or in emergency, he must delegate the work than the deciding in the team itself to avoid any mishaps.

Company specific factors:

Size of the company, orientation and is centralized or not makes its own impact on the buying behavior. If the company is technology oriented then the research and development team members / engineers will have the major share in making the decision for the Industrial buying.

Similarly if the company is very large, then many are the number of people involved in the decision making and hence becomes very complicated.

Also the level of centralization will have its effect, in a way that, greater is the level of centralization, lesser will be the decision makers.

Wind’s model of Industrial buying behavior:

In early 1970s, marketing professors Webster and Wind developed a very famous model (concept) if Industrial buying behavior called as ‘Buying Centre’ concept. This model partitions the buying behavior or the process into several interdependent processes that influence the subsequent ones. Concepts that they have explained are:

Environmental variable:

These are the factors which affect the business from outside. The changes in them directly affect the business buying behavior. They are economy, technology, politics, legal factors, competition etc.

Organizational factors:

These are the inside factors of an organization which have influence on the buying centre and hence the buying behavior. They can be classified as objectives of the organization, the purchase policies, and the strategy they follow and even the decentralization of the business.

Individual variables:

These objectives are related to the individuals of the decision making team. It could be the individual values, the educational background, the lifestyle, income, expertise etc.

External constraints: social, cultural, political, economic environment

Intra organizational contraints

Buying organization

Other inputs

Buyer Communication mix

Distribution mix

Communication mix

Distribution mix

intra

organizational intra organizational

constraints constraints

Intermediate marketing

Organization (distributors, dealers)

Manufacturing

Organization

Buyer’s needs, wants matched with needed goods and services

s other inputs goods&

distribution mix services

communication mix

goods & service mix

feedback goods & services

feedback

(Dr.PK Ghosh, Industrial Marketing, copy right 2006, pages 113)

The buying centre:

As is discussed under separate topic in page 17, consists of Initiators, users, influences, deciders, approvers, buyers and gate keepers.

The Reward-balance model:

This model aims at understanding the decision of the buyers and what factors combine to make them happen in a formal organization.

The general form can be represented as below:

Criteria for task evaluation and hence reward allocation.

Subordinate (buyer)

Senior purchasing manager

A typical buying organization can be shown through picture as:

Purchasing manager

Buyer supervisor

Buyer supervisor or purchasing agent

Buyer

Buyer

Junior or assistant buyer

Buyer

(PK Ghosh, Industrial Marketing, copy right 2009, pages 136-138)

A buyer’s behavior in a formal organization follows the satisfaction of its organization and also the social rewards. This is what is explained on Reward Balance model.

The analysis shows that this model consists of the buyer and his superior who has control over the rewards which the buyer expects. This exactly means that there is a hierarchical interdependence and the organization has many such interdependent hierarchical levels. In a typical organization, the purchasing manager plays very important role in allocation of the rewards.

We can explain the model as: the subordinate (buyer) is been given the job of completing his or her objectives and hence satisfying the job requirements. The evaluation of the same is done by the supervisor or the purchasing manager as in this case and is then rewarded for the work.

The buyer’s behavior depends on his expectations towards the rewards from his manager or the purchase as explained in this model and finds alternative ways to achieve the goals and hence would be rewarded for his or her efforts. There is a balance in this model as the buyer or the subordinate works towards getting his rewards by making the business buying successful.

Segmentation, targeting, positioning, pricing:

Organizational culture of the buying company is the main aspect every supplier has to look at to achieve success in business. Degree of centralization plays major role in a company which directly influences:

Industrial buying process.

Talks about negotiations, persuasion, politicking aspects.

Industrial buying behavior.

Explains company’s choice to balance cost and quality, degree of relationship between company and the supplier etc

This has led to the segmentation of the Industrial buyers. The marketing strategy here involves building a rapport with the buyer and hence providing the product service is very important. So we can classify this into two variables – product specific and buyer specific. All 4 P’s for the Industrial buyer has to be tailored as we clearly understand that Industrial are completely different than the consumers. There can be few difficulties in the path, for example, the buying process of a company will be different and most of the times, complex and lengthy with different backgrounds of the individuals involved in the decision making. There can be few factors the marketers need to look at when segmenting Industrial buyers:

Measurability: the marketers should be able to identify the needs of the buyer and hence need to know their characteristics.

Potential of business: marketers must check the substantiality of the buyer to make sure that the segment is worth investing.

Compatibility: the marketer must be able to deliver the needs of the buyer and hence needs to be competitive in market and technologically too.

Accessible: the marketer should be able to cater to the needs of the buyer when he requires and hence should be able to concentrate on the segments chosen.

Before the vendor attempts segmentation of the buyers, SWOT analysis of self is most essential.

We can categorize the Industrial market into Macro and Micro segments.

Standard segmentation techniques:

Wind and Cardozo’s approach:

This technique makes use of the Macro and Micro variables for segmentation. The major step is to identify the macro segments depending on the organizational culture. Then the marketers would evaluate the data and the capacity of the company and a target plan is made.

Morris- cost benefit approach:

This cost benefit method has 3 points to be considered to segment the industrial buyer:

Questioning: the marketer has to check the questions whether the chosen segment is measurable, homogeneous and accessible.

Second part is to analyze cost effectively to the micro and macro variables of the segment. The benefits expected include revenue, company image and economy. The cost incurred would be mainly from the research, production and overheads, risks as compared with the benefits.

After questioning and analysis, we achieve 3rd stage which is to conclude how much resources should be provided or allocated for the chosen segment.

Targeting and positioning:

Once the marketer understands the profitability and growth opportunities of the segments, should be able to target the segmented markets. The targeting could be the same four kinds:

Concentrated marketing

Differentiated marketing

Undifferentiated marketing

Niche marketing

BRANDING is very important to attract the business buyer. Suppliers have to build an image, a promise about the quality of product and the services. That is when the business buyer will come back to the same supplier.

POSITIONING:

Soon after the segmentation, positioning of the product is the next step, which is another strategy in marketing. The marketers should place their product in a very different position than their competitors, in the minds of the targeted customers. Industrial buyers are influenced by lot of elements as discussed in the reasons and definitions of the buying centre. Hence marketers should be very unique in their product positioning with the required market mix of product and the services, to gain the share of the buyers. There are some points the marketers may have to consider for the same:

Identify the unique requirement of the industrial buyer and attribute to it with the correct plan.

Make sure that the positioning is precisely communicated to the Industrial buyer.

These above factors can be achieved over the competitors by choosing,

Correct product quality and performance.

Services that the marketer can offer to the buyer.

Building a BRAND that the industrial buyer can never forget.

PRICING:

Pricing of a product is very important because, this will decide how well the product be accepted by the buyers and how well it will sustain its position in the market. Pricing also tells about the expectation of the marketer, that is if marketer is looking for long term profit or a short term profit.

The marketer can increase the pricing for certain premium products and buyers will be willing to buy, when the product is released. This is market Skimming.

The marketer can also lower the price of his products when he thinks that he has to capture wider market share, such a type is called market Penetration.

Also there are discounts provided on a product which is aimed at getting bulk orders, get the payments sooner, and maintain the costs.

The price has to be just right to attract the buyer and that depends on certain objectives such as:

Achieve the place for the product in the market.

To get the highest possible ROI.

Avoid competition with right positioning.

Increasing the market share.

Discriminatory pricing method holds good for industrial products and services, provided all their needs are custom made. There are few famous techniques to achieve good pricing of an Industrial product as below:

Selecting the pricing objective.

Determining demands of the market.

Estimating costs.

Analyzing cost & pricing of the Competitor.

Selecting a pricing method.

Selecting the final price.

Brand’s quality and advertising is one important aspect, as customers will be willing to pay extra prices for known product than unknown ones. So marketers have to make sure of the quality and performance of the product and the premium price will be happily borne by the consumers without a concern about the high pricing.

Apart from all these there are some other aspects, which may not be able to be classified but play very important role in the product market.

Geographical pricing: depends on the location of the customers.

Price discounts: done by marketer to get sooner payments, facilitate off season buying, volume purchases. There may be little profits at that time but the product will have more visibility and can have a long way in the market.

Promotional pricing: done by the marketer to trigger the customer’s mind for early purchase. Done usually when the product is newly launched in the market to grab the attention of the buyers.

Differentiated pricing: it’s an adjustment done by the marketers to cope with the differences in the market. For example, to cope with the differences in the customers, location or may be the product itself.

CONCLUSION

Industrial buying behavior is a concept that involves research and detailed study. It’s the field which requires very careful analysis and decision making. Organizational buyers are much diversified. It’s not only one person involved but a team of experts, which constitute a buying centre. Compared to the consumer markets, the business buyers may be few; however the volume of the purchase is so large the marketer tends to be associated with the buyer for a very long period. Total quality management is the prime aspect that the marketers need to look at when dealing with th