B2B

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Chapter Objectives Business-to-Business (B2B) Marketing CHAPTER 6 1 2 4 7 8 Explain each of the components of the business-to-business (B2B) market. Describe the major approaches to segmenting B2B markets. Identify the major characteristics of the business market and its demand. Discuss the decision to make, lease, or buy. Describe the major influences on business buying behavior. Outline the steps in the organizational buying process. Classify organizational buying situations. Explain the buying center concept. Discuss the challenges and strategies for marketing to government, institutional, and international buyers. 5 3 6 9

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• Business-to-business (B2B) market is significantly larger than the consumer market. • Example: U.S. companies spend more than $300 billion annually just for office and maintenance supplies. • Example: Department of Defense budget in a recent year was $500 billion. • Business-to-business (B2B) marketing Organizational sales and purchases of goods and services to support production of other products, to facilitate daily company operations, or for resale.

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NATURE OF THE BUSINESS MARKET

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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.

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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.

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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.

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SEGMENTING B2B MARKETS • Segmentation helps marketers develop the most appropriate strategy. SEGMENTATION BY DEMOGRAPHIC CHARACTERISTICS • Grouping by size based on sales revenues or number of employees. SEGMENTATION BY CUSTOMER TYPE • Grouping in broad categories, such as by industry. • Customer-based segmentation Dividing a business-to-business market into homogeneous groups based on buyers’ product specifications.

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North American Industry Classification System (NAICS) • Federal government developed Standard Industrial Classification in 1930s to subdivide business market into detailed segments. • Replaced by NAICS with implementation of NAFTA. • North American Industry Classification System Classification used by NAFTA countries to categorize the business marketplace into detailed market segments.

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SEGMENTATION BY END-USE APPLICATION • End-use application segmentation Segmenting a business-to-business market based on how industrial purchasers will use the product. • Example: A supplier of industrial gases that sells hydrogen to some companies and carbon dioxide to others. SEGMENTATION BY PURCHASE CATEGORIES • Segmenting according to organizational buyer characteristics. • Example: Whether a company has a designated central purchasing department or each unit within the company handles its own purchasing. • Businesses increasingly segment customers according to the stage in their relationship. • Example: Whether a customer is new or a long-term partner.

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CHARACTERISTICS OF THE B2B MARKET GEOGRAPHIC MARKET CONCENTRATION • Business market more concentrated than consumer market. • Example: Companies that sell to the federal government are often located near Washington, D.C. • Businesses becoming less geographically concentrated as Internet technology improves. SIZES AND NUMBER OF BUYERS • Business market has smaller number of buyers than consumer market. • Many buyers are large organizations, such as Boeing , which buys jet engines.

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THE PURCHASE DECISION PROCESS • Sellers must navigate organizational buying processes that often involve multiple decision makers. • Purchasing process usually more formal than in consumer market. • Purchases may require bidding and negotiations. BUYER-SELLER RELATIONSHIPS • Often more complex than in consumer market. • Greater reliance on relationship marketing. EVALUATING INTERNATIONAL BUSINESS MARKETS • Business purchasing patterns differ from country to country. • Global sourcing Purchasing goods and services from suppliers worldwide. • Can bring significant cost savings but requires adjustments.

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BUSINESS MARKET DEMAND • Demand characteristics vary from market to market.

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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.

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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.

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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.

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THE MAKE, BUY, OR LEASE DECISION • Firms acquiring needed products can get them in one of three ways: • Make the good or provide the service in-house. • Purchase it from another organization. • Lease it from another organization. • Producing the item may be cheapest route, but most firms cannot make all of the products they need. • Many companies purchase many of the goods they need. • Companies can spread out costs through leasing.

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THE RISE OF OFFSHORING AND OUTSOURCING • Offshoring Movement of high-wage jobs from one country to lower-cost overseas locations. • Example: China makes two-thirds of the world’s copiers, microwaves, DVD players, and shoes, and virtually all of the world’s toys. • Allows firms to concentrate their resources on their core business and access specialized talent or expertise. • Nearshoring Moving jobs to vendors in countries close to the business’s home country. • U.S. firms often nearshore in Canada or Mexico. • Outshoring Using outside vendors to provide goods and services formerly produced in-house. • Commonly outshore for three reasons: cost reduction, quality and speed of software maintenance and development, and greater value.

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PROBLEMS WITH OFFSHORING AND OUTSOURCING • Many companies discover their cost savings are less than expected. • Can raise security concerns over proprietary technology or customer data. • Can reduce flexibility to respond quickly to marketplace. • Can create conflicts with unions, even leading to shutdowns and strikes. • Can negatively affect employee morale and loyalty.

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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.

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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.

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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.

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MODEL OF THE ORGANIZATIONAL BUYING PROCESS

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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.

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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.

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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

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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.

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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.

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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.

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THE BUYING CENTER CONCEPT • Buying center Participants in an organizational buying action. BUYING CENTER ROLES

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INTERNATIONAL BUYING CENTERS • Marketers may have difficulty identifying members of foreign buying centers. • Foreign buying centers often include more participants than those in U.S. • Marketers who can quickly identify decision makers have an advantage over competition. TEAM SELLING • Combining several sales associates or other staff to help the lead account representative reach all those who influence the purchase decision. • May include members of the seller firm ’ s own supply network in the sales situation. • Example: Reseller of specialized computer applications whose clients require access to training.

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DEVELOPING EFFECTIVE BUSINESS-TO- BUSINESS MARKETING STRATEGIES • Marketer must develop strategy based on particular organization’s buying behavior and on the buying situation. CHALLENGES OF GOVERNMENT MARKETS • Government agencies make up the largest customer group in the U.S. • More than 85,000 government units buy products. • Purchases typically involve dozens of interested parties. • Influenced by social goals, such as minority subcontracting programs. • Can have either fixed-price contracts or cost-reimbursement contracts.

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Government Purchasing Procedures • Many purchases go through Government Services Agency , a central management agency. • By law, most federal government purchases must go through a complex bidding process governed by the Federal Acquisition Regulation . • Recent reforms have sped purchasing and increased flexibility. • State and local governments follow procedures similar to federal government. Online with the Federal Government • Government buyers often rely on electronic commerce. • GSA Advantage allows government buyers to make purchases online at preferred government prices. • Many government units lag behind the private sector in electronic procurement procedures.

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CHALLENGES OF INSTITUTIONAL MARKETS • Institutional buyers include schools, hospitals, libraries, foundations, and others. • Have widely diverse buying practices among, and even within, institutions. • Multiple buying influences can affect buying decisions, such as conflicts between professional staff and purchasing departments. CHALLENGES OF INTERNATIONAL MARKETS • Marketers must consider buyers’ attitudes and cultural patterns. • Local industries, economic conditions, geographic characteristics, and legal restrictions must also be considered. • Remanufacturing, or restoring worn-out products to like-new condition, can be an important strategy in places that cannot afford new products. • Foreign governments are also an important market.