Characteristics of B2B Markets
Site: | Saylor Academy |
Course: | BUS602: Marketing Management |
Book: | Characteristics of B2B Markets |
Printed by: | Guest user |
Date: | Friday, May 17, 2024, 7:24 AM |
Description
Read these sections, being sure to click through to the next section. Often referred to as B2B markets, organizational buyers differ significantly in type. A government buyer, for example, is not a business. However, governments at all levels are significant buyers of goods and services. Similarly, a reseller, such as a wholesaler or retailer, is in a different business than an industrial buyer purchasing raw materials for a manufacturing process.
The Characteristics of Business-to-Business (B2B) Markets
Learning Objectives
- Identify the ways in which business-to-business (B2B) markets differ from business-to-consumer (B2C) markets.
- Explain why business buying is acutely affected by the behavior of consumers.
Business-to-business (B2B) markets differ from business-to-consumer (B2C) markets in many ways. For one, the number of products sold in business markets dwarfs the number sold in consumer markets. Suppose you buy a five-hundred-dollar computer from Dell.
The sale amounts to a single transaction for you. But think of all the transactions Dell had to go through to sell you that one computer. Dell had to purchase many parts from many computer component makers. It also had to purchase equipment and facilities
to assemble the computers, hire and pay employees, pay money to create and maintain its Web site and advertise, and buy insurance and accounting and financial services to keep its operations running smoothly. Many transactions had to happen before
you could purchase your computer.
Each of those transactions needed a salesperson. Each of those companies have a marketing department. Thus, there are a lot more college marketing graduates going into B2B companies than in B2C, which is reason
enough to spend some time studying the subject. There are other differences, too.
Business products can be very complex. Some need to be custom built or retrofitted for buyers. The products include everything from high-dollar construction equipment
to commercial real estate and buildings, military equipment, and billion-dollar cruise liners used in the tourism industry. A single customer can account for a huge amount of business. Some businesses, like those that supply the U.S. auto industry
around Detroit, have just a handful of customers - General Motors, Chrysler, and/or Ford. Consequently, you can imagine why these suppliers become very worried when the automakers fall on hard times.
Not only can business products be complex,
but so can figuring out the buying dynamics of organizations. Many people within an organization can be part of the buying process and have a say in ultimately what gets purchased, how much of it, and from whom. Having different people involved makes
business marketing much more complicated. And because of the quantities each business customer is capable of buying, the stakes are high. For some organizations, losing a big account can be financially devastating and winning one can be a financial
bonanza.
How high are the stakes? Table 4.1 "Top Five Corporations Worldwide in Terms of Their Revenues" shows a recent ranking of the top five corporations in the world in terms of the sales they generate annually. Believe it or not, these
companies earn more in a year than all the businesses of some countries do. Imagine the windfall you could gain as a seller by landing an exclusive account with any one of them.
Table 4.1 Top Five Corporations Worldwide in
Terms of Their Revenues
Company | Sales (Billions of Dollars) |
---|---|
Walmart Stores | 422 |
Royal Dutch Shell | 369 |
ExxonMobil | 341 |
PetroChina | 222 |
Chevron | 189 |
Note: Numbers have been rounded to the nearest billion. |
Generally, the more high-dollar and complex the item being sold is, the longer it takes for the sale to be made. The sale of a new commercial jet to an airline company such as Southwest Airlines, Delta, or American Airlines can literally take years to be completed. Purchases such as these are risky for companies. The buyers are concerned about many factors, such as the safety, reliability, and efficiency of the planes. They also generally want the jets customized in some way. Consequently, a lot of time and effort is needed to close these deals.
Unlike many consumers, most business buyers demand that the products they buy meet strict standards. Take for example the Five Guys burger chain, based in Virginia. The company taste-tested eighteen different types of mayonnaise before settling on the one it uses. Would you be willing to taste eighteen different brands of mayonnaise before buying one? Probably not.
Another characteristic of B2B markets is the level of personal selling that goes on. Salespeople personally call on business customers to a far greater extent than they do consumers. Most of us have had door-to-door salespeople call on us occasionally. However, businesses often have multiple salespeople call on them in person daily, and some customers even provide office space for key vendors' salespeople. Table 4.2 "Business-to-Consumer Markets versus Business-to-Business Markets: How They Compare" outlines the main differences between B2C and B2B markets.
Consumer Market | Business Market |
---|---|
Many customers, geographically dispersed | Fewer customers, often geographically concentrated, with a small number accounting for most of the company's sales |
Smaller total dollar amounts due to fewer transactions | Larger dollar amounts due to more transactions |
Shorter decision cycles | Longer decision cycles |
More reliance on mass marketing via advertising, Web sites, and retailing | More reliance on personal selling |
Less-rigid product standards | More-rigid product standards |
The Demand for B2B Products
Even though they don't sell their products to consumers like you and me, B2B sellers carefully watch general economic conditions to anticipate consumer buying patterns. The firms do so because the demand for business products is based on derived demand. Derived demand is demand that springs from, or is derived from, a source other than the primary buyer of a product. When it comes to B2B sales, that source is consumers. If consumers aren't demanding the products produced by businesses, the firms that supply products to these businesses are in big trouble.Fluctuating demand is another characteristic of B2B markets: a small change in demand by consumers can have a big effect throughout the chain of businesses that supply all the goods and services that produce it. Often, a bullwhip type of effect occurs. If you have ever held a whip, you know that a slight shake of the handle will result in a big snap of the whip at its tip. Essentially, consumers are the handle and businesses along the chain compose the whip - hence the need to keep tabs on end consumers. They are a powerful purchasing force.
For example, Cisco makes routers, which are specialized computers that enable computer networks to work. If Google uses five hundred routers and replaces 10 percent of them each year, that means Google usually buys fifty routers in a given year. What happens if consumer demand for the Internet falls by 10 percent? Then Google needs only 450 routers. Google's demand for Cisco's routers therefore becomes zero. Suppose the following year the demand for the Internet returns to normal. Google now needs to replace the fifty routers it didn't buy in the first year plus the fifty it needs to replace in the second year. So in year two, Cisco's sales go from zero to a hundred, or twice normal. Thus Cisco experiences a bullwhip effect, whereas Google's sales vary only by 10 percent.
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Key Takeaway
B2B markets differ from B2C markets in many ways. There are more transactions in B2B markets and more high-dollar transactions because business products are often costly and complex. There are also fewer buyers in B2B markets, but they spend much more
than the typical consumer does and have more-rigid product standards. The demand for business products is based on derived demand. Derived demand is demand that springs from, or is derived from, a secondary source other than the primary buyer of a
product. For businesses, this source is consumers. Fluctuating demand is another characteristic of B2B markets: a small change in demand by consumers can have a big effect throughout the chain of businesses that supply all the goods and services that
produce it.
Review Questions
- Why are there more transactions in B2B markets than B2C markets? Why are there fewer buyers?
- Explain what derived demand is.
- Why do firms experience a bullwhip effect in the demand for their products when consumers demand changes?
Source: University of Minnesota, https://open.lib.umn.edu/principlesmarketing/chapter/4-1-the-characteristics-of-business-to-business-b2b-markets/
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 License.
Types of B2B Buyers
Learning Objectives
- Describe the major categories of business buyers.
- Explain why finding decision makers in business markets is challenging for sellers.
Business buyers can be either nonprofit or for-profit businesses. To help you get a better idea of the different types of business customers in B2B markets, we've put them into four basic categories: producers, resellers, governments, and institutions.
Producers
Figure 4.1
Your local tattoo parlor is a producer.
Producers are companies that purchase goods and services that they transform into other products. They include both manufacturers
and service providers. Procter & Gamble, General Motors, McDonald's, Dell, and Delta Airlines are examples. So are the restaurants around your campus, your dentist, your doctor, and the local tattoo parlor. All these businesses have to buy certain
products to produce the goods and services they create. General Motors needs steel and hundreds of thousands of other products to produce cars. McDonald's needs beef and potatoes. Delta Airlines needs fuel and planes. Your dentist needs drugs such
as Novocain, oral tools, and X-ray machines. Your local tattoo parlor needs special inks and needles and a bright neon sign that flashes "open" in the middle of the night.
Resellers
Resellers are companies that sell goods and services
produced by other firms without materially changing them. They include wholesalers, brokers, and retailers. Walmart and Target are two big retailers you are familiar with. Large wholesalers, brokers, and retailers have a great deal of market power.
If you can get them to buy your products, your sales can exponentially increase.
Every day, retailers flock to Walmart's corporate headquarters in Bentonville, Arkansas, to try to hawk their products. But would it surprise you that not everybody
wants to do business with a powerhouse like Walmart? Jim Wier, one-time CEO of the company that produces Snapper-brand mowers and snow blowers, actually took a trip to Walmart's headquarters to stop doing business with the company. Why? Snapper products
are high-end, heavy-duty products. Wier knew that Walmart had been selling his company's products for lower and lower prices and wanted deeper and deeper discounts from Snapper. He believed Snapper products were too expensive for Walmart's customers
and always would be, unless the company started making cheaper-quality products or outsourced their manufacturing overseas, which is something he didn't want to do.
"The whole visit to Wal-Mart's headquarters is a great experience," said Wier
about his trip. "It's so crowded, you have to drive around, waiting for a parking space. You have to follow someone who is leaving, walking back to their car, and get their spot. Then you go inside this building, you register for your appointment,
they give you a badge, and then you wait in the pews with the rest of the peddlers, the guy with the bras draped over his shoulder". Eventually, would-be suppliers were taken into small cubicles where they had thirty minutes to make their case. "It's a little like going to see the principal, really," he said.
Governments
Can you guess the biggest purchaser of goods and services in the world? It is the U.S. government. It purchases everything you can imagine, from paper
and fax machines to tanks and weapons, buildings, toilets for NASA (the National Aeronautics and Space Administration), highway construction services, and medical and security services. State and local governments buy enormous amounts of products,
too. They contract with companies that provide citizens with all kinds of services from transportation to garbage collection. (So do foreign governments, provinces, and localities, of course.) Business-to-government (B2G) markets, or when companies
sell to local, state, and federal governments, represent a major selling opportunity, even for smaller sellers. In fact, many government entities specify that their agencies must award a certain amount of business to small businesses, minority- and
women-owned businesses, and businesses owned by disabled veterans.
There is no one central department or place in which all these products are bought and sold. Companies that want to sell to the U.S. government should first register with the
Central Contractor Registry at http://www.CCR.gov. They should then consult the General Services Administration (GSA) Web site (http://www.gsa.gov). The GSA helps more than two hundred federal agencies buy a wide variety of products purchased routinely.
The products can include office supplies, information technology services, repair services, vehicles, and many other products purchased by agencies on a regular basis. Consequently, it is a good starting point. However, the GSA won't negotiate a contract
for the NASA toilet or a fighter jet. It sticks to routine types of purchases.
Figure 4.2
The General Services Administration (GSA) is a good starting point for companies
that want to do business with the federal government. The U.S. Small Business Administration (SBA) also offers sellers a great deal of information on marketing to the government, including online courses that explain how to do it.
The
existence of the GSA doesn't mean the agencies it works with don't have any say over what is purchased for them. The agencies themselves have a big say, so B2B sellers need to contact them and aggressively market their products to them. After all,
agencies don't buy products, people do. Fortunately, every agency posts on the Internet a forecast of its budget, that is, what it is planning on spending money on in the coming months. The agencies even list the names, addresses, and emails of contact
persons responsible for purchasing decisions. Many federal agencies are able to purchase as much as $25,000 of products at a time by simply using a government credit card. This fact makes them a good target for small businesses.
It's not unusual
for each agency or department to have its own procurement policies that must be followed. Would-be sellers are often asked to submit sealed bids that contain the details of what they are willing to provide the government and at what price. But contrary
to popular belief, it's not always the lowest bid that's accepted. Would the United States want to send its soldiers to war in the cheapest planes and tanks, bearing the lowest-cost armor? Probably not. Like other buyers, government buyers look for
the best value.
Yet selling to the government is not always easy. The GSA has its own red tape, as does each government division, and many purchases come with additional regulations or specifications written into the legislation that funded
them. Because many purchases can be rather large, decision cycles can be very long and involve large buying centers. Some businesses avoid selling to the government because the perceived hassle is too great to warrant the effort. Other businesses,
though, realize that learning the ins and outs of government purchases can become a sustainable competitive advantage.
Figure 4.3
Politics can come into play when it comes to large government purchases: Although the
F-22 is the most sophisticated fighter jet in the world, it has never been used in battle. But when the Pentagon wanted to stop production on seven of the jets so it could spend the money on other conventional weapons being used in the wars the United
States is currently fighting, it had a fight on its hands from the members of Congress. They didn't want the companies in their states that helped produce the plane to lose business.
Institutions
Institutional
markets include nonprofit organizations such as the American Red Cross, churches, hospitals, charitable organizations, private colleges, civic clubs, and so on. Like government and for-profit organizations, they buy a huge quantity of products and
services. Holding costs down is especially important to them. The lower their costs are, the more people they can provide their services to.
The businesses and products we have mentioned so far are broad generalizations to help you think about
the various markets in which products can be sold. In addition, not all products a company buys are high dollar or complex. Businesses buy huge quantities of inexpensive products, too. McDonald's, for example, buys a lot of toilet paper, napkins,
bags, employee uniforms, and so forth. Pretty much any product you and I use is probably used for one or more business purposes (cell phones and cell-phone services, various types of food products, office supplies, and so on). Some of us own real
estate, and so do many businesses. But very few of us own many of the other products businesses sell to one another: cranes, raw materials such as steel, fiber-optic cables, and so forth.
That said, a smart B2B marketer will look at all the
markets we have mentioned to see if they represent potential opportunities. The Red Cross will have no use for a fighter jet, of course. However, a company that manufactures toilet paper might be able to market it to both the Red Cross and the U.S.
government. B2B opportunities abroad and online B2B markets can also be successfully pursued. We will discuss these topics later in the chapter.
Who Makes the Purchasing Decisions in Business Markets?
Figuring out who exactly in B2B markets is responsible for what gets purchased and when often requires some detective work for marketing professionals and the salespeople they work with. Think about the college textbooks you buy. Who decides which ones ultimately are purchased by the students at your school? Do publishers send you emails about certain books they want you to buy? Do you see ads for different types of chemistry or marketing books in your school newspaper or on TV? Generally, you do not. The reason is that even though you buy the books, the publishers know that professors ultimately decide which textbooks are going to be used in the classroom. Consequently, B2B sellers largely concentrate their efforts on those people.
That's
not to say that to some extent the publishers don't target you. They may offer you a good deal by packaging a study guide with your textbook or some sort of learning supplement online you can purchase. They might also offer your bookstore manager
a discount for buying a certain number of textbooks. However, a publishing company that focused on selling its textbooks directly to you or to a bookstore manager would go out of business. They know the true revenue generators are professors.
The
question is, which professors? Some professors choose their own books. Adjunct professors often don't have a choice - their books are chosen by a course coordinator or the dean or chair of the department. Still other decisions are made by groups of
professors, some of whom have more say over the final decision than others. Are you getting the picture? Figuring out where to start in B2B sales can be a little bit like a scavenger hunt.
Key Takeaway
Business buyers can be either nonprofit
or for-profit businesses. There are four basic categories of business buyers: producers, resellers, governments, and institutions. Producers are companies that purchase goods and services that they transform into other products. They include both
manufacturers and service providers. Resellers are companies that sell goods and services produced by other firms without materially changing them. They include wholesalers, brokers, and retailers. Local, state, and national governments purchase large
quantities of goods and services. Institutional markets include nonprofit organizations such as the American Red Cross, churches, hospitals, charitable organizations, private colleges, civic clubs, and so on. Holding costs down is especially important
to them because it enables them to provide their services to more people. Figuring out who exactly in B2B markets is responsible for what gets purchased and when often requires some detective work by marketing professionals and the salespeople they
work with.
Review Questions
- What sorts of products do producers buy?
- What role do resellers play in B2B markets, and why are they important to sellers?
- How do sellers find government buyers? Institutional buyers?
- Why is it difficult to figure out whom to call on in business markets?