EXPLORING BUSINESS MARKETS AND BUSINESS MARKETING
Lying behind every consumer purchase in a modern economy there is a network of business – to business transactions. Even an apparently simple transaction at the supermarket is only made possible by a web of supporting b2b transactions. The key distinguishing feature of a b2b market is that the customer is an organization rather than an individual consumer. Both tend to buy similar products and therefore one cannot distinguish unambiguously between a business market and a consumer market on the basis of the nature of the product. The generally accepted term for the marketing of goods and services to organizations is b2b marketing. The expression b2b marketing is synonymous with business marketing.
Characteristics of Business Markets
- Derived demand
It is the convention in marketing to treat demand by consumers as direct and demand from businesses as derived. In essence, consumers want certain goods to satisfy their needs. Businesses require certain goods in order to produce products that satisfy customer needs. Therefore a business’s demand is derived from consumer demand.
- The accelerator effect
The accelerator effect describes the effect of a change in direct demand on the derived demand. In some cases, relatively small changes in direct demand can result in a relatively large (possibly temporary) change in derived demand, or the other way round. This is called the accelerator effect. One task for the business marketer is to understand both the scale of the underlying accelerator exerted by conditions in the market and the behavior of managers in customer organizations.
- Market concentration in b2b markets
B2b markets in general are characterized by higher concentration of demand than consumer markets. However, the degree of demand concentration varies from market to market and it is important to have some means of comparing markets to establish just how highly concentrated they are. A standard measure used is concentration ratio. This ratio reflects the market shares of the few largest firms in the market – known as the ‘oligopoly group’. It usually consists out of the top 3 or 4 firms.
To a business marketer it is the perspective of the industry supplier that is generally most relevant, along with the implications of the industry structure for sales and marketing strategy. While economists are generally most concerned about the monopoly power that businesses have over their customers, business marketers are usually more interested in the monopsony power that businesses have with respect to their suppliers because of the concentration of buying power. However, since those firms that control large shares of the customer market are also the largest customers for suppliers to the industry, we can use the concentration ratio as a proxy for the concentration of buying power.
- Other market structure differences
Demand elasticity – it is argued that businesses have less freedom simply to stop buying things than consumers, so that demand is likely to be less price elastic. Second, it has been suggested that there be more instances of reverse price elasticity. Businesses need critical inputs if they are to continue trading. If prices on these critical inputs start to rise, it might mean that supply is running out (demand>supply). This might cause a business to increase their orders (reverse price elasticity).
More heterogeneous, fragmented and complex – it is argued that organizations are even more diverse than consumers -> A local decorating business employing three people has almost nothing in common with a global electrical equipment manufacturer.
- Buying behavior differences and marketing practice differences
In essence, organizations tend to have more professionalized buying processes than consumers, often involving formal procedures and explicit decision-making practices, which in many organizations are implemented by managers who are specifically employed as purchasing professionals. Transaction values can be very high. As a result, sellers tend to tailor their product offerings to the needs of the buyer.
Classifying Business Products and Markets
The standard approach to classifying business products is to use a classification system that is quite separate from the usual consumer product classifications. This classification is based on the use to which the products are put, and the extent to which they are incorporated into the final product.
Something incorporated into the buying organization’s final product contributes directly to the finished product quality and so directly to the customer’s business reputation. Other purchases affect the buyer’s own customer less directly. The system of classification is as follows:
- Installations; major investment items such as heavy engineering equipment. Customers are expected to plan such investments carefully, perhaps involving the use of extensive financial analysis.
- Accessory equipment; consist of smaller items of equipment such as hand tools. Larger items of accessory equipment may be treated as investment items, while smaller items will be treated as expenses.
- Maintenance, repair and operating (MRO) supplies; individually minor items of expenditure that are essential to the running of the organization.
- Raw materials; unprocessed basic materials such as crude oil.
- Manufactured materials and parts; include raw materials that have been processed and component parts ready to be incorporated directly into finished products.
- Business services; maintenance and repair, and business advisory services
A commonly cited classification of industrial manufacturing organizations is the division into original equipment manufacturers (OEM) and others. OEMs are businesses that buy components and incorporate them into an end product that is sold under their brand name to the consumer market.
One can distinguish between the OEM market and the after-market. OEM customers are by definition business customers, while after-market customers may be either organizations or consumers.
There is a second classification system consisting out of four categories, based upon the effort involved in acquiring the product and the risk of making a poor decision:
- Convenience products; involve very little effort and negligible risk for the buyer. (e.g. MRO supplies)
- Preference products; involve a little more effort than convenience products but substantially more risk. (e.g. minor items of accessory equipment)
- Shopping products; a great deal more effort and perceived risk than convenience and preference products. (e.g. major items of accessory equipment)
- Specialty products; the highest rank in terms of effort and risk. (e.g. heavy engineering equipment)
The two principal classification systems should be regarded as complementary rather than as alternatives. The first of them is a seller-orientated classification scheme (implications for the seller).
The second is a buyer-orientated classification scheme (implications for the buyer).