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Chapter 4 Business, Government and Institutional Buying High-Level Chapter Outline I. Categories of Organizational Buyers A. Producers B. Intermediaries C. Government Agencies D. Other Institutions II. The Organizational Buying Process III. Purchase-Type Influences on Organizational Buying A. Straight Rebuy B. Modified Rebuy C. New Task Purchase IV. Structural Influences on Organizational Buying A. Purchasing Roles B. Organization-Specific Factors C. Purchasing Policies and Procedures V. Behavioral Influences on Organizational Buying A. Personal Motivations B. Role Perceptions VI. Stages in the Organizational Buying Process A. Organizational Need B. Vendor Analysis C. Purchase Activities D. Postpurchase Evaluation Detailed Chapter Outline I. Categories of Organizational Buyers Organizational buyers can be classified into four categories: producers, intermediaries, government agencies, and other institutions. Taken collectively, marketing to these organizations is called business-to-business or B2B marketing. Business-to-business marketing has become a topic of increasing interest because it is the major area where Internet marketing has been done profitably. A. Producers These organizational buyers consist of businesses that buy goods and services in order to produce other goods and services for sale. Producers are engaged in many different industries, ranging from agriculture to manufacturing, from construction to finance. Together they constitute the largest segment of organizational buyers. Producers of goods tend to be larger and more geographically concentrated than producers of services. B. Intermediaries Marketing intermediaries or resellers purchase products to resell at a profit. Intermediaries also purchase products and services to run their own business, such as office supplies and maintenance services. C. Government Agencies In the United States, government agencies operate at the federal, state, and local levels. There are over 86,000 governmental agencies in this country that purchase machinery, equipment, facilities, supplies and services. Marketing to government agencies can be complex since they often have strict purchasing policies and regulations. D. Other Institutions Besides businesses and government agencies, marketers also sell products and services to a variety of other institutions such as hospitals, museums, universities, nursing homes, and churches. II. The Organizational Buying Process Regardless of the type of organization, a buying process is needed to ensure that products and services are purchased and received in a timely and efficient manner. Figure 4.1 presents a model of organizational buying that represents some of the common influences and stages in the process. III. Purchase-Type Influences on Organizational Buying A major consideration that affects the organizational buying process is the complexity of the purchase that is to be made. Three types of organizational purchase based on their degree of complexity include the straight rebuy, modified rebuy, and new task purchase. A. Straight Rebuy The simplest and most common type of purchase is called straight rebuy. It involves routinely reordering from the same supplier a product that has been purchased in the past. Organizations use a straight rebuy when they are experienced at buying the product, have an ongoing need for it, and have regular suppliers of it. Straight rebuys are common among organizations that practice just-in-time inventory which is a system of replenishing parts or goods for resale just before they are needed. To retain customers who use straight rebuys, the marketer needs to maintain high-quality products and reliable service so that the customers will continue to be satisfied with their purchases. B. Modified Rebuy When some aspects of the buying situation are unfamiliar, the organization will use a modified rebuy. Organizational buyers follow this approach rather than a straight rebuy when a routine purchase changes in some way. Marketers seek to win new organizational customers by giving them reasons to change from a straight rebuy to a modified rebuy in which the marketer’s products are considered. C. New Task Purchase New task purchase involves an extensive search for information and a formal decision process. They are most often used for big-ticket items. This is the type of purchase decision that is most likely to involve joint decision making because many kinds of expertise are required to make the best decision. Figure 4.2 offers some suggestions for reaching organizational buyers for the three types of purchases. IV. Structural Influences on Organizational Buying The term structural influences refers to the design of the organizational environment and how it affects the purchasing process. The three important structural influences on organizational buying are purchasing roles, organization-specific factors, and purchasing policies and procedures. A. Purchasing Roles It is common in organizational buying for purchases to be made cross-functionally with representatives from different functional departments playing various roles in the process. Taken collectively, these are called the buying center and include the following roles: Initiators—who start the purchasing process by recognizing a need or problem in the organization. Users—who are the people in the organization who actually use the product. Influencers—who affect the buying decision, usually by helping define the specifications for what is needed. Buyers—who have the formal authority and responsibility to select the supplier and negotiate the terms of the contract. Deciders—who have the formal or informal power to select or approve the supplier that receives the contract. Gatekeepers—who control the flow of information in the buying center. When several persons are involved in the organizational purchase decision, marketers may need to use a variety of means to reach each individual or group. B. Organization-Specific Factors Three primary organization-specific factors influence the purchase process: orientation, size, and degree of centralization. In the terms of orientation, the dominant function in an organization may control purchasing decisions. The size of the organization may influence the purchasing process. The degree of centralization of an organization influences whether decisions are made individually or jointly with others. C. Purchasing Policies and Procedures Organizations typically develop a number of policies and procedures for various types of purchases. A current trend in many organizations is sole sourcing, in which all of a particular type of product is purchased from a single supplier. Sole sourcing has become more popular because organizational buyers have become more concerned with quality and timely delivery and less likely to purchase only on the basis of price. It is advantageous for suppliers because it provides them with predictable and profitable demand and allows them to build long-term relationships with organizational buyers. The use of sole sourcing also simplifies the buying process and can make what were formerly modified rebuys into simpler straight rebuys. V. Behavioral Influences on Organizational Buying A. Personal Motivations Organizational buyers are subject to the same personal motives or motivational forces as other individuals. Although buyers may emphasize nonpersonal motives in their buying activities, it has been found that organizational buyers often are influenced by such personal factors as friendship, professional pride, fear and uncertainty, trust, and personal ambitions in their buying activities. Marketers should understand the relative strength of personal gain versus risk-reducing motives and emphasize the more important motives when dealing with buyers. In examining buyer motivations, it is necessary to consider both personal and nonpersonal motivational forces and to recognize that the relative importance of each is not a fixed quantity. B. Role Perceptions A final factor that influences organizational buyers is their own perception of their role. The manner in which individuals behave depends on their perception of their role, their commitment to what they believe is expected of their role, the “maturity” of the role type, and the extent to which the institution is committed to the role type. Different buyers will have different degrees of commitment to their buying role, which will cause variations in role behavior from one buyer to the next. Organizations can be divided in to three groups based on differences in degree of employee commitment. These groups include innovative, adaptive, and lethargic firms: In an innovative firm, individuals approach their occupational roles with a weak commitment to expected norms of behavior. In an adaptive organization, there is a moderate commitment. In a lethargic organization, individuals express a strong commitment to traditionally accepted behavior and behave accordingly. Buyers’ perception of their role may differ from the perception of their role held by others in the organization. This difference can result in variance in perception of the actual purchase responsibility held by the buyer. VI. Stages in the Organizational Buying Process As with consumer buying, most organizational purchases are made in response to a particular need or problem. The organizational buying process can be analyzed as a series of four stages: organizational need, vendor analysis, purchase activities, and postpurchase evaluation. A. Organizational Need Organizations have many needs for products and services to help them survive and meet their objectives. Recognizing these needs, and a willingness and ability to meet them, often results in organizational purchases. For straight rebuys, the purchase process may involve little more than a phone call or a few clicks on a computer to order products and arrange payment and delivery. For modified rebuys or new task purchases, the process may be much more complex. B. Vendor Analysis Organizational buyers often use vendor analysis to evaluate possible suppliers. A vendor analysis is the process by which organizational buyers rate each potential supplier on various performance measures such as product quality, on-time delivery, price, payment terms, and use of modern technology. Figure 4.3 presents a sample vendor analysis form that lists a number of purchase criteria and the weights one organization used to compare potential suppliers. A formal vendor analysis can be used for at least three purposes. It can be used to develop a list of approved vendors, all of which provide acceptable levels of products and services. A vendor analysis could be used to compare competing vendors; the buyers then select the best one on the basis of the ratings. A vendor analysis can be done both before and after purchases to compare performance on evaluation criteria and evaluate the process of vendor selection. C. Purchase Activities Straight rebuys may involve a quick online order to an approved vendor or sole-source supplier. The complexity of the product or service, the number of suppliers available, the importance of the product to the buying organization, and pricing all influence the number of purchase activities to be performed and their difficulty. D. Postpurchase Evaluation Organizational buyers must evaluate both the vendors and the products they purchase to determine whether the products are acceptable for future purchases or whether other sources of supply should be found. One problem in judging the acceptability of suppliers and products is that different functional area may have different evaluation criteria. Figure 4.4 presents several functional areas of a manufacturing company and their common concerns in purchasing. These concerns should be considered both prior to purchasing from a particular supplier and after purchasing to ensure that every area’s needs are being met as well as possible. KEY TERMS Business-to-business (B2B) marketing: Marketing products and services to producers, intermediaries, government agencies, and other institutions rather than to consumers. Buyers: In buying centers, the persons who have formal authority and responsibility to select the supplier and negotiate the terms of the contract. Buying center: An organizational group formed from different departments which has the responsibility to evaluate and select products for purchase. Different members of the group may play different roles in the process. Deciders: In a buying center, individuals who have the formal and informal power to select or approve the supplier that receives the contract. For routinely purchased products, the decider is likely to be the buyer but for more complex products, the decider could come from R&D, engineering, or quality control. Gatekeepers: The people who control the flow of information to a buying center. Influencers: In buying centers, the people who affect the buying decision usually by helping define the specifications for what is needed. Initiators: In buying centers, the people who start the buying process by recognizing a need or a problem in the organization. Modified rebuy: A type of organizational purchase that involves the consideration of a limited number of alternatives before making a selection. NAICS: The North American Industry Classification System which provides information about the number of establishments, sales volume, and number of employees in each industry broken down by geographic area. New task purchase: A type of organizational purchase that involves an extensive search for information and a formal decision process. Sole sourcing: Organizational purchasing in which all of a type of product are obtained from a single supplier. Straight rebuy: A type of organizational purchase that involves routinely reordering a product from the same supplier that it had been purchased from in the past. Users: In a buying center, the people in the organization that actually use the product to be purchased. Vendor analysis: The process by which organizational buyers rate each potential supplier on various performance measures such as product quality, on-time delivery, price, payment terms, and use of modern technology. ADDITIONAL RESOURCES Anderson, James C., James A. Narus, and Das Narayandas. Business Marketing Management. 3rd ed. Upper Saddle River, NJ: Prentice Hall, 2009. Brennan, Ross; Louise E. Canning, and Raymond McDowell. Business-to-Business Marketing. Thousand Oaks, CA: Sage, 2007. Dwyer, F. Robert, and John F. Tanner. Business Marketing. 4th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2009. Hutt, Michael D., and Thomas W. Speh. Business Marketing Management: B2B. 11th ed. Mason, OH: Thomson South-Western, 2013. Vitale Robert, Waldemar Pfoertsch, and Joseph Giglierano. Business to Business Marketing. Upper Saddle River NJ: Prentice Hall, 2011. Chapter 5 Market Segmentation High-Level Chapter Outline I. Introduction II. Delineate the Firm’s Current Situation III. Determine Consumer Needs and Wants IV. Divide Markets on Relevant Dimensions A. A Priori versus Post Hoc Segmentation B. Relevance of Segmentation Dimensions C. Bases for Segmentation Benefit Segmentation Psychographic Segmentation Geodemographic Segmentation V. Develop Product Positioning VI. Decide Segmentation Strategy VII. Design Marketing Mix Strategy Detailed Chapter Outline I. Introduction Market segmentation is the process of dividing a market into groups of similar consumers and selecting the most appropriate group(s) for the firm to serve. The group or market segment that a company selects to focus on is called a target market. Figure 5.1 represents a model of the market segmentation process. Market segmentation analysis is a cornerstone of sound marketing planning and decision making. II. Delineate the Firm’s Current Situation A firm must do a complete situational analysis when embarking on a new or modified marketing program. At the marketing planning level, such an analysis aids in determining objectives, opportunities, and constraints to be considered when selecting target markets and developing marketing mixes. Marketing managers must have a clear idea of the amount of financial and other resources that will be available for developing and executing a marketing plan. The inclusion of this first step in the market segmentation process is intended to be a reminder of tasks to be performed prior to marketing planning. III. Determine Consumer Needs and Wants Successful marketing strategies depend on discovering and satisfying consumer needs and wants. As a practical matter, new technology often brings about an investigation of consumer needs and wants for new or modified products and services. In these situations, the firm is seeking the group of consumers whose needs could best be satisfied by the new or modified product. At a strategic level, consumer needs and wants usually are translated into more operational concepts. IV. Divide Markets on Relevant Dimensions In a narrow sense, this step is often considered to be the whole of market segmentation. Three important questions should be considered here: Should the segmentation be a priori or post hoc? How does one determine the relevant dimensions or bases to use for segmentation? What are some bases for segmenting consumer and organizational buyer markets? A. A Priori versus Post Hoc Segmentation An a priori segmentation approach is one in which the marketing manager has decided on the appropriate basis for segmentation in advance of doing any research on a market. Post hoc segmentation is an approach in which people are grouped into segments on the basis of research findings. Both of these approaches are valuable, and the question of which to use depends in part on how well the firm knows the market for a particular product class. If through previous research and experience a marketing manager has successfully isolated a number of key market dimensions, then an a priori approach based on them may provide more useful information. In the case of segmentation for entirely new products, a post hoc approach may be useful for determining key market dimensions. However, even when using a post hoc approach, some consideration must be given to the variables to be included in the research design. B. Relevance of Segmentation Dimensions Unfortunately, there is no simple solution for determining the relevant dimensions for segmenting markets. Managerial expertise and experience are needed for selecting the appropriate dimensions or bases on which to segment particular markets. In most cases, however, at least some initial dimensions can be determined from previous research, purchase trends, and managerial judgment. The most market-oriented approach to segmentation is on the basis of what benefits the potential consumer is seeking. Thus, consideration and research of sought benefits are a strongly recommended approach in the marketing literature. C. Bases for Segmentation A number of useful bases for segmenting consumer and organizational markets are presented in Figure 5.2. Two commonly used approaches for segmenting markets include benefit segmentation and psychographic segmentation. Geodemographic segmentation, a recent development with a number of advantages for marketers, is another approach for segmenting markets. Benefit Segmentation The belief underlying this segmentation approach is that the benefits people are seeking in consuming a given product are the basic reasons for the existence of true market segments. This approach attempts to measure consumer value systems and consumer perceptions of various brands in a product class. To illustrate, Russell Haley provided the classic example of a benefit segmentation in terms of the toothpaste market. Haley identified five basic segments, which are presented in Figure 5.3. Benefit segmentation is clearly a market-oriented approach that seeks to identify consumer needs and wants and to satisfy them by providing products and services with the desired benefits. Psychographic Segmentation Psychographic segmentation focuses on consumer lifestyles. Consumers are first asked a variety of questions about their lifestyles and then grouped on the basis of the similarity of their responses. Lifestyles are measured by asking consumers about their activities, interests, and opinions (AIO). The best-known psychographic segmentation is called VALSTM (values and lifestyles). The VALSTM framework has eight psychographic groups arranged in a rectangle based on two dimensions (see Figure 5.4). The vertical dimension segments people based on the degree to which they are innovative and have resources such as income, education, self-confidence, intelligence, leadership skills, and energy. The horizontal dimension represents primary motivations for buying and includes three different types. Consumers driven by knowledge and principles are motivated primarily by ideals. These consumers include the Thinkers and Believers groups. Consumers driven by a goal of demonstrating success to their peers are motivated primarily by achievement. These consumers include Achievers and Strivers. Consumers driven by a desire for social or physical activity, variety, and risk taking are motivated primarily by self-expression. These consumers include both the Experiencers and Makers. At the top of the rectangle are the Innovators, who have such high resources that they may express any of the three motivations. At the bottom of the rectangle are the Survivors, who live complacently and within their means without a strong primary motivation. Geodemographic Segmentation Geodemographic segmentation identifies specific households in a market by focusing on local neighborhood geography to create classifications of actual, addressable, mappable neighborhoods where consumers live and shop. One geodemographic system, is called Nielsen PRIZM, which stands for consumers “Potential Ranking Index of ZIP Markets.” The system classifies every U.S. neighborhood into one of 14 groups. The PRIZM segmentation is available on major marketing databases from leading providers. The PRIZM system is based on the assumptions that consumers in particular neighborhoods are similar in many respects and that the best prospects are those who actually use a product or other consumers like them. Marketers use PRIZM to better understand consumers in various markets, what they are like, where they live, and how to reach them. V. Develop Product Positioning Product positioning is concerned with positioning the product favorably in the minds of customers relative to competitive products. Several different positioning strategies can be used: Products can be positioned by focusing on their superiority to competitive products based on one or more attributes. Products can be positioned by use or application. Products can be positioned in terms of particular types of product users. Products can be positioned relative to a product class. Products can be positioned directly against particular competitors. One way to investigate how to position a product is by using a positioning map, which is a visual depiction of customer perceptions of competitive products, brands, or models (Figure 5.6) Some experts argue that different positioning strategies should be used depending on whether the firm is a market leader or follower and that followers usually should not attempt to position directly against the industry leader. VI. Decide Segmentation Strategy There are four basic alternatives in segmentation strategy. The firm may decide not to enter the market. The firm may decide not to segment but to be a mass marketer. There are at least three situations when this may be the appropriate decision for the firm: The market is so small that marketing to a portion of it is not profitable. Heavy users make up such a large proportion of the sales volume that they are the only relevant target. The brand is the dominant brand in the market, and targeting to a few segments would not benefit sales and profits. The firm may decide to market to one segment. The firm may decide to market to more than one segment and design a separate marketing mix for each. Three important criteria on which to base such decisions are that a viable segment must be: Measurable—for a segment to be selected, the firm must be capable of measuring its size and characteristics. Meaningful—a meaningful segment is one that is large enough to have sufficient sales and growth potential to offer long-run profits for the firm. Marketable—a marketable segment is one that can be reached and served by the firm in an efficient manner. Figure 5.7 offers a list of questions marketing managers should answer when deciding whether a market segment meets these criteria. VII. Design Marketing Mix Strategy The firm is now in a position to complete its marketing plan by finalizing the marketing mix or mixes to be used for each segment. While marketing mix design is placed at the end of the model, many of these decisions are made in conjunction with target market selection. KEY TERMS A priori segmentation: Approach in which the marketing manager has decided on the appropriate basis for segmentation in advance of doing any research on the market. Benefit segmentation: Approach that focuses on satisfying needs and wants by grouping consumers on the basis of the benefits they are seeking in a product. Geodemographic segmentation: Approach that identifies specific households in a market by focusing on local neighborhood geography (such as zip codes) to create classifications of actual, addressable, mappable neighborhoods where consumers live and shop. Market segmentation: The process of dividing a market into groups of similar consumers and selecting the most appropriate group(s) for the firm to serve. Post hoc segmentation: Approach that groups people into segments on the basis of research findings rather than determining the basis prior to any research. Positioning map: A visual depiction of consumer perceptions of competitive products, brands, or models. Psychographic segmentation: Approach that focuses on consumer lifestyles as the basis for segmentation. Consumers are asked a variety of questions about their lifestyles (commonly, their activities, interests, and opinions) and then grouped on the basis of the similarity of their responses. Target market: The group or market segment that a company selects to serve. VALS: A product of SRI Consulting Business Intelligence; the best known psychographic approach; stands for “values and lifestyles.” ADDITIONAL RESOURCES Bolton, Ruth N., and Matthew B. Myers. “Price-Based Global Market Segmentation for Services,” Journal of Marketing, July 2003, pp. 108-28. Dickson, Peter R., and James L. Ginter. “Market Segmentation, Product Differentiation, and Marketing Strategy.” Journal of Marketing, April 1987, pp. 1-10. Myers, James H. Segmentation and Positioning for Strategic Marketing Decisions. Chicago: American Marketing Association, 1996. Yankelovich, Daniel, and David Meer. “Rediscovering Market Segmentation,” Harvard Business Review, February 2006, pp. 122-31. Instructor Manual for A Preface to Marketing Management J. Paul Peter, James H. Donnelly, Jr. 9780077861063, 9781259251641
