The other night at a business networking event, I met a new business owner who was struggling to define the market she wanted to enter. The business owner had just started a cleaning company and was unsure whether to concentrate on domestic cleaning (of customer’s homes) or commercial cleaning (Shops, offices, etc.). She was also considering marketing her services to estate and letting agents.
As a new business, I advised her of Porter’s generic marketing strategies; cost focus, diversification and niche marketing. As a new start business, I advised her to, at least initially, to concentrate on one market niche. The reason for this advice was that small businesses often lack the resources to offer distinct offers to different market segments and that cost focus could restrict the earning potential needed to offset set up costs.
I also advised her that there was a big difference between marketing your services to consumers and marketing to organisations.
Organisational buying is the purchase of products and services to meet the needs of manufacturers, resellers, government and other types of organisation.
There are three types of organisational market:
- Industrial Markets: Companies that purchase goods and services to make other goods and services. For example, most car manufacturers buy components from other suppliers. A major employer in my town is a plastic mouldings firm who supplies dashboards and other plastic components to a wide range of car manufacturers.
- Reseller Markets: Members of these markets buy goods and services which they sell on to others. For example, supermarkets buy milk from farmers which they sell on to consumers.
- Government Markets: Councils, government departments and other agencies buy goods and services to help them with their activities. Increasingly governmental services are provided by private sector outsourcing firms such as Capita and Serco.
If you are considering selling your goods and services into an organisational market, a business to business marketing environment, you need a strong understanding of the buying behaviour of organisations.
The implications of making bad buying decisions in an organisational market have greater significance than in consumer markets. Professional buyers tend to be more cautious and they will often follow pre-determined systems and procedures when deciding whether or not to buy.
Organisational buyers do not purchase on impulse; consumers do.
So if you want to sell your products to an organisation, you need to have a good understanding of the buying culture and processes of that organisation.
When I worked in a local authority, I regularly got cold called by salesmen trying to sell the council goods and services. I worked in consumer protection. The Council’s central purchasing unit were in a neighbouring office. The council’s buyers operated a tendering process and a policy of best value purchasing was in place which meant that two quotes had to be received for every contract (other than in exceptional circumstances. The council did not respond to cold calls or telemarketing.
A decision by an organisation to buy goods is likely to be made buy a group not an individual. There may be many stakeholders in the organisational buying decision:
- Initiators – those individuals in the organisation who start the buying decision.
- Deciders – those in the organisation who decide to start the buying process: usually in a management role.
- Influencers – professionals such as accountants or engineers who place constraints on the buying process and help to determine the purchasing criteria.
- Buyers – Certified professionals who carry out the buying and negotiation process.
- Gatekeepers – those control access to decision-makers. The PA of a company CEO is often a master gatekeeper.
These stakeholders often make up a formal decision-making unit or buying centre. You will likely need to be aware of the group dynamics of a buying centre to successfully obtain a contract.
Organisational buying will often exhibit the following characteristics:
- Nature and Size of Customer: The number of customers in an organisational market tends to be small. In the Airliner industry, there are only two major players; Boeing and Airbus. The Pareto Principle often applies. Eighty percent of a suppliers income may come from only twenty percent of its customer base (hence key account management). Often, long-term relationships exist between buyers and suppliers. Supply is often direct from the manufacturer to the customer. There are few middle men in the organisational buying process.
- Complexity of Buying: Organisational buying tends to involve large sums of money. Many people in both the buying and selling organisations may be involved in the purchasing process. Often the people buying the product will not be the end-user of the product. Often there is multi-level selling involving sales teams rather than individual salesmen.
- Economic and Technical Choice Criteria: These exist in organisational buying and purchasing decisions are far less likely to be made on the basis of emotions. There are formal buying procedures and tender documents.
- Risk: Often the contract is agreed before the product or service is made. Products tend not to be off the shelf. This was a major issue in the collapse of Carillion where contract delays eat into expected margins.
- Buying to Specific Requirements: Product specifications are drawn up by buyers and potential suppliers compete to meet those specifications. You therefore may have to design a product or service for an individual customer rather than for a demographic group.
- Reciprocal Buying: Customers in organisational markets may exert significant power and be in a more advantageous position than suppliers. With such power they are able to demand significant concessions from suppliers. This may include reciprocal buying where a supplier is expected to buy some of the customers goods in exchange for the contract. For example, a supplier to a major motor vehicle manufacturer may be expected to buy and use that customers vehicles for deliveries.
- Derived Demand: Demand for industrial goods is often derived from the demand for consumer goods. Consumers buy yoghurt, Muller buy milk and equipment to make yoghurt. A small rise in the demand by consumers for products may result in a massive rise in the demand for manufacturing equipment as production lines reach maximum capacity. This is known as the accelerator principle. Elon Musk has seen significant rise in demand for his Model 3 electric car. Musk doesn’t have the production capacity to meet the rise in demand and this has led to significant delivery delays. As a result Tesla has had to significantly increase production capacity including building new production lines. However, this expansion in capacity has involved Musk incurring significant costs and increased his firm’s losses.
- Negotiations: Negotiation is important in organisational buying as the purchasing process is often complex. A supplier’s price is likely seen as the starting point for negotiation rather than the final price to be paid by the buying organisation.
- Frequency of Purchase: If a manufacturing company is buying new production line equipment, they may only do so infrequently. They may also expect a supplier to provide extensive maintenance services many years after the initial purchase of equipment. Just in Time supply chains mean that buyers may purchase large amounts of raw materials but expect them to be delivered in small quantities on tight deadlines.
The following may be concerns and complications in the organisational buying process:
- The supplier may struggle to supply products of the desired quality and there may be issues with availability.
- Suppliers may be beaten down on price and there may be extensive costs during the life-cycle of a contract.
- Suppliers may struggle to provide continuity of supply – particularly with JIT resourcing.
- Perceived risks – these can be functional; that the supplied product will not operate as intended; or they can be psychological e.g. a buyer may not trust the supplier to provide goods of adequate quality based on prior experiences.
- Office politics may be in operation within a buying centre. Managers within an organisation at be competing for advancement or to gain power for their department within the organisation. These power games may be played out within the buying decision.
- Individual members of a buying centre will have individual likes and dislikes. One buying centre member may like a particular salesman whilst another member of the group may hate that salesman. A graphic designer may like a particular brand of software whilst his manager may prefer the software of a competitor. I know a few photographers. Some of those photographers will only use Nikon cameras and lenses whilst others will only use Canon products.
The implications of marketing to organisations are extensive. You may have to take great care and pay significant attention to the needs of different buying centre members if you are to succeed in obtaining contracts.