Tag: organisational buying

Organisational Buying

Marketing to organisations is different to marketing to consumers. Repeat: MARKETING TO ORGANISATIONS IS DIFFERENT TO MARKETING TO BUSINESSES.

The reason is simple, when selling to consumers you are predominantly selling to individuals.  When selling to organisations; such as businesses, local authorities and government departments; you will likely be selling to a group of people operating within strictly defined protocols.

When I worked in local government, I was a client facing enforcement and advice professional.  I didn’t do much purchasing (the exception being equipment for legal metrology equipment and laboratory services).  For big purchases, such as IT equipment, and routine purchases, such as stationery, my employer had a central purchasing unit staffed by professional buyers.

Even within the purchasing activities I had responsibility for, I had to operate within tight policies.  I had to get a minimum of two quotes for any purchase unless I could show an exceptional reason for not doing so (e.g. only one laboratory could do the required testing).  I also had to show ‘best value’ that the products and services I was procuring could give more ‘bang for their buck’ than the rejected alternatives.

In organisations there are four types of purchase:

  1. Routine Order Products:  These are regular, low risk purchases like stationery.
  2. Procedural Problem Products:  These purchases affect the way work is carried out e.g. buying new software. Often these will involve training beyond the purchase of the product or service.
  3. Performance Problem Products: These purchases improve the users requirements and expectations.  For example buying new machinery which is more productive and less likely to require maintenance.  A major issue is the compatibility of the purchased product with existing equipment.
  4. Political Problem Products:  These are purchases which take resources away from other parts of the organisation.  For example, a business may face a choice between purchasing a new packaging system and a new computerised order tracking system.  The businesses delivery team manager will be put out if the ordering system is not purchased. The businesses operations manager will be put out if the new packaging machinery is not bought.  So the choice of purchase may result in destructive office politics.

The latter category of purchase above is common when businesses are making big strategic purchases which are of high value and which directly affect the future of a business.  Whereas routine purchases may be delegated to an individual member of staff; major purchases are usually made by a group, a ‘decision-making unit’ or DMU.

Members of a decision-making unit will often take up the following roles:

  • Initiator: This is the individual who initiates the purchasing process and proposes a purchasing solution to solve a particular problem. It could be a departmental manager or in organisations using systems such as Kaizen or TQM, an individual employee or group of employees.
  • User(s):  Those who will actually use the product purchased.  This may or not be the initiator.
  • Buyer:  A professional negotiator who carries out the process of the purchase.  For complicated or expensive products or services these negotiations may take significant time and there may be significant lead times before the purchased product is delivered.
  • Influencer:  These members of the DMU may have little or no impact on the process of buying but may have a major impact on the decision to purchase.  This could be the company’s accountant or union representatives within the organisation.
  • Decider:  The person who has the final say on the purchase.  This could be the company owner or in a local authority, a vote by councillors.
  • Gatekeeper: This person controls the flow of information to the DMU.  The personal assistants of senior managers are a good example as they often control who the senior manager talks to and meets as they control his diary.

Political tensions often build in a decision-making unit.  This can be for the following reasons:

  1. Individual self-interest; a particular manager may see a purchase choice as a route to personal advancement or reward.
  2. Operational needs of particular departments: Organisations have limited resources and often choices need to be made as to what to purchase when. If a purchase negatively affects other parts of an organisation, or limits its expectations, tensions can arise.
  3. Professional Pride:  Individuals have professional pride and if a purchasing decision dents that pride, tensions grow.  I have worked in an organisation that treated my profession with contempt.  It was a hugely frustrating experience and guess what, I left.
  4. Different incentives and reward expectations:  If an operations manager receives his bonus based on the productivity of his plant, and the failure to purchase equipment which improves that productivity occurs; you may find that the manager becomes obstructive.

As organisational buying is more complex than consumer purchasing, academics have tried to build frameworks which map the process and develop logical processes.

The Webster Webb framework sets four variables which influence the purchasing decision:

  1.  Environmental:  This is effectively PESTEL analysis and issues such as the actions of competitors.  If the macro-political situation is confused or complicated, firms may be less willing to make major purchases.  Brexit Britain is one such environment, where some firms are actively divesting from the market and others are holding back on major purchases due to market uncertainty.  It is also noticeable that UK productivity has been weak for some time.
  2. Organisational:  Purchases are directly affected by an organisations goals, the organisation’s culture and policies and procedures.  If a firms goal is, like Lloyd’s bank, ‘to be the best for customers’, it is likely that purchases which improve the customer experience will be prioritised. If the organisation has a traditional top-down management structure, the views and personalities of those at the top will strongly affect purchasing decisions.
  3. Interpersonal: The relationships between individuals and the buying centre may affect purchasing decisions.  For example, in the 1970s in the UK, it would be a difficult task to make purchase which significantly cut the number of employees in a firm.  There would be significant resistance from unions and purchases may postponed or not made as a result of how they would affect the union’s members. That was a world where there were major strikes over minor demarcation issues, the most ridiculous was at the BBC where studios were shut down because of a dispute over who was responsible for the Play School clock (the scenery shifters said it was scenery and therefore their responsibility but because it contained electrical components the BBC electricians believed it was their responsibility).
  4. Individual:  Different DMU members will have different attitudes to risk, they will have different personal goals, they will have different experience, they will have different education and training.

The Sheith Framework has similar elements to the Webster-Webb framework. However, it places an emphasis on the psychology of the purchasing process.  it states that there are four factors to organisational buying:

  • The experience of DMU members
  • Factors inherent in the buying process
  • The character of the decision-making process
  • Situational factors

The expectations of DMU members may differ as a result of their functionality.  A firm’s chief engineer will have different expectations to those of the firm’s finance director.  This means sales presentation and literature could be subject to perceptual distortion.

Factors in the decision-making process include perceived risk of the purchase, time pressures, the type of purchase or the organisations orientation i.e. is the organisation pursuing an aggressive or a defensive strategy.  If a firm needs a particular piece of equipment to meet a tight deadline, then it may make fewer procedural checks before making that purchase.  other factors include organisational size.  A routine purchase for a large company may be a major purchase for a small company.

The level of decentralisation may affect purchasing decisions.  As stated earlier, I used to work for a council that had a central purchasing unit which undertook all the purchasing negotiations.  But I have also worked in an organisation where many purchasing decisions were delegated to individual managers and members of staff.

The process of purchasing may affect the buying process.  For example, where purchasing decisions are to be made jointly, there may be more room for conflict than where purchasing decisions are made by individuals

There are four types of organisational conflict:

  • Problem-solving
  • Persuasion
  • Bargaining, and
  • Politicking

Problem-solving and Persuasion are seen as rational sources of conflict.  Bargaining and Politicking are seen as irrational sources of conflict.  But bargaining and politicking are common in organisations.  Who hasn’t been in an organisation without office politics or experienced those office politics becoming toxic?

Situational factors affect purchasing decisions e.g. long lead times for delivery, industrial relations at potential suppliers, takeovers and mergers, financial issues, production breakdowns and tax changes.  For example, McDonald’s in the UK stopped using Heinz tomato ketchup when Heinz headhunted one of their senior managers.  This ‘poaching’ of the manager was seen as a significant breakdown in the relationship between the two companies.

Organisational Buying Behaviour and Selling To Local Authorities

Too many small businesses do not differentiate between selling to businesses and selling to consumers.  They assume that there are no differences as to how organisations and the public buy goods and services. The failure to take account of organisational buying behaviour leads to many small businesses assuming that selling to large organisations is too difficult and they  concentrate solely on consumer segments.

I have discussed the four Ansoff market growth strategies several times in this blog.  Ansoff prioritises market penetration as the easiest strategy to grow your presence in the market; that is selling more of your existing products to your target market segments.  Ansoff then argues that once there are no more opportunities for market penetration, the next least risky strategy is one of market expansion; selling your existing products to new markets.  Market expansion could mean expanding your sales geographically but another perfectly plausible strategy is to sell your existing products and services to organisations.

However, business and organisational markets segment differently to consumer markets.  This difference is driven by the nature of organisational buying behaviour.

Consumers often make purchases on the spur of the moment.  They often take the decision to purchase as individuals.  Organisations tend to have structured buying procedures which are followed for the majority of purchases.  The bigger the cost and the risk of the purchase, the more likely that strict purchasing processes will be followed.

It is rare for organisational purchases to be made by an individual.  There will be a group of people behind an organisational purchase.  Where a group of people are involved in a purchase, there will be formal and informal power dynamics.

Marketers call those in an organisation involved in a purchase a Decision-making Unit (DMU).  Within a DMU there are six main roles:

  • Initiator:  This individual identifies the issue that must be overcome by the decision to purchase a product or service.  When I worked in Trading Standards this was one of my roles.  I was responsible for the maintenance, calibration and replacement of the services metrological and testing equipment.  I also had to procure the services of test laboratories for formal and informal samples of food, consumer products and fuels.  With regard to the purchase of equipment, which could cost thousands of pounds, I may have identified the need to purchase, but I could not make that purchase on my own volition.  I had to refer the purchase to a group of senior managers.
  • User:  This is the person who will actually use the product or service after it is purchased.  This could be the initiator or it could be other members of staff.  For example, an IT manager may identify the need for new copywriting software but it will be the firms marketers who will use that software.  Many organisations have implemented quality assurance systems such as Kaizen.  A feature of such systems is that staff, through suggestion boxes or quality circles identify where processes could be improved.  In such systems process improvement may mean the purchase and design of new equipment.  So in such circumstances, the user will also be the initiator.
  •  Buyer:  Many organisations will employ a professional buyer to purchase everything from office equipment, IT systems to raw materials and production equipment.  Often large organisations have central purchasing units who carry out the vast majority of purchases in bulk and from a central location such as a head office.  Professional buyers will negotiate the best price for bulk purchases and they will work from detailed technical briefs.  These technical briefs will be created by other members of the decision-making unit.
  • Influencer:  The influencer is a member of the decision making unit who does not directly make the decision to purchase or the decision as to which supplier to use; but they have a major impact on the decision.  This could be an employee of the organisation who has expert knowledge.  So the health and safety manager of a firm may influence the decision to buy machinery by advising the DMU of the law with regard to safety requirements and compliance with legislation such as the Electricity at Work Regulations.
  • Decider:  This is the person who actually makes the decision to purchase.  This could be a senior manager such as a firms managing director or in many cases, the finance director.  The greater the importance of the purchase, the more a senior figure in a firm will be involved with it.
  • Gatekeeper:  These individuals determine the flow of information that reaches the decision-making unit.  Secretaries, executive assistants and PAs often act as a gatekeeper to their busiy bosses.  Technical managers may have a preference for one supplier over another, e.g.  an IT manager may prefer Apple products over those of Microsoft.

The size and make up of the decision-making unit will depend on the size and nature of purchase.  If a company is buying new production line robots, the DMU will be significantly larger than the decision to buy a photocopier.

Organisational purchases can be classified in terms of their level of risk:

  • Routine Order Products:   These items are bought on a regular basis and are unlikely to cause performance problems regarding their use.
  • Procedural Problem Products:  These products will require some level of staff training for their use.  There may be some resistance to these products as staff resent the change to their daily life.
  • Performance Problem Products:  There are risks that the product or service purchased will not meet users’ requirements.  This issue often occurs with the implementation of new technology.
  • Political Problem Products:  Such issues occur where a purchase takes resources from one area of an organisation and gives them to another part of the organisation.  So if a business makes a high value investment in IT and that purchase takes budget from the sales team.  These purchase decisions will likely cause political strife within an organisation.  They can lead to accusations of empire building and arguments about status between managers.

Members of a decision-making unit will often act in their own self interest as well as in the interest of the organisation.  Self interest can get in the way of the aims of an organisation.  Such issues can develop when there are different incentives for different parts of an organisation.  So if an investment means that the sales team may receive lower commission rates, there may be resistance to it.

Local authority purchasing displays all the characteristics of organisational buying behaviour but there are additional considerations.  Many local authorities employ central purchasing units and have expert influencers on purchasing decisions.

Local authorities, by law, must follow best value protocols.  The definition of Best Value is often confused with a requirement to accept the lowest bid; particularly in these times of austerity where local government budgets are squeezed.

Best value does not mean a focus on the lowest bid.  Higher bids may be accepted if they offer more in terms of functionality.  So if a laptop computer is more expensive, but it has more memory and better pre-loaded apps, that may be better value to the authority than the cheaper equivalent product.

Best value protocols require local authorities to obtain multiple contract bids for products and services.  There will nearly always a competitive bidding process.  The need to obtain competitive bids can be ignored only if there are exceptional reasons for doing so. 

For example, one of my roles as a TSO was to obtain the services of expert witnesses and test laboratories.  If I believed that a particular expert or laboratory could provide exceptional value, I could ignore competitive bidding.  I often did this where a product neeed to be tested and I knew that evidence for a criminal trial would require a particular expert opinion.  I often preferred one laboratory because I knew that the court evidence would be provided by the chair of the appropriate British Standards Institution panel.

For large scale of expensive local authority purchases, it will be the case that the decision to purchase will be taken out of the hands of managers and would be taken by a committee of councillors or even a full council vote.  In such circumstances purchasing decisions can become fractious with opinions falling along party lines or even splitting between political groups within the ruling administration.

When entering organisational and B2B markets it is critical that you do your homework.  You need to carefully examine bid specifications.  You need to research the decision-making unit within the organisation and target your marketing activity on those group members who have the most influence on the decision to purchase.  You also need to work hard to get your promotional effort past gatekeepers.

Organisational Buying Characteristics

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:

  1.  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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5.  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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.