Business to Business Marketing

Lecture 2:
Organizational Buyers
Learning Objectives 2

1. Discuss and classify the diverse mix of organizational buyers

drawn from the three sectors of the business market
2. Classify the commercial enterprise and explain the purchasing
function goals
3. Discuss the items to be considered before the purchase and
total cost considerations of a product or service
4. Compare different levels of development and pathways to cost
reduction and revenue enhancement
5. Explore government purchasing practices and procedures and
discuss the institutional buying environment
Variety of Organizational Buyers 3

Commercial Enterprises

Organizational
Government Units
Buyers

Institutions
Commercial Enterprises 4

Includes
– Manufacturers
– Construction
– Service firms
– Transportation
– Professional
– Resellers
 Manufacturers & Size 5

• Small in number, large in volume

• The 250 largest commercial enterprises purchase more than $1.2 trillion
of goods and services annually
• Approximately 360,000 manufacturers in the U.S.
• 10%, or 36,000 firms, employ more than 100 workers.
• That 10% ships more than 75% of all products manufactured in the
U.S.
• Business marketers typically serve far fewer, but far larger, customers
than does a consumer-product marketer.
Discussion Question 1 6

Large firms are generally vitally important to

Large Commercial
business marketers and have vast
Buyers
buying power

Two-thirds of all U.S. manufacturers employ

fewer than 20 people and more than 5 million
Small Commercial
small businesses in the U.S. employ fewer than
Buyers
6 employees. Based on sheer numbers, small
Businesses represent a dominant category.
Manufacturers & Geography 7

• Geographical concentration of industry

• Half located in eight states (California, New York, Ohio,
Illinois, Michigan, Texas, Pennsylvania and New Jersey)
• Important implications:
– First, can concentrate marketing efforts in areas of high
market potential
– Second, with distribution centers in large volume areas
rapid delivery is possible (logistical facilities are effective)
– Third, sales personnel may not be tied to specific geographic
areas

Centralized
FedEx drop-off
Purchasing
points
Center
 Classifying Commercial Enterprises
8
 NAICS organizes business activity into economic sectors and identifies groups of
business firms that use similar production processes.
 Result of NAFTA (North American Free Trade Agreement).
 Replaces SIC (Standard Industrial Classification) system.

(NAICS) North American Industrial Classification System

Source: Reprinted from K. Douglas Hoffman, et al., Marketing: Best Practices (Mason, Ohio: South-Western/Thomsen Learning,
2003)
 Purchasing Function Goals 9
• Address the needs of business customers of all types.
• May have to juggle different, clashing objectives.

Purchasing
Goals
 Items to be considered before the purchase 1
0

• Nature of the business

• Size of the firm
• Volume of purchased products
• Variety
• Technical complexity of item purchased
• Relationships

As products and materials become more sophisticated, buyers must become more
knowledgeable about material characteristics, manufacturing processes, and design
specifications. Frequently, a sizable group is employed to conduct research, evaluate
materials, and perform cost studies.
Total Cost Considerations of a Product or Service
1
1

Factors that drive total cost.

Acquiring and managing costs.

Quality, reliability over the life cycle.

Value of product to firm/customers.

 Firms operate at different levels of development and emphasize
different pathways to cost reduction and revenue enhancement.
1
2
Levels of Procurement Development and
Pathways to Savings/Revenue Enhancement
Levels of Procurement Development
1
3
Level 1 --- Leveraged Buy (Buy for Less)

•To achieve cost saving by centralizing decision-making authority

•To select suppliers that provide the best prices and terms

Level 2 --- Linked Buy (Buy Better)

•To take an external view of the supply chain and develop mutually
beneficial relationships with suppliers
•To achieve cost savings by streamlining the bidding process, optimizing
delivery and information flows, and making stable commitment to enable
efficient production by suppliers
Levels of Procurement Development
1
4
Level 3 --- Value Buy (Consume Better)

•To advance the performance of the procurement function by optimizing

the life cycle costs and value of products and services
•Value analysis, Complexity management, earlier supplier involvement

Level 4 --- Integrated Sell (Sell Better)

•To apply when specific product and service choices the purchasing
organization makes have a significant effect on revenue and also involve
a high degree of business risks
•Highly skilled and knowledgeable purchasing professionals are required
Segmenting Purchase Categories 1
1st Point, each firm has a unique portfolio.
5
2nd Point, more attention on purchases having the greatest impact on revenue
generation or the greatest risk to performance.

Segmenting the Buy

 Two Types of Contracts 1
6

1. Fixed-price contracts
• A price is agreed to before contract is awarded and payment is made at
conclusion of work.
• Provides for the greatest profit potential.
• Poses greater risks.

2. Cost-reimbursement contracts
• Reimbursement for allowable costs may be allowed; sometimes “cost-
plus” contracts allow costs and certain percentage of profit.

*Incentive Contract* - rewards firm when actual project cost is below target
cost; normally also imposes penalty if actual cost exceeds target cost.
 Government Procurement 1
7

1. U.S. Department of Defense (DOD)-said to be largest

single enterprise in world.

2. Non-defense procurement administered by wide variety

of agencies.
Two Procurement Strategies 1
8
1. Formal Advertising—the government solicits bids
from suppliers, and usually the lowest bidder is
awarded the contract.

2. Negotiated Contract—used to purchase products or

services that are not differentiated on price alone,
competition is common.
The Institutional Market 1
9

• Schools, health care organizations, non-profit agencies.

• Similar to government buyers--political considerations

and laws.

• Similar to commercial buyers--often managed like

corporations--broad range of purchase requirements.

• Group purchasing quite common.

Key Words 2
0

Organizational Buyers Levels of Procurement Development

• Commercial enterprises • Leveraged buy
• Government units • Linked buy
• Institutions • Value buy
• Integrated sell
NAICS (North American Industry
Classification Standard) Two Types of Contracts
SIC (Standard Industry • Fixed-price contracts
Classification)) • Cost-reimbursement contracts

Purchasing Goals Two Procurement Strategies

• Formal advertising
Total Cost • Negotiated contract
DISCUSSION