ORGANIZATIONAL BUYING vs. CONSUMER BUYING

Organizational consumers purchase for:

• further production,
• usage in operating the organization, and/or
• resale to other consumers

Final (or ultimate) consumers purchase for:

• personal,
• family, or
• household use

What is the difference between the terms consumer, buyer, and customer?

INDUSTRIAL/ORGANIZATIONAL MARKETS

• Producer
  • manufacturers
  • service producers

• Reseller
  • wholesalers
  • retailers

• Government
  • federal
  • state
  • county
  • local

• Institutional
  • charitable
  • educational
  • community
  • other non-business

Think about the hundreds of components that are used in producing, say, a telephone. Each one of those component parts had to be sold to the telephone manufacturer. The part had to be designed such that it met the needs of the buyer, it had to be promoted in a way to make the buyer aware that it was available, it had to be distributed at the times and in the quantities that the buyer needed, and all of this had to be done in such a way that the part could be produced and delivered at a competitive price. There are hundreds of parts, wires, screws, glues, paints, and such that are marketed before the telephone is itself finally produced, marketed, and sold to a final household consumer.

This manufacturer must also purchase supplies that are not part of the product but are used in running the manufacturing operation. It must purchase computers, printer and photocopier paper, desks and chairs, services to mow the lawn, etc. How is it that this manufacturer makes buying decisions that are similar in nature to household buyers? How is it that this manufacturer makes buying decisions that are different in nature from those of household buyers?

DIFFERENCES IN ORGANIZATIONAL MARKETS
Organizational markets are different in nature from household consumer markets.

• Use goods for further production, operations, or resale. Household, or final, consumers purchase products for personal consumption.

• Purchase equipment, raw materials, and semifinished goods. Household purchasers almost always purchase finished goods for personal consumption.

• Demand is derived from that of final consumers. If you own a machine shop that makes bushings that are used in washing machine motors, then the demand for your products (bushings) is derived from final consumer demand for washing machines. If the economy is poor, and demand for washing machines is down, then so too will be the demand for washing machine motors and for the bearings that are used in them.
  • multiplier effect / accelerator principle: However, there will probably not be a one to one correspondence between these. If retailers find that demand for washing machines is declining, they might be conservative in placing new orders with wholesalers, perhaps ordering slightly less than what they actually believe demand to be. Wholesalers, in seeing their orders decline, might also be conservative in placing orders to manufacturers, ordering slightly less than what they actrully believe demand to be. Manufacturers, seeing their orders decline, might order slightly fewer motors, and the motor manufacturers might conservatively order slightly fewer bushings than they actually expect to need. Demand for your bushings might experience wider swings, either up or down, than the changes in demand at the final consumer end of the supply chain. This makes organizational markets, especially if you produce some of the small parts at the beginning of the supply chain, very volatile.

• Can make items themselves. Competition in organizational markets comes not only from suppliers of similar goods and services, but can come from buying organization itself. If it is not happy with the suppliers goods, services, or delivery, then it can choose to make those products itself.

DIFFERENCES IN ORGANIZATIONAL TRANSACTIONS

• Buying specialists are often used. Organizations often employ people who are professional purchasing agents. Just as sales agents are professional specialists at finding organizations that need the products that their employer produces, purchasing agents are specialists are professional specialists at finding what their employer needs. Whatever stereotypes you might have from experiences with salespeople in consumer sales, any negative stereotypes of salesperson behavior probably would not be appropriate in dealing with professional buyers.

• Often use multiple buying responsibility. A household purchaser is often the sole decision maker. Making a sale to an organization, however, often requires selling to several entities within the buying center. For example, you might be the user of a desktop computer at work, but the decision as to what specifications were needed might have been set by someone in the computer department, the decision to buy might have been made by your department manager, bids taken buy taken by someone in the purchasing department, and the final authorization made by the company president.

• Often use multiple suppliers. It is often desireable to have a long term relationship with more than one supplier, even if a second supplier has higher prices for otherwise similar terms and conditions. If problems in quality or delivery are experienced with a supplier, production can still be maintained if the second supplier can be used to replace the first. The ideals of a cozy, trusting relationship that has been promised with strategic alliances in the popular business literature does not always work if it leaves one party vulnerable as a sole supplier or buyer.

• More likely to require exact specifications. A household purchaser might select a particular model of desktop computer for no other reason than it has a pleasing color. An organizational purchaser is more likely to set specifications regarding processor speed, memory, hard drive size, and such before taking bids on price.

• Often lease equipment and space. As a household consumer, you would probably prefer to own your own car, furniture, and home. These are things that represent personal expression, status, and wealth. Your objectives as a business manager, however, are very different. You might prefer to lease public warehouse space to provide the flexibility to change locations when the market demands, to lease trucks so that you can leave the problems of maintenance and disposition to someone else, etc.

• More frequently employ competitive bidding and negotiation. Household consumers (especially those of us in North America) are more likely to accept as final a price that is placed on a product in a retail setting or to accept a price that is given to us by a service provider. As a business manager, your employer is more likely to require that you accept, say, three bids for a service or to negotiate various terms and conditions associated with product specifications, delivery, and price.

TYPES OF I/O PURCHASES

• Straight Rebuy
  • routine purchase
  • associated with frequently purchased items

• Modified Rebuy
  • routine purchase
  • frequent purchase, but buyer does review product specifications or supplier

• New Task
  • not routine
  • product needs and specifications researched, vendors evaluated

An example of a straight rebuy situation would be the purchase of photocopy paper for a large organization. Once a relationship is established with a supplier who appears to be providing good products at good terms and prices, there is no need to re-negotiate the terms and conditions every time more supplies of paper are needed. The purchase of a large, expensive crane, however, would require more than a good relationship between a purchasing agent and a salesperson.

In a straight rebuy situation, the buyer is likely to periodically apply value analysis and vendor analysis.

• value analysis: a periodic review of the qualities of the product for the price
• vendor analysis: a periodic review of the services of the vendor (seller)

An annual value analysis of the paper in the above example might show that the product performs well, but a vendor analysis might show that the vendor is often late in deliveries and often delivers the wrong assortment of products. In this situation, the purchasing agent might search for a new supplier of the same brand of paper.

BUYING CENTER

Recall that there are often multiple decision makers involved in organizational purchases. This requires that the marketer is aware of the needs of the various constituancies involved in making decisions. Additionally, there can be constituancies in an organization who do not have decision making authority, but who nonetheless might have some influence over the purchase and consumpion process.

• Users: If you are a secretary, you might have had the experience of arriving to work one day to find a new typewriter on your desk, whether or not you even wanted it. A salesperson would not call on you if you had no influence over what product was purchased. However, if you and your co-workers submit numerous complaints about missing or problematic features of the new replacements, the salesperson might be faced with a very expensive customer service problem to solve. A user is the end consumer of a product.

• Influencers: Perhaps in this case, the office manager was consulted with regard to features or specifications to set in the purchase of new typewriters. Although the office manager might have no decision making authority with regard to the purchase, whatever specifications that s/he requests could be used without change in making the purchase. A salesperson might need to be aware of these influencers - a special trick is to get the influencer to write a specification list that happens to match the seller's product features! An influencer is someone who has influence over what is purchased.

• Deciders: In this case, some middle manager, ignorant of the needs of secretaries, might have made the decision as to when and what to purchase. The point of this statement is that the marketer or seller must be aware of how it is that decisions are made and often must focus some or all efforts at whomever it is that makes decisions in the organization. Note, however, that decision making authority does not necessarily mean that this person exerts any influence on what is purchased. The company president might be the only person who signs all purchase requisitions, and therefore has ultimate decision authority, but might otherwise merely sign some requisitions without question or involvement. A decider is someone who ultimately has authority if or what to purchase.

• Buyers: The final purchase transaction might be left to a purchasing agent who otherwise has no involvement in decision making. A sales agent for an office equipment supply house might help an organization to decide what brand of typewriters would be best, but that organization could then allow the purchasing agent to find the best deal on that brand, and the best deal with regard to price might come from a competing office supply house. A responsibility of salespeople, then, is often to maintain good, trusting, long term relationships with the purchasing agents in prospective buying organizations, whether or not they have purchased in the past. A buyer is someone who arranges the transaction.

• Gatekeepers: Why do salespeople often give secretaries little gifts of chocolates or flowers or an occasional free lunch? A secretary can be nice or nasty in passing information in either direction. The prospective buyer's secretaries can be helpful in providing names, telephone numbers, and office hours of key members of a buying center in an organization. They can also be helpful in passing messages from the salesperson to members of the organization. A gatekeeper could include anyone in the organization who can control the flow of information.

Some books use the term Decision Making Unit to describe the notion of the buying center, and some additionally include the entity of initiator. An initiator would be a person who initiates the idea or a purchase.

Note that the idea of the Buying Center is conceptual - there is no such department in any organization!