Leg 2 from Lisbon to Cape Town (VI). Bases for segmenting business markets and government entities.
Hello, hola, hi!
Here we are today: We will start with the topic of segmenting for Businesses and Government Markets. I will dedicate a couple of days to this theme.
What Is Organizational Buying? The process of segmentation in industrial and other organizational markets is analogous to that employed in consumer markets. “Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers.”
The Business Market versus the Consumer Market
The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. The major industries making up the business market are agriculture, forestry, and fisheries; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; government institutions and services.
Business-to-business firms identified the following as challenges they faced when purchasing:
- Understanding deep customer needs in new ways;
- Identifying new opportunities for organic business growth;
- Improving value management techniques and tools;
- Calculating better marketing performance and accountability metrics;
- Competing and growth in global markets, particularly with Chinese products;
- Countering the threat of product and service commoditization by bringing innovative offerings to market faster and moving to more competitive business models; and
- Convincing C-level executives to embrace the marketing concept and support robust marketing programs.
The most common challenges when looking at business or organizational markets are:
Fewer, larger buyers. When selling solutions, products or services to organizational markets, there are fewer deals but normally much larger buyers particularly in such industries as aircraft engines for example. The fortunes of Goodyear tires, Cummins engines, Delphi control systems, and other automotive part suppliers depends on getting big contracts from just a handful of major automakers.
Close supplier-customer relationship.
Because of the smaller customer base and the importance and power of the larger customers, suppliers are frequently expected to customize their offerings to individual business customer needs. For example, let´s say there is a lighting company which would like to do businesses with the City of Miami. In an average fiscal year, the City of Miami Procurement Department issues about 14,000 purchase orders with a value of approximately 134 million dollars (FY 2015/Aug 2016). Due to the significant amount of public funds expended each year by, the Procurement Department is guided in its Procurement procedures and any supplier or business should comply with these procedures. Let´s say there is one preferred supplier for the City of Miami which offers MRO (Maintenance, Repair, and Operating) goods and services on annual value added/costs-savings proposals. This company submitted a lighting project suggestion that reduced costs by $300,000 negotiating discounted prices for new fixtures and LED fluorescent bulbs. This company is saving money to the Citi of Miami, and at the same time is offering innovation and value-added with the Forever LED bulbs.
Professional purchasing. Business goods are often purchased by trained purchasing agents, who must follow their organizations’ purchasing policies, constraints, and requirements. Many of the buying instruments—for example, requests for quotations, proposals, and purchase contracts— are not typically found in consumer buying. Professional buyers spend their careers learning how to buy better. In the USA, there is an entity called the Institute for Supply Management, which seeks to improve professional buyers’ effectiveness and knowledge, and it offers certifications and conferences.
Multiple buying influences. More people typically influence business buying decisions. Buying committees consisting of technical experts and even senior management are common in the purchase of major goods. Businesses need to send well-trained sales representatives and sales teams to deal with the well-trained buyers.
Multiple sales calls, emails and digital social media.
In the case of capital equipment sales for large projects, it may take many attempts to fund a project, and the sales cycle—between quoting a job and delivering the product—is often measured in years. There is a lot of time spent on calls, mobile instant-messaging, emails, etc. “It is suggested that you need 5 calls to set 1 appointment, 2 appointments to deliver 1 proposal and 5 proposals to close 1 deal”.
“The demand for business goods is ultimately derived from the demand for consumer goods. For this reason, the business must closely monitor the buying patterns of ultimate consumers”. For example, if there is a housing demand when construction of new homes or apartments rises, the demand for materials and labor force increases. “Business buyers must also pay close attention to current and expected economic factors, such as the level of production, investment, and consumer spending and the interest rate. In a recession, they reduce their investment in plant, equipment, and inventories”. When housing materials sales are reduced, it is a sign that the housing market is slow too. Business marketers can do little to stimulate total demand in this environment. They can only fight harder to increase or maintain their share of the demand”.
The total demand for many business goods and services is inelastic—that is, not much affected by price changes. Shoe manufacturers are not going to buy much more leather if the price of leather falls, nor will they buy much less leather if the price rises unless they can find satisfactory substitutes. Demand is especially inelastic in the short run because producers cannot make quick changes in production methods. Demand is also inelastic for business goods that represent a small percentage of the item’s total cost, such as shoelaces”.
“The demand for business goods and services tends to be more volatile than the demand for consumer goods and services. A given percentage increase in consumer demand can lead to a much larger percentage increase in the demand for plant and equipment necessary to produce the additional output. Economists refer to this as the acceleration effect. Sometimes a rise of only 10 percent in consumer demand can cause as much as a 200 percent rise in business demand for products in the next period; a 10 percent fall in consumer demand may cause a complete collapse in business demand”.
Geographically concentrated buyers. “For years, more than half of U.S. business buyers have been concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan. The geographical concentration of producers helps to reduce selling costs”. In financial markets and investment banking, if you wish to develop your career it is important to be hired in New York, London, Hong Kong or in a hub office which has your field of specialization. For example, if I wished to be hired as a senior VP Strategist for Latinamerican Markets in a European merchant bank, I have to be based in New York City because all these banks do have a subsidiary for Latin America there, and the offices are there. That is why I can´t be based in El Salvador. As simple as that. However, since I will marry Alex Guillermo Lozano Artolachipi, my new life as a future married lady will change and he and I will have to decide where to live next after the wedding.
Direct purchasing. “Business buyers often buy directly from manufacturers rather than through intermediaries, especially items that are technically complex or expensive such as mainframes or aircraft”.
Thank you. See you tomorrow.
Note: All the pictures and videos shown on this blog do not belong to me. I do not own any of the lovely photos posted unless otherwise stated.
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