CHAPTER 7
Business Markets and Buying Behavior
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Purpose and Perspective
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Lecture Outline
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Discussion Starters
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Class Exercises
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Chapter Quiz
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Semester Project
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PURPOSE AND PERSPECTIVE
This chapter first describes the major types of business markets, including producer, reseller, government,
and institutional markets. Next, the major characteristics of business customers and transactions with
those customers are described. The chapter also examines the attributes of business customers and some
of their primary concerns in making purchase decisions, business buying methods, and the major types of
business purchases. Then, attributes of demand for business products are discussed. It also covers the
business (organizational) buying decision process. The major participants in business buying decision
processes are analyzed through an examination of the buying center. The stages of the business buying
decision process and the factors that affect that process are examined. Finally, the chapter discusses
industrial classification systems and their usefulness to business marketers in planning marketing
strategies.
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LECTURE OUTLINE
I. Business Markets
A. A business market (also called a business-to-business or B2B market) consists of individuals,
organizations, or groups that purchase a specific kind of product for one of three purposes:
1. Resale
2. Direct use in producing other products
3. Use in general daily operations
B. Marketing to businesses employs the same concepts—defining target markets, understanding
buying behavior, and developing effective marketing mixes—as marketing to ultimate consumers.
However, there are important structural and behavioral differences in business markets:
1. A company that markets to another company must be aware of how its product will affect
other firms in the marketing channel, such as resellers and other manufacturers.
2. Business products can be technically complex, and the market often consists of sophisticated
buyers.
3. Market segment can be as small as a few customers because the business market consists of
relatively smaller customer populations.
C. For most business marketers, the goal is to understand customer needs and provide a value-added
exchange that shifts the focus from attracting customers to retaining customers and developing
relationships.
D. The four categories of business markets are producer, reseller, government, and institutional.
E. Producer Markets
1. Individuals and business organizations that purchase products for the purpose of making a
profit by using them to produce other products or using them in their operations are
classified as producer markets.
a. Producer markets include a broad array of industries ranging from agriculture,
forestry, fisheries, mining, construction, transportation, communications, and utilities.
F. Reseller Markets
1. Reseller markets consist of intermediaries, such as wholesalers and retailers, which buy
finished goods and resell them for a profit.
a. Aside from making minor alterations, resellers do not change the physical
characteristics of the products they handle.
b. Wholesalers purchase products for resale to retailers, other wholesalers, producers,
governments, and institutions.
(1) Wholesalers can also be geographically concentrated.
c. Retailers purchase products and resell them to final consumers.
d. When making purchase decisions, resellers consider several factors.
(1) They evaluate the level of demand for a product to determine the quantity and
the price levels at which the product can be resold.
(2) They assess the amount of space required to handle a product relative to its
potential profit.
(3) Because customers often depend on resellers to have products available when
needed, resellers typically appraise a supplier’s ability to provide adequate
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quantities when and where they are needed.
(4) They also take into account the ease of placing orders and whether producers
offer technical assistance or training programs.
(5) When marketing their products to business customers, the business-to–business
market tends to take one of three approaches: providing direct support to
customers through marketing efforts, training, or other valuable incentives;
collaborating with the reseller to develop marketing activities targeted toward
the reseller’s customers; or marketing to indirect customers independently from
the reseller.
(6) Before resellers buy a product for the first time, they will try to determine
whether the product competes with or complements products they currently
handle.
G. Government Markets
1. Federal, state, county, and local governments make up government markets.
a. These markets spend billions of dollars annually for a wide range of goods and
services, ranging from office supplies and health-care services to vehicles, heavy
equipment, and weapons, to support their internal operations and provide citizens with
such products as highways, education, energy, and national defense.
2. Because government agencies spend public funds to buy the products needed to provide
services, they are accountable to the public.
a. This need for accountability explains their complex buying procedures.
3. Governments advertise their purchase needs through releasing bids or negotiated contracts.
a. To make a sale under the bid system, firms must apply and be approved for placement
on a list of qualified bidders.
b. The government unit is usually required to accept the lowest-priced bid.
4. When buying nonstandard or highly complex products, a government unit often uses a
negotiated contract.
a. Under this procedure, the government unit selects only a few firms and then negotiates
specifications and terms.
H. Institutional Markets
1. Organizations with charitable, educational, community, or other nonbusiness goals constitute
institutional markets.
a. Members of institutional markets include churches, some hospitals, fraternities and
sororities, charitable organizations, and private colleges.
b. Because institutions often have different goals and fewer resources than other types of
organizations, marketers may use special efforts to serve them.
II. Dimensions of Business Customers and Business Transactions
A. Characteristics of Transactions with Business Customers
1. Transactions between businesses differ from consumer sales in several ways.
a. Orders by business customers tend to be much larger than individual consumer sales.
b. Suppliers of large, expensive, or complex goods often must sell products in large
quantities to make profits; they may prefer not to sell to customers who place small
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orders.
2. Some business purchases involve expensive items, such as computer systems.
a. Other products, such as raw materials and component items, are used continuously in
production, and their supply may need frequent replenishing.
3. Discussions and negotiations associated with business purchases can require considerable
marketing time and selling effort.
a. Purchasing decisions are often made by committee, orders are frequently large and
expensive, and products may be custom built.
b. Several people or departments in the purchasing organization are often involved.
4. Business customers look for solutions to reach their objectives, making it crucial for
suppliers to identify their capabilities to position their products so they provide company
value.
5. One practice unique to business markets is reciprocity, an arrangement in which two
organizations agree to buy from one another.
a. Reciprocal agreements that threaten competition are illegal.
b. The Federal Trade Commission and the Justice Department monitor and take actions
to stop anticompetitive reciprocal practices, particularly among large firms.
c. Because reciprocity influences purchasing agents to deal only with certain suppliers, it
can lower morale among agents and lead to less than optimal purchases.
B. Attributes of Business Customers
1. Business customers also differ from consumers in their purchasing behavior because they are
generally better informed about the products they purchase.
a. They typically demand detailed information about a product’s functional features and
technical specifications to ensure that it meets their needs.
2. Most purchasing agents seek the psychological satisfaction that comes with organizational
advancement and financial rewards.
a. Agents who consistently exhibit rational business buying behavior are likely to attain
these personal goals because they help the organization achieve its objectives.
3. Today, many suppliers and their customers build and maintain mutually beneficial
relationships, sometimes called partnerships.
C. Primary Concerns of Business Customers
1. When making purchasing decisions, business customers take into account a variety of
factors; their chief considerations are:
a. Among their chief concerns are price, product quality, service, and supplier
relationships.
2. Price is an essential consideration for business customers because it influences operating
costs and costs of goods sold, which in turn affect the selling price, profit margin, and
ultimately the organization’s ability to compete.
a. When purchasing major equipment, a business customer views price as the amount of
investment necessary to obtain a certain level of return or savings on business
operations.
3. Most business customers try to maintain a specific level of quality in the products they buy.
a. To achieve this goal, most firms establish standards (usually stated as a percentage of
defects allowed) for these products and buy them on the basis of a set of expressed
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characteristics, commonly called specifications.
b. A customer evaluates the quality of the products being considered to determine
whether they meet specifications.
c. If a product fails to meet specifications or malfunctions for the ultimate consumer, the
customer may switch to a different supplier.
d. Business customers are also likely to be cautious about buying products that exceed
minimum required specifications because they often cost more than is necessary,
which drives up the cost of goods and services.
e. Because their purchases tend to be large and may be complicated, business buyers
value service.
f. Services offered by suppliers directly and indirectly influence customers’ costs, sales,
and profits.
(1) Offering quality customer service can be a means of gaining a competitive
advantage over other firms, which leads some businesses to seek out ways to
improve their customer service.
g. Typical services desired by business customers from suppliers include market
information, inventory maintenance, on-time delivery, and repair services.
(1) Business buyers may need technical product information, data regarding
demand, information about general economic conditions, or supply and delivery
information.
h. Maintaining adequate inventory is critical to quality customer service, customer
satisfaction, and managing inventory costs and distribution efficiency.
(1) Furthermore, on-time delivery is crucial to ensuring that products are available
as needed.
i. Customer expectations about quality of service have increased and broadened over
time.
(1) Marketers should develop customer service objectives and monitor customer
service programs, striving for uniformity of service, simplicity, truthfulness, and
accuracy.
(2) Spending the time and effort to ensure that customers are satisfied can greatly
benefit marketers by increasing customer retention.
4. Businesses are increasingly concerned about ethics and social responsibility.
a. Sustainability in particular is rising as a consideration among customers making
purchases.
b. This results in purchase decisions that favor sustainable and environmentally
friendly products.
c. The Environmental Protection Agency created an Environmentally Preferable
Purchasing program to help the federal government comply with green purchasing
guidelines and support suppliers selling eco-friendly products.
d. Companies are also attempting to create greener supply chains.
5. Business customers are concerned about the costs of developing and maintaining
relationships with their suppliers.
a. By building trust with a particular supplier, buyers can reduce their search efforts and
uncertainty about prices.
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D. Methods of Business Buying
1. Although no two business buyers do their jobs the same way, most use one or more of the
following purchase methods—description, inspection, sampling, and negotiation.
a. The most straightforward is description.
(1) When products are standardized and graded according to characteristics such as
size, shape, weight, and color, a business buyer may be able to purchase simply
by specifying quantity, grade, and other attributes.
(2) Commodities and raw materials may be purchased this way.
b. Certain products, such as industrial equipment, used vehicles, and buildings, have
unique characteristics and may vary with regard to condition.
(1) Consequently, business buyers of such products must base purchase decisions
on inspection.
c. Sampling entails evaluating a portion of the product on the assumption that its
characteristics represent the entire lot.
(1) This method is appropriate when the product is homogeneous—for instance,
grain—and examining the entire lot is not physically or economically feasible.
d. Some business purchases are based on negotiated contracts.
(1) In these instances, buyers describe exactly what they need and ask sellers to
submit bids; they then negotiate with the suppliers that submit the most
attractive bids.
(2) This approach is generally used for very large or expensive purchases, such as
with commercial vehicles.
(3) This is frequently how the federal government conducts business.
(4) In some cases, a buyer and seller might negotiate a contract that specifies a base
price and provides for the payment of additional costs and fees.
(a) These contracts are most commonly used for one-time projects such as
buildings, capital equipment, and special projects.
E. Types of Business Purchases
1. Most business purchases are one of three types—new-task, straight rebuy, or modified rebuy.
a. For a new-task purchase, an organization makes an initial purchase of an item to be
used to perform a new job or solve a new problem.
(1) A new-task purchase may require development of product and vendor
specifications and procedures for future product purchases.
(2) To make the initial purchase, the business buyer usually needs to acquire a lot
of information.
(3) New-task purchases are important to suppliers because they can result in a long–
term buying relationship if customers are satisfied.
2. A straight rebuy purchase occurs when buyers purchase the same products routinely under
approximately the same terms of sale.
a. Buyers require little information for routine purchase decisions and tend to use
familiar suppliers that have provided satisfactory products in the past.
b. These marketers may set up automated systems to make reordering easy and
convenient for business buyers.
c. A supplier may even monitor the business buyer’s inventories and communicate to the
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buyer what should be ordered and when.
3. For a modified rebuy purchase, a new-task purchase is altered after two or three orders, or
requirements associated with a straight rebuy purchase are modified.
a. A business buyer might seek faster delivery, lower prices, or a different quality level
of product specifications.
b. A modified rebuy situation may cause regular suppliers to compete to keep the
account.
III. Demand for Business Products
A. Demand for business products (also called industrial demand) can be characterized in different
ways, either as derived, inelastic, joint, or fluctuating.
B. Derived Demand
1. Because business customers, especially producers, buy products for direct or indirect use in
the production of goods and services to satisfy consumers’ needs, the demand for business
products derives from the demand for consumer products; it is therefore called derived
demand.
a. The derived nature of demand is usually multilevel in that business marketers at
different levels are affected by a change in consumer demand for a product.
C. Inelastic Demand
1. With inelastic demand, a price increase or decrease does not significantly alter demand for a
business product.
a. A product has inelastic demand when the buyer is not sensitive to price or when there
are no ready substitutes.
b. Because many business products are more specialized than consumer products, buyers
will continue to make purchases even as the price goes up.
c. Because some business products contain many different parts, price increases that
affect only one or two parts may yield only a slightly higher per-unit production cost.
d. Inelasticity of demand in the business market applies at the industry level, while
demand for an individual firm’s products may fluctuate.
D. Joint Demand
1. Joint demand occurs when two or more items are used in combination to produce a product.
a. Understanding the effects of joint demand is particularly important for a marketer that
sells multiple jointly demanded items.
b. Such a marketer realizes that when a customer purchases one of the jointly demanded
items, an opportunity exists to sell related products.
E. Fluctuating Demand
1. Because the demand for business products is derived from consumer demand, it is subject to
dramatic fluctuations.
a. In general, when consumer products are in high demand, producers buy large
quantities of raw materials and components to ensure that they can meet long-run
production requirements.
b. Conversely, a decline in demand for certain consumer goods reduces demand for
business products used to produce those goods.
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c. Sometimes, price changes lead to surprising temporary changes in demand.
d. Fluctuations in demand can be substantial in industries in which prices change
frequently.
IV. Business Buying Decisions
A. Business (organizational) buying behavior refers to the purchase behavior of producers,
government units, institutions, and resellers.
B. Although several factors that affect consumer buying behavior also influence business buying
behavior, a number of factors are unique to businesses.
C. The Buying Center
1. The buying center is the group of people within the organization, including users,
influencers, buyers, deciders, and gatekeepers, who make business purchase decisions.
2. Users are the organizational members who will actually use the product being acquired.
a. They frequently initiate the purchase process and/or generate purchase specifications.
3. Influencers often are technical personnel, such as engineers, who help develop product
specifications and evaluate alternatives.
a. Technical personnel are especially important influencers when the products being
considered involve new, advanced technology.
4. Buyers select the suppliers and negotiate the terms of the purchases.
a. They may also be involved in developing specifications.
b. Buyers are sometimes called purchasing agents or purchasing managers.
5. Deciders actually choose the products.
a. For routinely purchased items, buyers are commonly deciders.
6. Gatekeepers, such as secretaries and technical personnel, control the flow of information to
and among the different roles in the buying center.
a. Buyers who deal directly with vendors also may be gatekeepers because they can
control information flows.
D. The number and structure of an organization’s buying centers are affected by the organization’s
size, its market position, the volume and types of products purchased, and the firm’s overall
managerial philosophy on who should make purchase decisions.
1. A marketer attempting to sell to a business customer should first determine the people and
the roles they play in the buying center and which individuals are most influential in the
decision process.
E. Stages of the Business Buying Decision Process
1. Like consumers, businesses follow a buying decision process (Figure 7.2).
a. First stage—one or more individuals in the business recognize that a problem or need
exists.
(1) It may be individuals in the buying center or other individuals in the firm who
initially recognize that a problem exists.
b. Second stage—this stage involves the development of product specifications which
requires that buying center participants assess the problem or need and determine what
is necessary to resolve or satisfy it.
(1) Users and influencers, such as engineers, provide information and advice for
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developing product specifications.
c. Third stage—this stage involves searching for and evaluating potential products and
suppliers.
(1) Some organizations engage in value analysis, an evaluation of each component
of a potential purchase; value analysis examines quality, design, materials, and
possibly item reduction or deletion, in order to acquire the product in the most
cost-effective way.
(2) Some vendors may be deemed unacceptable because they are not large enough
to supply needed quantities; others may be excluded because of poor delivery
and service records.
(3) A number of firms employ vendor analysis, a formal, systematic evaluation of
current and potential vendors, focusing on such characteristics as price, product
quality, delivery service, product availability, and overall reliability.
d. Fourth stage—the results of deliberations and assessments in the third stage are used
to select the product to be purchased and the supplier.
(1) In some cases, the buyer selects and uses several suppliers, a process known as
multiple sourcing.
(2) At times, only one supplier is selected, a situation called sole sourcing.
(a) Sole sourcing has historically been discouraged except in the cases where
a product is only available from one company.
(b) While still not common, more organizations now choose sole sourcing,
partly because the arrangement means better communications between
buyer and supplier, stability and higher profits for suppliers, and often
lower prices for buyers.
(c) However, multiple sourcing remains preferable for most firms because it
lessens the possibility of disruption caused by strikes, shortages, or
bankruptcies.
e. Fifth stage—the product’s performance is evaluated by comparing it with
specifications.
(1) The supplier’s performance is also evaluated at this stage.
F. The business buying decision process is used in its entirety primarily for new-task purchases.
1. Several stages, but not necessarily all, are used for modified rebuy and straight rebuy
situations.
G. Influences on the Business Buying Decision Process
1. The four major factors that influence business buying decisions are environmental,
organizational, interpersonal, and individual (Figure 7.2).
a. Environmental factors include competitive and economic factors, political forces, legal
and regulatory factors, technological changes, and sociocultural issues.
(1) Changes in one or more environmental forces, such as new government
regulations or increased competition, can create opportunities and threats that
affect purchasing decisions.
b. Organizational factors that influence the buying decision process include the
company’s objectives, purchasing policies, resources, and the size and composition of
its buying center.
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(1) An organization may also have certain buying policies to which buying center
participants must conform that limit buying decisions.
c. Interpersonal factors are the relationships among people within the buying center.
(1) Trust and clear communication ensure that all parties are satisfied with the
outcome, however interpersonal dynamics and varying communication abilities
within the buying center may complicate processes.
d. Individual factors are the personal characteristics of participants in the buying center,
such as age, personality, education level, and tenure and position in the organization.
(1) To be effective, marketers must know customers well enough to be aware of
these individual factors and their potential effects on purchase decisions.
(2) Promotion targeted to individuals in the buying center can influence individual
decision making as well.
V. Industrial Classification Systems
A. Marketers have access to a considerable amount of information about potential business customers
through government and industry publications and websites.
1. Marketers use this information to identify potential business customers and to estimate their
purchase potential.
B. Much information about business customers is based on industrial classification systems.
1. In the United States, marketers historically relied on the Standard Industrial Classification
(SIC) system, which the federal government developed to classify selected economic
characteristics of industrial, commercial, financial, and service organizations.
2. The SIC system was replaced by the North American Industry Classification System
(NAICS) when the U.S. joined the North American Free Trade Agreement (NAFTA).
a. NAICS is a single industry classification system used by the United States, Canada,
and Mexico to generate comparable statistics among the three partners of NAFTA.
b. The NAICS classification is based on production activities.
c. NAICS is similar to the International Standard Industrial Classification (ISIC) system
used in Europe and other parts of the world.
(1) NAICS divides industrial activities into 20 sectors.
(2) NAICS is more comprehensive and up-to-date, and it provides considerably
more information about service industries and high-tech products.
C. Industrial classification systems provide a uniform means of categorizing organizations into groups
based mainly on such factors as the types of goods and services provided.
1. Although an industrial classification system is a vehicle for segmentation, it is best used in
conjunction with other types of data to determine exactly how many and which customers a
marketer can reach.
D. A marketer can take several approaches to determine the identities and locations of organizations in
specific groups.
1. One approach is to use state or commercial industrial directories, such as Standard & Poor’s
Register and Dun & Bradstreet’s Million Dollar Database.
a. These sources contain information about a firm, including its name, industrial
classification, address, phone number, and annual sales.
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b. By referring to one or more of these sources, marketers isolate business customers by
industrial classification numbers, determine their locations, and develop lists of
potential customers by desired geographic area.
2. A more expedient, although more expensive, approach is to use a commercial data service.
a. A commercial data company can provide, for every company on an industrial
classification list, its name, location, sales volume, number of employees, types of
products handled, names of chief executives, and other pertinent information.
C. To estimate the purchase potential of business customers or groups of customers, a marketer must
find a relationship between the size of potential customers’ purchases and a variable available in
industrial classification data, such as the number of employees.
1. Once this relationship is established, it can be applied to customer groups to estimate the size
and frequency of potential purchases.
a. After deriving these estimates, the marketer is in a position to select the customer
groups with the most sales and profit potential.
D. Despite their usefulness, industrial classification data pose several problems.
1. A few industries do not have specific designations.
2. Because transferring products from one establishment to another is counted as a shipment,
double-counting may occur when products are shipped between two establishments within
the same firm.
3. Because the Census Bureau is prohibited from providing data that identify specific business
organizations, some data, such as value of total shipments, may be understated.
4. Because government agencies provide industrial classification data, a significant lag usually
exists between data-collection and the time when the information is released.