-Types of business products -Business buyer behavior [SLIDE 1] As already described, in the US, businesses buy more product than consumers do. Some items are the same as what consumers buy, such as pens and food. However, others are far larger, more complex, and higher-priced than in the B2C market. The products purchased tend to fall into one of the following seven categories: -Major equipment -Accessory equipment -Raw materials -Component parts -Processed materials -Supplies -Business services [SLIDE 2] Major equipment typically refers to capital goods such as large or expensive machines, blast furnaces, generators, airplanes and buildings. “Capital goods” is a term used as an accounting term to refer to items purchased through capital expenditures (CAPEX) as opposed to operating expenses (OPEX). Capital purchases are products that are typically used for more than a year. They are carried on a company’s balance sheet and are depreciated as they age. Operating expenses are those items purchases that are then used within the current year. The other categories of business products are almost always purchased as operating expenses. Because of the relative permanence of major equipment, they are also referred to as installations. Due to the complexity and cost of major equipment, direct selling is almost always used. Marketers must provide the messages that directly address the needs of the prospects in order to build a strong relationship. [SLIDE 3] Accessory equipment is typically less expensive and shorter-lived than major equipment and includes items such as portable tools and office equipment. Depending on the expected life of the item, it can be charged to CAPEX and depreciated, or purchased or even leased as OPEX. An example of regularly-leased accessory equipment are the copies and printers found in most offices. As the technology continues to advance, businesses do not want to be locked into old technology, so leasing provides a means to upgrade in reasonable timeframes. Unlike major equipment purchases, accessory equipment purchases often happen through distributors and wholesalers who can provide salespeople to address SMBs. They also can then provide parts and supplies, such as printer toner, to the business. The B2B seller must rely on a more complex marketing plan than in direct sales. While it is important to advertise to the end business, in order to get them to look for distributors who handle the company’s products, it is also important to market to the distributors. If those companies do not see a benefit from working for you, they will distribute for your competitor. [SLIDE 4] Raw materials are unprocessed extractive or agricultural products such as mineral ore, lumber, wheat, and corn. Those items are used to produce components and final products. The need for these materials means that key customers buy very large volumes of raw materials. Think about how much steel is needed by the automobile manufacturers, how much lumber is needed in construction, and the amount of product needed by packaged food companies. Because there are often a large number of producers of raw materials, and not a lot of buyers, the price of raw materials is usually set by commodity markets, external trading exchanges that set prices in the same way as stock exchanges work. Buyers and sellers agree on prices, setting market values that drive the next exchanges. Because of the large volume of materials, marketing is usually done directly to the buyers. For very large purchases, price negotiations happen one-to-one but still use the market value as a beginning price. While wholesalers exist to purchase volumes that can be broken down and resold to smaller businesses, as they buy in bulk, the producers of raw materials view the wholesalers in the same way they view business directly using the raw materials. [SLIDE 5] Component parts are halfway between raw materials and final goods. They are finished products ready for assembly or products that need very little proceeding before becoming part of another product. Consider vehicles. As previously mentioned, GE makes jet engines that Boeing buys to install in airplanes, which are the finished products. Spark plugs, much smaller, are another example. Given they are components, there are two primary markets for these parts: -OEM: Selling to the manufacturer the parts which will go into the finished good to be sold -Replacement: Selling the product to companies and individuals who replace component parts as they wear out OEM parts can critically affect the reputation and revenue of the finished good producer. In 2015, a manufacturer of a key component for the Apple Watch provided substandard parts. That forced Apple to delay shipment of the products as it had to rush to find a new supplier for the part. Component parts providers selling into the replacement market have to think more like B2C customers. Whether selling to a chain selling auto parts, a repair shop, or an individual wanting to fix her own car, the parts provider must be prepared to meet the short-term demands. Only for the largest resellers does price negotiation happen, with most people and businesses paying a fixed price without question, as in the consumer market. [SLIDE 6] Processed materials are used directly in manufacturing other products. They are similar to component parts in that respect but are not as complete. They are slightly-manufactured raw materials, items such as sheet rock and lumber used in construction, and sheet metal used in manufacturing. As processed materials are used to make finished products, just like raw materials and component parts, they are usually sold to the OEM market. Because of the processing but still fundamental nature of the materials, they are usually produced and sold in grades and quality either defined by the purchasing company’s industry or according to specific specifications of the individual firm. Since the quality and grade matters, as well as timing for inventory purchases, price and service are critical components of vendor selection. [SLIDE 7] Supplies are the consumable, frequently-needed items that do NOT become part of the final product. They have relatively short lives and low prices. Think about pens and printer paper. Rags and cleaning material used on a shop floor are another example. Supplies are sometimes referred to as MRO items because there are three primary categories covering almost all supplies: -Maintenance -Repair -Operating [SLIDE 8] Business services are expense items that do not become part of the final product. They can range from janitorial services to management consulting. Outside contractors provide those services because of a few factors: -Economy of scale means service providers can provide the service at a lower price than can the company (janitorial, advertising, legal) -The task is needed infrequently so that it is not efficient to have experts on staff (legal, management consulting, market research) [SLIDE 9] As is now clear, business buyers behave differently than do consumers, except in a few cases. It is important to wrap up the introductory lessons on business buying to discuss how business purchases are made. That buying behavior centers around five aspects: -Buying centers -Evaluative criteria -Buying situations -Business ethics -Customer service [SLIDE 10] Business buying decisions are usually complex and there are often multiple people involved in a buying decision. Sales and marketing, therefore, must work to understand and address the issues of various stakeholders. There is no surprise in the fact that the more complex or expensive the buying decision, the more people there are involved in the decision. For instance, in the location decision for purchasing land for a new facility, there may be a formal buying committee. However, many other people, including the CEO, can be informally involved in the decision. [SLIDE 11] As in the family buying decision, there are multiple roles. As there is more complexity than in family decisions, there are more roles. Here are the six key roles: -Initiator: The person who first suggests making a purchase -Influencer/Evaluator: People who have an impact on the decision. They often help define specifications and processes for evaluating options -Gatekeeper: Group members who control the flow of information between the vendor and the buying center members. It could also be a secretary necessary for setting appointments with key members -Decider: The person who has the formal or informal power to choose or approve of the selection. -Purchaser: The people who negotiates the purchase of the good or service -User: The people who will actually use the new acquisition. They are often the initiators, but not always [SLIDE 12] The complexity of the buying center in even mid-sized companies can frustrate sales and marketing personnel. Successful vendors work early and continually to identify the people who are in each of the roles. While executives often are not formally in the buying center, they have significant impact upon it. However, executives are not involved day-to-day. They are most involved at the beginning and end of the purchase process. That means marketing must work to help sales contact executives early in the process. In fact, some marketing programs are focused on identifying the executives in target companies even before there is a specific sale in sight. While executives can help the purchase decision, marketing and sales must be aware of executive expectations. Executives look for four characteristics in sales representatives: -Ability to marshal resources -Understanding of buyer’s business goals -Responsiveness -Willingness to be held accountable [SLIDE 13] Business buyers evaluate both suppliers and products on three key criteria Quality A measure of appropriate suitability of product and material. The key is “appropriate”. Note that a lower-priced product could intentionally have lower standards for components than a higher-priced product, in order to have lower materials costs to maintain a profit with the lower price. However, quality of the organization must usually be high as a business wants to be able to trust the supplier can consistently meet needs while remaining in business. Service Service matters. Many contracts include a section defining Service Level Agreements (SLA), clearly identifying the required levels of service to be provided by the vendor. Service can include installation, training, maintenance and other postsale services. In the cloud computing era, it also defines the amount of time the computing systems are available, the response time of the systems, and other technical needs to keep the business’ end users satisfied. Dependability of supply is also a critical service factor. Without a guaranteed supply, a business cannot meet its own customers’ demands. Price Businesses are constantly looking for the lowest price. However, demanding too low a price often comes at the sacrifice of quality. [SLIDE 14] Businesses, especially manufacturers, regularly have a decision to make about whether or not to make a component or buy it from someone else. The build versus buy decision is centered on a cost/benefit analysis. However, there is also an opportunity cost component. For example, Briggs & Stratton Corporation might be able tot save $150,000 annually on outside purchases by spending $500,000 on equipment to internally produce throttles. However, if that $500,000 was used to upgrade the carburetor assembly line, they would save $225,000. If the company decides to buy rather than build, there are three types of purchases. -New buy: The purchase of a product for the first time -Modified rebuy: The purchaser wants some change in the original good or service -Straight rebuy: The purchaser reorders the same goods or services without looking for new information or investigating other suppliers The most difficult sale is the new buy while the straight rebuy has the highest return on investment (ROI) for the seller. A company which builds strong relations can better drive straight rebuy revenue. A purchase contract is an additional way to lock-in straight rebuys, as it provides a fixed price for a period of time while purchasing department acceptance of the contract makes the buys far simpler than the other options. [SLIDE 15] Previously, we have discussed ethics, the moral principles or values that generally govern the conduct of individuals and groups. A vendor needs to not only know its own ethics but also needs to be aware of the ethics of the target companies. [SLIDE 16] Service was briefly mentioned in the discussion of evaluative criteria, but it also deserves its own place as a key decision factor. Customer service is critical to satisfying customers and increasing the volume of straight rebuys that help your profit margin. As technology has advanced, companies have begun to do more than aim at providing customer service, they have gained ways to track customer satisfaction that helps to measure whether or not the customer thinks you are providing the appropriate customer service. In order to define appropriate measurements, a company must look at its own strategies and values, and then match those with the needs and expectations of the target market. A key concept about service levels is that not all customers are created equal. Larger dollar value customers can expect to receive a higher service level than smaller customers. However, consider if your largest customer is 10% of your business but 90% of your business comes from small business. Can you afford to focus on the 10%? It’s up to the vendor to decide if that is the case and how to address all customers with the appropriate level of service. Another example is that Company A might spend less than Company B, but Company A buys higher profit-margin items.