The institutional market consists of schools, hospitals, nursing homes, prisons, and other institutions that provide goods and services to people in their care. Many of
Table 3.3 Characteristics of Business Markets
Geographically concentrated buyers
Business marketers normally deal with far fewer buyers than do consumer marketers.
Buyers for a few large firms do most of the purchasing in many industries.
With the smaller customer base and the importance and power of the larger customers, suppliers are frequently required to customize offerings, practices, and performance to meet the needs of individual customers.
More than half of U.S. business buyers are concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey, and Michigan, which helps to reduce selling costs.
Demand for business goods is ultimately derived from demand for consumer goods, so business marketers must monitor the buying patterns of ultimate consumers.
Total demand for many business goods and services is inelastic and not much affected by price changes, especially in the short run, because producers cannot make quick production changes. Demand for business products tends to be more volatile than demand for consumer products.An increase in consumer demand can lead to a much larger increase in demand for plant and equipment needed to produce the additional output.
Goodyear Tire Company aims to get orders from buyers for the Big Three U.S. automakers (General Motors, Ford, and Daimler-Chrysler). Major companies are big customers in industries such as aircraft engines and defense weapons. Tooling supplier Stillwater Technologies shares office and manufacturing space with key customer Motoman,a supplier of industrial robots, to minimize delivery distances and enhance their symbiotic working relationship.1 Because the Big Three U.S. automakers have their U.S. headquarters in the Detroit area, industry suppliers head there on sales calls.
The Big Three U.S. automakers are seeing higher demand for steel-bar products, mostly derived from consumers' demand for minivans and other light trucks, which consume far more steel than cars. Shoe manufacturers will not 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.
An increase of only 10% in consumer demand for computers might result in a 200% increase in business demand for related parts, supplies, and services; a 10% drop in consumer demand for computers might cause a complete collapse in business demand.
Table 3.3 Characteristics of Business Markets—Continued
Professional Trained purchasing agents follow purchasing organizational purchasing policies, constraints, and requirements to buy business products. Many of the buying instruments—such as proposals and purchase contracts—are not typical of consumer buying. More people typically influence business buying decisions. Buying committees are common in the purchase of major goods; marketers have to send well-trained sales reps and often sales teams to deal with these well-trained buyers. Multiple sales With more people involved in the calls process, it takes multiple sales calls to win most business orders, and the sales cycle can take years.
Direct Business buyers often buy directly purchasing from manufacturers rather than through intermediaries, especially items that are technically complex or expensive.
Reciprocity Business buyers often select suppliers who also buy from them.
Leasing Many industrial buyers lease rather than buy heavy equipment to conserve capital, get the latest products, receive better service, and gain tax advantages.The lessor often makes more profit and sells to customers who could not afford outright purchase.
Programs on the Cisco Systems Web site allow purchasing agents to research, select, and price new networking systems at any hour and obtain speedy online answers about products, orders, and service.2
Metal supplier Phelps Dodge uses an "account management approach" to reach all the key people who influence business buying decisions in customer organizations.3
In the case of major capital equipment sales, customers may take multiple attempts to fund a project, and the sales cycle—between quoting a job and delivering the product—is often measured in years.4 Southwest Airlines, Air Madagascar, and other airlines around the world buy airplanes directly from Boeing.
A paper manufacturer buys chemicals from a chemical company that buys a considerable amount of its paper.
General Electric leases truck and car fleets, aircraft, commercial trailers, railcars, and other major equipment products to business buyers.
Sources for examples: iJohn H. Sheridan, "An Alliance Built on Trust," Industry Week, March I7, I997, pp. 66-70; 2Andy Reinhardt, "Meet Mr. Internet," Business Week, September H, I999, pp. I28-40; 3Minda Zetlin,"It's All the Same to Me," Sales & Marketing Management, February I994, pp. 7 i-75; 4Michael Collins, "Breaking into the Big Leagues," American Demographics, January i996, p. 24.
these organizations have low budgets and captive clienteles. For example, hospitals have to decide what quality of food to buy for their patients. The buying objective here is not profit, because the food is provided to the patients as part of the total service package. Nor is cost minimization the sole objective, because poor food will cause patients to complain and hurt the hospital's reputation. The hospital purchasing agent has to search for institutional food vendors whose quality meets or exceeds a certain minimum standard and whose prices are low. Knowing this, many food vendors set up a separate division to respond to the special needs of institutional buyers. Thus, Heinz, for example, will produce, package, and price its ketchup differently to meet the different requirements of hospitals, colleges, and prisons.
Being a supplier of choice for the nation's schools or hospitals means big business for marketers such as Allegiance Healthcare. This firm has become the largest U.S. supplier of medical, surgical, and laboratory products. Through its stockless inventory program, known as "ValueLink," Allegiance delivers ordered products to more than 150 hospitals when and where staff members need them. Under the old system, the most needed items were inevitably in short supply, while the rarely used items were available in great number. By using Allegiance's ValueLink system, hospitals save an average of $500,000 or more yearly and gain faster, easier access to the items they need.3
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At least once in every person’s life comes a time when the need is great and the resources are few. It can be hard enough to make ends meet on a decent wage, but, when the times get tough and the money just is not there to meet the need, a person can easily despair.