Describing Organizational Markets

Transcription

1 Describing Organizational Markets Selling to Organizational Markets Organizational customers are different than consumers. As we ve been learning, people purchasing for personal use frequently build emotional and psychological bonds with some of the brands they buy; people want the brands that they use to make them feel good inside. Yet, many of these very same people go to work making purchases on behalf of their companies and in the process could not care less about how those brands make them feel inside. In other words, the same human beings apply very different processes and criteria to the purchases they make for themselves versus purchases they make for their companies. In these and Web Notes to follow, we ll examine ways in which purchases by organizations differ from consumer purchases and the implications that those differences hold for marketers. Those differences include the kinds of products purchased, the size of the purchases, the reasons for the purchases, and the processes used to reach purchase decisions. Definitions of Important Terms From the very first day of class, we ve used the term market to refer to people with particular wants and needs and the ability to satisfy those needs. In our discussion of consumer market segmentation, we added the terms product market, market segment, and target market in order to describe the basic three step segmentation process. Those definitions will also apply to describing organizational markets. Like consumers, organizations are comprised of people. People tend to think of organizations such as General Electric, the University of Dayton, or the United States Department of Defense as somehow being separate from the people who inhabit them, as if the organizations were entities unto themselves. Of course, they re not. And because organizations are really the people who inhabit them, when organizations want or need a particular product it means people have that want or need. The circumstances may be different, but the definition still applies. How marketers define and describe organizational markets differs greatly from how marketers define and describe consumer markets. For example, the variables used to describe a consumer market (i.e., demographics, psychographics) don t apply well to most organizational settings. These details notwithstanding, you ll find many similarities between segmenting consumer and organizational markets. Transacting Business in Organizations Understanding organizational market segmentation requires that you keep in mind how business is transacted between organizations. For the sake of comparison, consider a typical consumer purchase. When consumers make purchases, they usually travel to a retailer; the retailer does

2 Organizational Market Segmentation page 2 not travel to them. Consumers frequently select stores and products based on mass media advertising. Once inside the store, a consumer will select products from a rack or shelf sometimes with assistance from a store clerk and then take the products to a cash register to pay for them. The events leading up to purchases by organizations differ greatly from the typical consumer purchase. That s because doing business in organizational markets revolves around personal selling. Sales staff from the seller travel to the buyer in hopes of making a sales presentation. Once the salesperson has an opportunity to make a presentation and assuming the buyer agrees to a purchase, a deal with payment and delivery terms is negotiated between buyer and seller. In this context, several differences between consumer and organizational purchases are noteworthy. First, in organizational markets, personal selling is the primary means of delivering information from seller to buyer; advertising plays a supplementary role. Second, in organizational markets, sellers are responsible for proactively identifying and contacting individual buyers; they cannot wait for buyers to come to them. Third, buyers must make decisions within an organization that imposes constraints and limitations on their abilities to act. Collectively, these differences affect how marketers describe and segment organizational markets. For one thing, marketers are not concerned with identifying mass markets. Instead, they focus more on lists of specific companies and even specific individuals in those companies. That means that organizational markets are smaller in size than consumer markets. For a national consumer products company such as Procter and Gamble, consumer product markets may contain hundreds of thousands of individual consumers or households. Organizational market segments may number from fewer than a dozen buyers to a few hundred identifiable buyers. For another thing, research on organizational market segments is far more reliant on secondary and syndicated data. Data on organizations and their activities are routinely collected by government agencies, chambers of commerce, and syndicated data firms. Easily obtainable data include organization names and contact information such as names of officers and executives. In addition, sales estimates and rough expenditure data are also not difficult to acquire for thousands of organizations, particularly businesses. In fact, the UD library subscribes to several business directories that publish that very kind of information. Basic Types of Organizational Markets What we call organizational markets in this class is often referred to as business markets or industrial markets in other circles. The term organizational markets seems more accurate and less restricting because not all organizations are businesses, but all virtually businesses are organizations. Yet, organizations of all types make similar kinds of purchase decisions and marketers approach them in similar ways. To make this point clearer, let s divide the world of organizational markets into four broad categories: producers, intermediaries, governments, and not-for-profits. Producers These are businesses that make or create goods or services. Producers include raw materials suppliers such as farms, mines, and foresters. Producers can also be

3 Organizational Market Segmentation page 3 manufacturers of tangible goods such as a steel, tires, or clothing. Service providers such as airlines, hospitals, and insurance companies also count as producers. In all cases, the producers primary line of business is creating a good or providing some sort of service to their customers. Intermediaries The term intermediary means someone or something that comes inbetween two other people or things. Marketing intermediaries are businesses that come in-between sellers or buyers in channels of distribution. By definition, there are only two kinds of marketing intermediaries: wholesalers and retailers. These businesses come in-between the producers and consumers. They buy products in order to resell them. Thus, marketing intermediaries are also called resellers or middlemen. Government The United States federal government is by far the largest purchaser of goods and services in the world. Each year, the federal government purchases hundreds of billions of dollars worth of products from the private sector. On top of our federal government, foreign governments make large purchases from businesses in the United States. Add to that purchases by state and local governments, and it should not be hard to see that collectively, governments are huge customers of all kinds of products. Not-for-Profits (NFP) The term not-for-profit may bring to mind thoughts of small community philanthropic organizations that operate on shoestring budgets. In many cases, this is true. However, NFPs also include very large, very well-funded organizations that make very lucrative purchases. For example, the University of Dayton is an NFP. So is Miami Valley Hospital. To many local businesses, UD and MVH are two substantial institutional customers. Of course, these examples are local to the Dayton area. Many large not-for-profit institutions, foundations, and endowments are expected to spend money in order to fulfill their missions. Under these circumstances, NFPs make very good customers. The Organizational Market Segmentation Process The three basic steps for segmenting organizational markets are identical to the basic steps for segmenting consumer markets: identify the product market, divide the product market into subgroups or segments, and select the segments to be target markets. The details of how each step is executed differ greatly from those of consumer market segmentation. Those details are discussed in this section. Step One: Define the Product Market As noted earlier, the definition of an organizational product market is essentially the same as a consumer product market. The only real difference is that it applies to organizations rather than individual consumers. Therefore, an organizational product market is defined as all organizations with a want or need for the benefits offered by a particular product category and the ability to satisfy that want or need. Purpose of defining organizational product markets. The purpose of this step in the segmentation process is to make certain that no potential customers are being

4 Organizational Market Segmentation page 4 overlooked. Taking the time to think systematically about one s products and the potential customers who might have need for it may help identify new opportunities that had previously not been pursued. When selling to organizations, defining the product market is usually a somewhat more straightforward task than selling to consumers. Indeed, for certain highly specialized products, the entire product market may consist of only a handful of potential customers that can be identified by name. For example, one southwest Ohio company manufacturers electronic tubes used in CT scanners. Their product market consists of four companies worldwide. In such instances, finding new opportunities in this product market would probably not be time well spent. However, the tubes used in CT scanners might be similar to tubes used in other nonmedical applications. If seeking out new opportunities, this company could determine whether they could adapt their product line to suit related purposes. With this goal in mind, the company might find it worthwhile to investigate new product markets or broaden the definition of the product market they currently serve. NAICS Codes and Organizational Product Markets. A useful tool available to marketers to help them define product markets are NAICS Codes. The NAICS, which means North American Industrial Classification System, refers to a system of assigning numeric codes to businesses and other organizations that easily identify the organizations lines of business. This way, information can be gathered easily about businesses in particular industries. The information is ostensibly for governments to track economic activity, however, marketers have found the coding system useful for indentifying potential customers. The coding system works by assigning all businesses or business installations to what s referred to as an industry sector Under the NAICS system, the economy is divided into twenty diverse sectors including mining, agriculture, financial services, arts and entertainment, and health care. As Exhibit 1 shows, the sector code for construction becomes the first two digits of related business NAICS Codes. 23 Construction 236 Construction of Buildings Construction of Residential Buildings Construction of New Single Family Residences 62 Health Care and Social Assistance 621 Ambulatory Health Care Services 6216 Home Health Care Services Exhibit 1. NAICS Codes Examples for the Construction and Health Care Industries Within each sector, additional digits indicate greater specificity. The third digit is referred to as the subsector, the fourth digit is called the industry group, the fifth digit is the industry. The sixth and final digit is reserved for the U.S., Canada, or Mexico to assign for their own unique national circumstance. Exhibit 1 shows an example of how NAICS codes work from the sector level through the industry. Not all industries fill out all five or six digits in an NAICS category. Note that in residential construction, there is no unique four digit code. The categorization jumps from three digits to five. In home

5 Organizational Market Segmentation page 5 health care services, there are no five or six digit codes. As these and many other industries evolve, their respective code structures may fill out more completely. Still, the fundamental idea of greater specificity with more digits holds throughout the NAICS system. For marketers, this comprehensive system of classification aids organizational market segmentation in couple of ways. First, by categorizing and listing so many different lines of business, NAICS codes permit marketers to identify avenues for potential growth. Second, marketers can easily find often for sale information on individual companies that operate within certain NAICS codes. This information may include contact names, addresses, phone numbers, and other valuable data. Step Two: Divide the Product Market into Segments Recall that market segments are simply subgroups of the product market with some set of shared characteristics. In consumer market segmentation, these shared characteristics were used to describe the market segments. They included certain demographic, psychographic, and geographic variables. Together these variables provided insights into the benefits desired by the consumers. Product markets were actually segmented by starting with groups of related benefits and then describing in psychographic, demographic, and geographic terms groups who would desire those benefits. Dividing organizational product markets into segments follows a somewhat similar process, with a couple of important exceptions. First concerns the types of benefits sought by organizational purchases. Unlike consumer markets, for which psychological benefits are central to purchase decisions, organizations make purchases for very practical and rational reasons. Therefore, the benefits used to segment organizational markets should be very rational and much less focused on emotions. Second, marketers use different segmentation bases to describe organizational markets than they use with consumer markets. In contrast to consumer market segmentation bases such as demographics and psychographics, marketers turn to organizational market segmentation bases: macrosegmentation variables and microsegmentation variables. Macrosegmentation variables. Breaking up product markets into segments begins with describing the very characteristics of the organizations within the product market. These descriptive characteristics are referred to as macrosegmentation variables. They are intended to provide an easily identifiable means of categorizing organizations for the sake of grouping them into market segments. Information about companies for many of their macrosegmentation characteristics are easily available from public records or simple library or internet searches. One common macrosegmentation variable is organizational size. Marketing to large organizations may require very different strategies than marketing to small organizations. Organization size can be measured by variables such as market capitalization and annual sales in units or dollars. Depending on the product being sold, number of employees, or number of stores, offices, or installations may also capture the idea of organization size. Another useful macrosegmentation variable is the stage of the product life cycle in which the organization s products are sold. Firms operating in product categories that are in the introduction or growth stages

6 Organizational Market Segmentation page 6 face very different circumstances than firms with mature or declining product categories. These circumstances may greatly affect firms objectives and in turn the benefits they seek from their purchases. Indeed, where a firm s products are in their life cycle will also affect and what and how much they purchase. A third frequently used macrosegmentation variable is type of organization ownership. Generally, ownership may be simply be divided into public versus private organizations, although more nuanced divisions are also possible. Privately owned organizations may be managed by the organizations owners, which may affect the internal decision making dynamics. In particular, owner operated businesses tend to concentrate decision making authority into fewer hands. This is especially true with family owned businesses. Publicly held companies are more likely to diffuse decision making authority into more managers hands. However, publicly held companies face more extensive reporting requirements and may be more extensively regulated than privately owned companies. Other macrosegmentation variables that affect organizational purchases may be the age of the company, its market share or dominance Microsegmentation variables. These variables pertain to how an organization or an individual decision maker within the organization approaches making purchase decisions. The range of microsegmentation variables is quite broad in part because they can apply to organizational processes or to individual approaches and attitudes. A few relatively common microsegmentation variables are discussed below. One important pair of microsegmentation variables we will collectively refer to as organizational structure variables, which we will see again later in our discussions of organizational decision making a little later this semester. The first of this pair is organizational formalization, which refers to the extent that an organization uses required steps to reach purchase decisions. The more required steps that are required for a typical purchase decision, the more formalized the organization is said to be. The importance of formalization to marketers should be relatively self evident. Greater formalization usually requires greater time to make a sale. Greater formalization generally requires more information from the buyer to the seller at various stages of the decision process. Each required step in a relatively formalized process may involve new individuals with input into the decision process. Each of these individuals may ask different questions or demand different information from the seller. And of course, potential sales can be derailed more easily in organizations with highly formalized decision processes. The second of our pair of structural microsegmentation variables is organizational centralization. This refers to the number of individuals in an organization who possess purchase decision making authority. He fewer the number of authorized decision makers, the greater the centralization. In other words, in such organizations, decision authority is centralized into only a few hands. For marketers, centralization can be a double-edged sword. On one hand, having fewer decision makers means a smaller set of individuals with whom to make contact. On the other hand, because their authority increases the demands on their time, reaching these important decision makers may be difficult. Another important pair of variables pertains to the approaches to exchange

7 Organizational Market Segmentation page 7 organizational decision makers hold toward exchange with their vendors and suppliers. These two approaches are called transactional exchange and relational exchange. Broadly speaking, transactional and relational exchange may be thought of as opposites that anchor two ends of a continuum. Transactional exchange may best be thought of as an old way of doing business, even though it s certainly not uncommon today. When buyer and seller engage in transactional exchange, they do business at arm s length with an almost adversarial view of each other. That is, the two parties do not share more information with each other than is necessary to complete the exchange. They operate under the assumption that the other party might try to take advantage of any mistake or misstep. Therefore, exchanges often involve carefully negotiated contracts and the each monitors the other s performance. This is not to say that transactional exchange is unfriendly, argumentative, or unethical. It certainly need not be. However, it is to say that parties to transactional exchanges exercise care when dealing with each other. Transactional exchange is also characterized by no expectations of future exchanges between buyers and sellers. If the deal goes well, both parties remain open to the possibility of doing future business. However, they don t necessarily count on it. Each transaction is taken one at a time. On the other end of the spectrum is relational exchange. When buyers and sellers approach exchange from this perspective, they look to create strategic partnerships that are based on trust and interdependence. When exchange is treated relationally, both parties share much information about their respective operations and they do so with the strong expectation of the relationship lasting over time. Because the relationship between buyer and seller is ultimately based on mutual trust, much of the oversight that characterizes transactional exchange is unnecessary. While the risks of doing business that way can be high, so too are the potential rewards. Gone is the need for detailed contracts, legal compliance with terms, enforcement, etc. And gone too are the considerable expenses that can accompany a less than trusting business relationship. A couple of points about transactional versus relational exchange are in order. One, the buyer usually drives how the relationship develops over time. Sellers will generally follow along. If the buyer s approach is to seek strategic relationships with sellers, then that s how the relationship progresses. Two, buyers do not seek relational exchange uniformly with all sellers. In fact, a mix of approaches is common within a single buying organization, depending on the product being purchased. That said, which sellers a particular buyer will approach transactionally and which will be approached relationally may be difficult to predict. One might assume that the more strategically important the product in question, the more likely the seller is invited into a relational type exchange relationship. For example, a cousin of mine sold office products to several large businesses in Houston, Texas. Among them was the corporate headquarters of a major American oil producer. My cousin and his company was the sole supplier of office products to that nearly forty story building. Each week, he entered the building, went to the material storage rooms, inventoried the supplies on hand, and ordered the needed supplies. He did so with virtually no oversight from the buyer. In this case, the relationship between buyer and seller was very close and cooperative even though office supplies

8 Organizational Market Segmentation page 8 would hardly be categorized as a strategic purchase for the oil company. Still, the buyer found it more efficient and less costly to turn over the inventory and order processes to a single trusted vendor rather open the processes to competition each time office supplies needed replenishment. That s the essence of relational exchange. Relationship between macro- and microsegmentation variables. Like the bases of consumer market segmentation, macrosegmentation and microsegmentation variables have a simple sequential relationship: while both affect independently the benefits desired by organizational buyers, macrosegmentation variables more often affect microsegmentation variables than the other way around. This relationship is shown in Exhibit 2. For example, smaller organizations may be less formalized and more centralized in their decision structures. Macrosegmentation Microsegmentation Desired Benefits Exhibit Two. Relationships Between Microand Macrosegmentation Variables Based on this set of relationships, the process for creating organizational market segments parallels that of consumer market segmentation. Think of the benefits needed by a given organizational product market and, if possible, the individual decision makers within those organizations focusing on the rational, functional nature of the benefits that typically dominate organizational purchases. Then, using groups of related benefits, think of microsegmentation and then macrosegmentation variables that would describe organizations needing those benefits. The end result is a profile of organizations. Step Three: Select Segments to be Target Markets As noted earlier, marketing to organizations relies most heavily on personal selling to communicate product benefits to buyers and to create marketing offers to suit specific buyer needs. As such, much organizational marketing is differentiated. That is, because buyers are treated as unique individual entities, sellers customize sales presentations and tailor proposals for individual buyer needs. Thus, distinguishing between undifferentiated, differentiated and concentrated marketing strategies does not apply as neatly to organizational marketing settings as the distinctions do to the mass markets of consumer marketing. Still, segmenting organizational markets can be extremely beneficial to sellers. Even in the absence of mass markets, organizations still design products and offers to suit groups of organizations. Perhaps more importantly, sellers deploy salesforces and other marketing resources in response to the characteristics of market segments. Picking targets from among the identified market segments follows essentially the same criteria for organizational markets as in consumer markets. At a minimum, market segments must be accessible, measureable, and substantial to be considered possible targets.