Chapter Ten Understanding and Negotiating with Organizational Buyers

Chapter Ten Understanding and Negotiating with Organizational Buyers

Chapter Outline Types of organizational markets
What organizational buyers want from salespeople Industrial markets Resellers Government markets Not-for-profit markets Negotiating styles of organizational buyers Business orientation of organizational buyers International negotiations Copyright © Houghton Mifflin Company. All rights reserved.

Learning Objectives After reading this chapter, you should understand:
Four kinds of organizational buyers. Roles of the members of the buying center. Major steps in the buying process and the three types of buying situations. Why, what, and how organizational markets buy products and services. Six negotiation styles of organizational buyers. Buyers’ preferred relationships with salespeople. Decision-making styles of buyers. How to do business in international markets. Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Types of Organizational Markets
From a salesperson's perspective, there are four types of organizational markets Also called producer or manufacturer markets, these are organizations that buy goods and services or the production of other products and services that are sold, rented, or supplied to other organizations and final consumers 1. Industrial markets Royalty-Free, Photodisc/Getty Images Individuals and organizations (retailers, wholesalers, and industrial distributors) that buy goods to resell or rent to other organizations and final consumers 2. Reseller markets Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Types of Organizational Markets cont’d
Federal, state, and local governmental units that buy goods and services for conducting the functions of government 3. Government markets Royalty-Free, Photodisc/Getty Images Organizations such as public and private universities, colleges, hospitals, nursing homes, prisons, museums, libraries, and charitable institutions that buy goods and services for carrying out their functions 4. Nonprofit markets Royalty-Free, Stockdisc Premium/Getty Images Chapter Review Question: What four major characteristics distinguish nonprofit markets from the three other organizational markets? Copyright © Houghton Mifflin Company. All rights reserved.

What Organizational Buyers Want from Salespeople
To buy from salespeople they trust to deliver on their promises, provide reliable service, and supply them with precise, accurate, and complete information Royalty-Free, Photodisc/Getty Images To do business with salespeople who are looking out for their organization’s best interests and who help them look good personally Copyright © Houghton Mifflin Company. All rights reserved.

Creating and Maintaining Long-Term Relationships
Relationships in organizational markets are critical for customer satisfaction and loyalty Salespeople who successfully sell to organizations understand that it is more profitable to create and nurture long-term relationships with customers (instead of taking a short-term view that emphasizes profit) Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Selling the Relationship
Relationship selling includes all activities aimed at creating, developing, and maintaining successful exchange relationships with prospects and customers Relationships between buyers and sellers are more effective and long-lasting when both parties cooperate with one another, have mutual trust in one another, and realize that each of them needs the other Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Industrial Markets Largest and most diverse of all the organizational markets; dollar volume far exceeds that for consumer markets. There are more careers in industrial selling than in other kind of selling because almost all industries buy from and sell to one another in creating products for the final consumer Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

North American Industry Classification System (NAICS)
One of the best basic sources for identifying new business prospects and their general requirements is the North American Industry Classification System (NAICS) published by the U.S. Office of Management and Budget (OMB) NAICS replaces the old Standard Industrial Classification (SIC) System and provides for standardization in reporting economic data between Mexico, Canada, and the United States Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

North American Industry Classification System (NAICS) cont’d
NAICS is more detailed than SIC and provides better coverage of services such as health care, entertainment, and financial institutions The NAICS code starts with the broad industry category identified by two digits then focuses more specifically on products and services with each additional digit Copyright © Houghton Mifflin Company. All rights reserved.

Figure 10.1: North American Industrial Classification System for Identifying Business Prospects
Copyright © Houghton Mifflin Company. All rights reserved.

Industrial Market Characteristics cont’d
Industrial markets differ from consumer markets in: Industrial demand tends to be derived demand as the demand for the industrial good comes from demand for a consumer good 1. Demand Industrial buyers tend to be geographically concentrated 2. Buyers Industrial purchases are less frequent and normally require a longer negotiation period than do consumer purchases Organizations often tend to buy from one another and engage in a mutual exchange of benefits 3. Purchasing Process The many differences between industrial and consumer markets in terms of demand, buyers, and purchasing process require that companies selling to industrial organizations develop marketing mixes tailored to specific customer groups and their unique needs 4. Marketing Mix Chapter Review Question: Compare and contrast industrial markets and consumer markets. Copyright © Houghton Mifflin Company. All rights reserved.

Table 10.1 Industrial Versus Consumer Market Characteristics

Table 10.1 Industrial Versus Consumer Market Characteristics cont’d

The Role of the Industrial Buyer
Industrial buyers are frequently called “purchasing agents” because they are the buying experts for their organizations The success of industrial buyers depends largely on their ability to: Negotiate favorable prices and purchase terms Develop alternative solutions to buying problems Protect the organization's cost structure Assure reliable, long-run sources of supply Maintain good relationships with suppliers Manage the procurement process Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

What Do Industrial Markets Buy? cont’d
Industrial buyers are interested in three basic categories of goods and service: Goods used in the production process that do not become part of the finished product, such as fixed major equipment and office equipment 1. Foundation Goods Ingredients or components that become part of the finished product, such as raw materials and semi-manufactured goods 2. Entering Goods Consumed while assisting in the ongoing production process, such as maintenance and repair items 3. Facilitating Goods Copyright © Houghton Mifflin Company. All rights reserved.

Table 10.2 Classification of Industrial Goods

Table 10.2 Classification of Industrial Goods cont’d

How Do Industrial Markets Buy?
In larger organizations, it’s realistic to refer to industrial purchasing operations as buying centers because several people participate in purchasing decisions Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Buying Centers cont’d A buying center consists of all people in the organization who participate in or influence the purchase decision process and may include anyone playing any of the following six roles in the buying process Initiators People who first recognize a problem which may require the purchase of a product or service Gatekeepers People who control information or access to decision makers Influencers People who influence the purchase decision by setting specifications or by providing information about evaluating alternatives Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Chapter Review Question:
Buying Centers cont’d Deciders Higher level managers who have power to approve suppliers and final purchase decisions Buyers People with formal responsibility and authority to order products and negotiate purchase terms Users People who will actually use the product or service and can help initiate the purchase and set specifications Chapter Review Question: What are the six roles that different members of a buying center can play in the industrial buying process? Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Types of Buying Situations cont’d
There are three basic types of buying situations Straight rebuy Routine reorder such as office supplies and utilities Modified rebuy Change in product specifications, prices, or supplier performance, such as consulting services, company vehicles, and heavy equipment New task buy Complex product purchase such as a new heating plant or the construction of a building Royalty-Free, Photodisc/Getty Images Chapter Review Question: List, discuss, and give examples of the three types of industrial buying situations. Copyright © Houghton Mifflin Company. All rights reserved.

Figure 10.2: Three Types of Industrial Buying

Stages in the Buying Process cont’d
There are eight major steps in the buying process: Recognizing the problem Describing the basic need Developing product specifications Searching for suppliers Soliciting proposals Basic decision criteria: (i) performance, (ii) economic, (iii) integrative, (iv) adaptive, and (v) legalistic Evaluating proposals and selecting suppliers Setting up the ordering procedure Reviewing performance Chapter Review Question: Name and describe the sequential stages in the industrial buying process. Copyright © Houghton Mifflin Company. All rights reserved.

Resellers Includes all those intermediary organizations that buy goods for reselling or renting to others at a profit or for conducting their own operations Resellers serve as purchasing agents for their customers Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Types of Resellers cont’d
Industrial distributors Sell to manufacturers and producers. There are three types of industrial distributors: a) General-line distributors (mill supply houses) b) Specialist firms c) Combination houses Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Resellers Wholesalers Retailers Dell to retailers
More than 370,000 wholesalers in the U.S. who handle half of all manufacturer consumer goods Retailers Sell to consumers Most retail store salespeople, usually called salesclerks, are little more than order takers; only recently have a few large chains begun offering incentives or commissions on sales to their retail salespeople Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Reseller Buying Situations cont’d
Resellers usually find themselves concerned with one or more of three types of buying situations New-product Selection of the best supplier Better set of terms from current supplier Six criteria most often used for new product buying situations are Pricing and profit margins Product's uniqueness and strength of the product category Seller's intended positioning and marketing plan Test market evidence of consumer acceptance Advertising and sales promotion support Selling company's reputation Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Reseller Information Systems
Electronic point-of-sale (POS) systems and in-store computers began appearing in retail outlets in the early 1970s Today, resellers often have more information than the salesperson about inventory turnover, product performance, cash flow, customer complaints, and accounts payable Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Computer-Assisted Buying
As reseller information systems based on computerized purchasing operations increase in sophistication, the professional salesperson's job will rapidly shift toward providing buyers with detailed and comprehensive data Royalty-Free, Photodisc/Getty Images Some salespeople have already edged out competitors by providing their reseller customers with individualized merchandising service Copyright © Houghton Mifflin Company. All rights reserved.

Incentives and Sales Tools Offered to Resellers
Several incentives and sales tools can be used to make help salespeople make their offerings more attractive to resellers Radio Frequency Identification (RFID) Point-of-Sale Inventory-Tracking Systems Product Tags Cooperative Advertising Allowances Promotional Pricing Trade Margins and Allowances Reseller Contests and Sweepstakes Point-of-Purchase Displays Reseller Training Programs In-Store Demonstrations Slotting Allowances Just-in-Time Purchasing Copyright © Houghton Mifflin Company. All rights reserved.

Table 10.3 Incentives Offered to Resellers

Government Markets The U.S. government, 50 state governments, more than 3,000 county governments, and 86,000 local government units purchase over $1 trillion worth of goods and services annually Royalty-Free, Photodisc/Getty Images The federal government accounts for more than 40 percent of the total spent by all government levels Copyright © Houghton Mifflin Company. All rights reserved.

Sales Opportunities in Government Markets
Government markets offer opportunities for both producers and “middlemen” to sell everything from spacecraft to toothpaste—everything needed to provide citizens with such services as national defense, fire and police protection, education, health care, water, postal service, waste disposal, and public transportation Government purchasing patterns sometimes change abruptly in response to budget constraints and the service demands of citizens Copyright © Houghton Mifflin Company. All rights reserved.

Chapter Review Question:
How Do Governments Buy? Federal buying is done for two sectors: The General Services Administration (GSA) purchases goods and services for civilian government agencies. The Defense Logistics Agency (DLA) purchases for the military services. Both the GSA and the DLA function like wholesalers and resellers for other government units. Nearly 20 percent of all government contracts are awarded on the basis of only one bid. Most purchases are made by either negotiated contracts or open bids (where the award usually goes to the lower-cost qualified bidder). Chapter Review Question: Briefly discuss government markets. What are the two sectors for which the federal government buys? How are most government purchases made? What sources of help in dealing with the government are available? Copyright © Houghton Mifflin Company. All rights reserved.

Not-for-Profit Markets
Also called noncommercial or not-for-profit organizations, nonprofits include colleges, hospitals, libraries, charities, churches, museums, and various associations such as the National Organization for Women (NOW) and the American Association of Retired People (AARP) Nonprofit organizations have distinct characteristics: providing services and creating social change close public scrutiny from multiple publics multiple objectives such as the social impact of their efforts, the number of people served, and the amount of donation attracted dual management (professional managers and specialists with managerial responsibilities) Copyright © Houghton Mifflin Company. All rights reserved.

Negotiating Styles of Organizational Buyers cont’d
1. Hard Bargainers Keep several suppliers competing aggressively against one another to win the business 2. Facilitators Try to work efficiently and cooperatively with salespeople to reach mutually acceptable agreement 3. Straight-Shooters Exhibit honesty and integrity throughout negotiations and refrain from pressuring the salesperson into concessions Copyright © Houghton Mifflin Company. All rights reserved.

Negotiating Styles of Organizational Buyers cont’d
4. Socializers Keep several suppliers competing aggressively against one another to win the business 5. Persuaders Try to make salespeople show respect to them and their organizations and express appreciation for their business 6. Considerate buyers Empathize with salespeople and try to work with them to reach mutually acceptable agreements Copyright © Houghton Mifflin Company. All rights reserved.

Business Orientation of Organizational Buyers
Organizational buyers differ with respect to the preferred kind of relationship they have with salespeople Salespeople must determine the kind of relationship their prospects and customers desire and adapt their behavior accordingly Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Business Orientation of Organizational Buyers cont’d
Three types of customers have been identified with respect to their preferred relationship: Interact with salespeople like personal friends, as they share intimacy and casual conversation and engage in joint leisure activities beyond the usual sales call (e.g., attending sporting events). Such relationships tend to be long term. 1. Commercial Friends Royalty-Free, Digital Vision/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Business Orientation of Organizational Buyers cont’d
Treat salespeople almost like a fellow employee and meld both personal and business aspects of the relationship, but are less intimate than commercial friends are with salespeople. As with commercial friends, relationships between the salespeople and a customer coworker are long term. 2. Customer Coworkers Royalty-Free, Digital Vision/Getty Images 3. Business Acquaintances Maintain a formal relationship with salespeople and are reliant on them for economic gain; although the association is cordial—and may even incorporate discussions of personal life—it lacks intimacy and does not entail interaction beyond the business context. Copyright © Houghton Mifflin Company. All rights reserved.

Buyers and Decision-Making Styles cont’d
There are three kinds of decision-making styles: Planning-oriented, Entrepreneurially Oriented, and Bureaucratically Oriented A buyer’s style influences his or her preferences for the seller’s selling strategy. The selling strategy a salesperson uses with a given customer should reflect that customer’s decision-making style. Copyright © Houghton Mifflin Company. All rights reserved.

Buyers and Decision-Making Styles cont’d
Entails making decisions on the basis of long-run considerations, as the needs of the firm are carefully evaluated and planned. It requires detailed information and consultations with multiple departments 1. Planning-Oriented Style Try to work efficiently and cooperatively with salespeople to reach mutually acceptable agreement 2. Entrepreneurially Oriented Style Characterized by utilization of formal rules and policies that determine information flows, activities, and interactions among company members 3. Bureaucratically Oriented Style Chapter Review Question: Compare and contrast the three different types of decision-making styles used by professional buyers: the planning-oriented, entrepreneurially oriented, and bureaucratically oriented styles. How would you negotiate with buyers who exhibit each of the three styles? Copyright © Houghton Mifflin Company. All rights reserved.

Table 10.4 Type of Decision-Making Style

International Negotiations
As domestic markets become saturated, nearly every company is interested in increasing international sales This is little more than wishful thinking until the company's sales representatives find global customers, build trustful relationships, and bring the global sales concept to reality Therefore, professional sales personnel must be especially aware of cultural differences that they will encounter when doing business with international organizational buyers and how those differences will influence the buyer-seller relationship Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Guidelines for Doing Business in International Markets
Several guidelines are important to consider in international selling: Don't Be in a Hurry Understand Time Continue Gathering Information Be Comfortable with Silence Never Be Confrontational or Argumentative Thoroughly Prepare Before Any Negotiations Stay Open to Different Negotiating Styles Try Negotiating by the Other Side's Rule Book Be Knowledgeable About Etiquette in Other Cultures Copyright © Houghton Mifflin Company. All rights reserved.

Table 10.5 Considerations in Doing International Business

Table 10.5 Considerations in Doing International Business cont’d

International Views of Negotiation
Buyers from other countries often see U.S salespeople as negotiating with a "winner-take-all" attitude Royalty-Free, Photodisc/Getty Images Many other cultures, by contrast, prefer to develop buyer-seller relationships up front that encourage win-win negotiations based on trust International negotiators generally believe that trust and shared interests characterize a healthy relationship, not some complex legal contract Copyright © Houghton Mifflin Company. All rights reserved.

Know Your Negotiating Partner
When salespeople engage in international negotiations, they must understand local customers—traditions, customs, habits, and sensitivities Royalty-Free, Photodisc/Getty Images This will help avoid misunderstandings, enhance mutual respect, and increase the chances for success in the negotiations Copyright © Houghton Mifflin Company. All rights reserved.

Business Etiquette in Other Cultures
Salespeople must learn as much as they can about local business etiquette when negotiating in different countries Avoiding a mistake in business etiquette can often make the difference between successful and unsuccessful negotiations Royalty-Free, Photodisc/Getty Images Copyright © Houghton Mifflin Company. All rights reserved.

Business Etiquette in Other Cultures cont’d
Some major issues to be aware of and sensitive to Use of business cards Use of first names Eye contact Understanding what “yes” means Acceptance of gifts Interpretation of smiling handshakes Use of one’s voice Posture and body language Distance between buyer and seller Awareness of host country holidays Use of the term “foreigners“ Importance of face-to-face contact Importance of humility and modesty Chapter Review Question: Provide some basic guidelines and rules of business etiquette for salespeople selling in international markets. Copyright © Houghton Mifflin Company. All rights reserved.

Key Terms North American Industry Classification System (NAICS)
Focuses on all activities aimed at creating, developing, and maintaining successful exchange relationships with prospects and customers. Derived Demand Demand created as a result of consumer demand; typical of industrial markets. Reciprocity In industrial buyer-seller relationships, an informal agreement between two or more organizations to exchange goods and services on a systematic and more or less exclusive basis. In other words, “you buy from me, and I’ll buy from you.” Industrial Buyer The buying expert for an organization. Sometimes called the purchasing agent. Foundation Goods Goods used in the production process that do not become part of the finished product, such as fixed major machine tools and office equipment. Copyright © Houghton Mifflin Company. All rights reserved.

Key Terms cont’d Entering Goods
Ingredients or components that become part of the finished product, such as raw materials and semi-manufactured goods. Facilitating Goods Goods consumed in the ongoing production process, such as maintenance and repair items. Gatekeeper Person who controls information or access to decision makers. Examples include technical advisers, secretaries, security guards, and even telephone switchboard operators. Influencers People who can influence the purchase decision by helping set product specifications, negotiating purchasing procedures and prices, or providing information about evaluating alternatives. Copyright © Houghton Mifflin Company. All rights reserved.

Key Terms cont’d Buying Center
In a buying organization, a group of organization members responsible for making purchases. FedBizOpps.gov Website that contains all federal contracting community solicitations for purchases exceeding $25,000 Dual Management A management system in which both professional managers and specialists without managerial training run an organization, sometimes resulting in conflict. Typical of many nonprofit organizations. Copyright © Houghton Mifflin Company. All rights reserved.

Chapter Review Questions
Explain why industrial demand is derived demand. Why are industrial markets more price inelastic and volatile than consumer markets? Name the different criteria on which the success of a purchasing agent is determined by his or her company. Copyright © Houghton Mifflin Company. All rights reserved.

Topics for Thought and Class Discussion
How would you go about becoming acquainted with members of an organization’s “buying center”? How would you determine which specific role each person played? What do you think about the practice of reciprocity in business? If you were a small business owner who wanted to obtain some federal government contracts, how would you find out how to sell to the government? Outline the steps that you would take. Copyright © Houghton Mifflin Company. All rights reserved.

Topics for Thought and Class Discussion cont’d
What do you think are some of the reasons why U.S. salespeople sometimes fail when trying to negotiate contracts with prospects from other countries? What might they do to increase their success? Of the four different types of organizations (manufacturers, resellers, governments, and nonprofits), which do you think you would most like to call on as a salesperson? Which would you least like to call on? Why? Copyright © Houghton Mifflin Company. All rights reserved.

Internet Exercises Use the Internet to access the North American Industry Classification System (NAICS) website at What are the different industrial sectors on which you can find information? Describe the type of information that is available about manufacturing and service firms in North America. As a salesperson, how would you be able to use this information? Copyright © Houghton Mifflin Company. All rights reserved.

Internet Exercises cont’d
Using Google or any other search engine, find guidelines (in addition to those discussed in this chapter) for doing business in international markets. Use the Internet to find articles on business etiquette that salespeople should be aware of when doing business in countries whose cultural systems are very different from those in the United States. Using an Internet search engine, find articles on different international negotiation approaches. Which countries do you think differ the most in their negotiation approaches? Copyright © Houghton Mifflin Company. All rights reserved.

Projects For Personal Growth
Your company’s R&D department has developed a chemical compound made from corn by-products that provides airtight sealing properties when coated over various substances. R&D scientists believe that this product, tentatively named Sealatron, will have many uses in the heavy construction industry. They say it may be appropriate for a final coating on top of the outer insulation wrappings for large oil and gas pipes, power lines, and perhaps sewer and water mains. It might also be used for waterproofing the exteriors of commercial buildings. Go to your school library and use the North American Industry Classification System (NAICS) to research the potential markets for this new chemical sealant. How specifically can you define the potential markets with NAICS digits? Once you’ve found the level of specificity that you want, how will you use the NAICS information? Copyright © Houghton Mifflin Company. All rights reserved.

Projects For Personal Growth cont’d
Assume that you sell for a small clothing manufacturer that wants to supply your company’s undershirts, undershorts, and trousers to one or more of the military branches. Go to FedBizOpps.gov and see what information you can find about federal government solicitations for clothing contracts. What other websites did you visit to find more information? Keep at it until you find at least two solicitations that you believe your company could bid on. Find out how, when, and where to submit your bid. Select a country (other than the United States) in which you would like to sell products and services for a U.S.-based company. What are some basic considerations and rules of etiquette that you need to know and follow in order to sell successfully in this country? Copyright © Houghton Mifflin Company. All rights reserved.

Case 10.1: Do I Really Have To Worry About All These People?
In terms of buying-center roles (initiators, gatekeepers, influencers, deciders, buyers, and users), how should Linda classify each of the seven people she met at Gamble & Simpson (Marie Doyle, Bill Constantin, Esther Hughes, Dr. Stuart Forbes, Dr. Li Chu, Fred Burnett, and Dr. Leland Birsner) Which of these people do you think has the greatest influence on purchase decisions? Why? Copyright © Houghton Mifflin Company. All rights reserved.

Case 10.1: Do I Really Have To Worry About All These People? cont’d
What advice would you give Linda in her efforts to think up a strategy and tactics to develop and maintain good relationships with all of these buying center members? Now that her first sales call is over, what should Linda do to follow up with some or all of the Gamble & Simpson people? Copyright © Houghton Mifflin Company. All rights reserved.

Case 10.2: Now What Am I Going To Do?
Do you think Keith has been doing a good job serving the Eaton account? Why or why not? In what stage of the buying process is Eaton’s new purchasing organization? What is the buying situation from their perspective? What specific actions would you advise Keith to take now? If Keith manages to retain the Eaton account, what advice would you give him for long-run maintenance of the account? Case 10.2 is found online at Copyright © Houghton Mifflin Company. All rights reserved.

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