what is Business-to-Business (B2B) Market
This article provides notes on Business-to-Business (B2B) Market.
The business market consists of all organizations that acquire goods and services to further produce products or services to be sold, rented, or supplied to others. Demand in the business market is derived from demand in the consumer market and fluctuates with the business cycle. Nonetheless, the total demand for most business goods and services generally prices inelastic.
Business Market v. Consumer Market:
Business markets have several characteristics that contrast sharply with those of consumer markets, such as close supplier-customer relationships; professional purchasing; several buying influences; multiple sales calls; derived and inelastic demand; geographically concentrated buyers and direct purchasing.
Business marketers need to be aware of the role of professional purchasers and their influencers, the need for multiple sales calls, and the importance of direct purchasing, reciprocity, and leasing.
The business buyer needs to take many decisions when making a purchase. The number of decisions depends on the buying situation—the complexity of the problem being solved, the newness of the buying requirement, the number of people involved, and the time required.
Based on these, there are three types of buying situations: straight rebuy, modified rebuy, and new task.
A purchase in which a customer buys the same goods in the same quantity on the same terms from the same supplier as the first buy.
A buying situation in which an individual or organization buys goods that have been purchased previously but changes either the supplier or some other element of the previous order.
An organizational buying situation in which the organization has had no previous experience with the purchase of a product of the kind required.
Purchasing agents are influential in straight rebuy and modified rebuy situations, where engineering personnel usually influence selection of product components and purchasing agents dominate in selecting suppliers,
Business Marketers’ Task:
To effectively target their efforts, business marketers have to figure out:
• Who are the major decision participants?
• What decisions do they influence?
• What is their level of influence?
• What evaluation criteria do they use?
Small sellers concentrate on reaching the key buying influencers. Large sellers, on the other hand, go for multilevel, in-depth selling to reach as many participants as possible. Business marketers must periodically review their assumptions about buying center participants.
In defining target segments, different types of business customers can be identified, with corresponding marketing implications. Every organization has specific purchasing objectives, policies, procedures, organizational structures, and systems. Business buyers seek to obtain the highest benefit package in relation to the market offering’s costs. A business buyer’s incentive to purchase will be greater in proportion to the ratio of perceived benefits to costs. A marketer’s task is to construct a profitable offering that delivers superior customer value to the target buyers.
Marketers need to understand how business-purchasing departments work. Peter Kraljic, Director Emeritus, McKinsey, distinguished four product-related purchasing processes:
(i) Routine products—low value and cost and little risk
(ii) Leverage products—high value and cost but little risk
(iii) Strategic products—high value and cost and high risk
(iv) Bottleneck products—low value and cost but some risk.
Websites are organized around e-hubs: vertical hubs centered on industries and functional hubs. The buying decision process, mode of purchase and the type of product being purchased play an important role in the marketing initiatives taken by a company. With technology becoming an integral part of marketing, initiatives in technological means are of importance too.
Technological Initiatives in B2B Marketing:
Technology has always been an important factor in determining the type of business being carried out. With advances in information technology, the way people do business has also changed to a great extent. The Internet has emerged as one of the busiest spaces which business people use to conduct their business activities. Companies use their websites for both purchasing and selling activities.
An electronic marketplace allows buyers, sellers, independent third parties, and multi-firm consortiums to exchange information about prices and product offerings. It has been suggested that electronic markets will create benefits for both buyers and suppliers and it gives suppliers a greater reach and buyers the opportunity to obtain information about all available products.
1. E-business and E-commerce:
The concept of e-business emerged as a result of developments in Internet technology The Internet is the largest network which companies use to carry out their activities more advantageously E-business means the use of electronic means and platforms to conduct a company’s business.
E-commerce is more specific than e-business. In addition to providing e-business services, e-commerce helps in making business transactions on the Internet more secure. With the development of e-commerce, the concept of e-marketing has also developed. This is a process by which companies inform potential and existing buyers about the services and products they offer globally.
An electronic market is an inter-organizational information system through which multiple buyers and sellers interact to accomplish one or more of market-making activities such as identifying potential trading partners, selecting a specific partner and executing a transaction.
3. Electronic Data Interchange (EDI):
EDI is an inter-organizational system which transmits standard business documents electronically between trading partners. EDI allows firms to fundamentally change the way they do business, thus improving their overall performance and enhancing their competitive advantage.
While EDI provides economic benefits, it may be expensive to implement, especially when an organization does not achieve hardware or software compatibility Security, in particular, becomes an issue, as EDI systems do not operate unilaterally For example, organizations motivated to adopt EDI must either find similarly motivated trading partners or persuade and/or coerce their existing trading partners to adopt EDI.
One key barrier to this is the lack of trading partner trust owing to a lack of open communication and information sharing. Scala and McGrath (1993) identified social and organizational issues that impact organizational culture, structure, and levels of adoption of EDI. Ford was one of the earliest innovators of EDI network technology. It was adopted to streamline business processes and optimize supply chain management activities.
Ford had two EDI systems and many application systems across its five branches, namely parts and accessories, original equipment, non-production, purchasing and Ford credit and finance. During the late 1980s, acceptance testing of EDI business transactions was carried out. Later Telstra developed the Trade Link software in 1988.
Building Relationships and Partnerships in the B2B Market:
Business-to-business relations can be defined as commercial business between trading partners. B2B e-markets can be categorized into static/established and dynamic/discovered electronic markets. Enabling buyers to purchase from suppliers through electronic catalogs and auctions, allowing one too many transaction events for procuring or selling goods or services are examples of static/established markets.
Exchange matching supply and demand via real time, bid ask spot markets and e-Hub representing neutral Internet-based intermediaries providing extensive services and integrating into participants’ systems are examples of dynamic/discovered markets.
Another categorization of B2B e-markets is dividing them into spot markets, open markets, private markets and information markets. Spot markets are markets where information is collected for each transaction to compare prices. Examples are financial services, raw materials, and transportation services.
Open markets are shops where you can buy standard commodities such as pens, diskettes and other office equipment. Private markets are markets where a few organizations conduct their purchases by inviting suppliers into the market. Information markets provide information on buyers and suppliers, but the actual transaction takes place outside these markets.
Four kinds of dynamic e-market models are emerging: procurement networks, service networks, supply networks and delivery networks. The expected benefits from electronic procurement markets include reduced transaction costs, negotiation of better agreements with suppliers, better utilization of frame agreements, and access to more suppliers. It has been suggested that companies expecting reduced transaction costs will be the most active users of electronic marketplaces. And reduced transaction costs will be of importance mainly to organizations with high procurement volumes.
To improve effectiveness and efficiency, business suppliers and customers constantly explore different ways to manage their relationships. Building trust between parties is often seen as an essential prerequisite for healthy long-term relationships.
The relationship between advertising agencies and clients illustrates findings such as:
(a) In the relationship formation stage, one partner experiences substantial market growth.
(b) Information asymmetry between partners is such that a partnership would generate more profits than if the partner attempted to invade the other firm’s area.
(c) At least one partner has high barriers to entry that would prevent the other partner from entering the business.
(d) Dependence asymmetry exists such that one partner is more able to control or influence the other’s conduct.
(e) One partner benefits from economies of scale related to the relationship.
Vertical coordination can facilitate stronger customer-seller ties but it can, at the same time, increase the risk to the customer’s and suppliers specific investments. Specific investments are expenditures tailored to a particular company and value chain partner.
They help firms increase profits and achieve positioning. They also entail considerable risk to both the customer and supplier. Specific investments are partially sunk. They lock-in the firms that make investments to a particular relationship. Sensitive cost and process information may also need to be exchanged. A buyer may be vulnerable to hold-up because of switching costs.
A supplier may be more vulnerable to future hold-up contracts because of dedicated assets and/or expropriation of technology/knowledge. When buyers cannot easily monitor supplier performance, the supplier might shirk or cheat and not deliver the expected value.
Opportunism can be thought of as ‘some form of cheating or undersupply relative to an implicit or explicit contract’. Opportunism is a concern because firms must devote resources to control and monitor that otherwise could be allocated for more productive purposes.
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