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The Nature of
Business Marketing
After studying this chapter you should be able to:
Know what business marketing is.
Understand customer value in business markets.
Know the differences in the characteristics between business and consumer marketing.
Learn about business marketing planning.
Understand the concept of derived demand and other related concepts.
The basic concepts of marketing (in terms of exchange processes between buyers and sellers) remain
the same for both the consumer marketing and business marketing. However, there are differences between consumer markets and business markets. These differences must be understood well by business
marketers who want to reach and satisfy the customers better and faster than their competitors, in order
to achieve the corporate objectives.
Business marketing is a dynamic and challenging area that presents opportunities for the application
of marketing concepts and principles. To market effectively in a business market, we must understand
the nature of business marketing which functions differently, in many respects, from consumer marketing. It is therefore necessary to study business marketing for those who are planning a career in business marketing.
WHAT IS BUSINESS MARKETING?
Business marketing is also referred to as ‘business-to-business marketing’ (B2B), industrial marketing,
or ‘organisational marketing’. Business marketing is the marketing of products and services to business organisations. Business organisations include manufacturing companies, government undertakings, private sector organisations, educational institutions, hospitals, distributors, and dealers. Business
organisations buy products and services to satisfy many objectives like production of other goods and
services, making profits, reducing costs, and so on. In contrast, consumer marketing is the marketing
of products and services to individuals, families, and households. The consumers buy products and
services for their own consumption or use.
The companies (selling organisations) that sell steel, machine tools, computers, courier services,
and other goods and services to business firms (buying organisations) need to understand the buyers’
needs, resources, policies, and buying procedures. The important point in business marketing is to create value (benefit) for the buying organisations (customers) with products and services that focus on
buying organisational needs and objectives. For example, a company manufacturing and marketing
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precision steel tubes to bicycle manufacturers is doing business marketing. Business marketer of the
precision steel tube company, must understand the needs of bicycle manufacturers such as Hero Cycle
and Atlas Cycle, in terms of their quality requirements, applications of tubes, availability or delivery on
daily or weekly basis, and so on.
Similarly, a small and proprietary firm, giving technical advice (or service) to paint-manufacturers
is also doing business marketing.
Business Markets
Business Markets consist of firms, institutions and government organisations that purchase goods and
services either for their own use, i.e. for use in the products and services that they produce, or for resale
along with other products and services to other firms. Generally, business markets are composed of
fewer but larger customers than consumer markets. For example, Lakshmi Machine Works (LMW)
Limited, Coimbatore, India, is a leading textile machinery manufacturer, whose business markets
consist of textile mills in India as well as in Asian and Ocean regions. These textile mills sell fabrics
of cotton or wool to garment manufacturers, who are also the business customers. Finally, the garment
manufacturers make items of clothing, such as shirts and trousers, which are sold in consumer markets
to individuals. There are companies whose products and services are marketed to both business and
consumer markets. One such example is Havells India Limited, described below:
Example: Consumer Market (B2C) and Business Market (B2B)
Havells India Limited is a leading electrical and power distribution equipment manufacturer. Let us
consider how Havells markets one of its products – viz. fans. Various types of fans, such as ceiling,
table, wall mounting, pedestal and exhaust are sold to both consumer market (B2C) and business market (B2B).
Figure 1.1
Consumer and Business Markets for Havells Fans
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Havells fans are sold in larger quantity to consumer market, i.e. to households. However, fans are
also required for business markets where the volume of business coming from a single customer like
a new office building for a central government organisation can be very large. Havells may serve large
government and private sector companies directly through its branch sales people. For household
customers, fans are sold through Havells distribution network, consisting of the company showrooms,
called “Havells Galaxy”, dealers, and retail outlets.
CUSTOMER VALUE IN BUSINESS MARKETS
Customer value or value is one of the widely used terms in business markets in recent years. However,
most customer value propositions or offerings make claims of benefits to the customer, but do not express the value in monetary terms.
Value in business markets is defined as “the economic, technical, service, and social benefits received by a customer firm in exchange for the price paid for a product or service offering”1. There is
another method of defining value, that is, “a ratio between what the customer gets (i.e. benefits) and
what he gives (i.e. costs)2 ”. Here, value = benefits/costs. The benefits include functional and emotional
benefits. The costs include monetary, time, energy, and psychic costs. The customer firm, which receives offerings V1 and V2 from the two supplier firms, chooses the offering which gives higher value,
that is, higher ratio of benefits to costs.
Estimating Customer Value
Accurately estimating value would help the supplier firm to create and deliver value to targeted market
segments and customers. In business markets, customer value varies for different market segments and
customers. Business market managers should estimate the worth of their offering in monetary terms for
market segments and customer firms. Some of the methods used to assess or estimate customer value
are: focus group, customer interview, internal test, and conjoint analysis.
Focus Group This consists of a group of knowledgeable individuals (or participants) from customer
firms. The moderator from the supplier firm shows the product offering to the participants and then asks
them to write down the value of the offering to their firms. The moderator then discusses the offering
with the participants in detail for about one hour. At the end of the discussion, the participants are asked
to write down their interest in the product, using a 10-point scale, and again, what benefits they expect
and the price they would be willing to pay for these benefits.
Customer Interview In this method, the supplier firm people (and/or their consultants) seek customer firm’s cooperation to get detailed information about the benefits and costs associated with the
supplier firm’s product or service. Based on the data collected, the supplier firm calculates the value
estimate of its product for that specific application.
Internal Test Technical people in the supplier firm conduct laboratory tests on the product in order
to get an estimate of its value. This method can be applied only if the supplier has a detailed knowledge
of how the product is used by the customers.
Conjoint Analysis Here, the participants (or respondents), in a personal interview, are asked to
evaluate a set of product offerings. The participants indicate a purchase preference rating for each product offering. The researcher then uses regression analysis to decompose the ratings into value estimates.
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Most business marketing firms do not try to estimate the customer value in monetary terms. The few
but growing number of firms who develop this capability have superior knowledge of the market and
show superior performance.
Customer Value Proposition
Business marketing firms (or supplier firms) use the term “customer value proposition” (or “value
proposition”) for three types of benefits:
(a) many benefits listed,
(b) few benefits compared, and
(c) few benefits meeting customer expectations.
Many Benefits Listed In a study conducted by the author, about 70 per cent of business marketing
firms listed more than four benefits, which they believed their product or service would deliver to their
target customers. They thought more number of benefits (or customer value propositions), the better it
would be. However, when asked, some of their target customers were not aware of these benefits. Listing many benefits require little knowledge about customers and competitors. These marketing firms
cannot answer the buying firm’s question, “Why should we buy your product?”
Few Benefits Compared In our study, about 20 per cent business marketing firms mentioned three
or four benefits and compared some of these benefits to the competitors’ value propositions. They
assumed that some of these superior benefits might be valuable to their target customers. Here, the
marketing firms did not have detailed information about the customers’ needs or expectations. In other
words, they did not estimate customer value.
Let us consider one example of Intel core processors supplied to its business customers, such as
Dell and Lenovo, for desktop PCs. Intel has developed a customer value proposition, which includes as
many as six benefits as follows:
•
•
•
•
•
•
Superior quality
Lower price
Competitive service offerings
Greater investment protection
Partnering to deliver mission results
Provide a complete range of highly scalable, flexible, and reliable products
Dell and Lenovo recall only three out of the six benefits listed by Intel—that is, product quality, lower prices and service offerings. It is interesting to know that Intel’s competitor AMD’s customer value
proposition was similar, and consisted of two benefits—superior quality and lower price. When asked
about the similarity of the customer value propositions of Intel and AMD, Dell and Lenovo responded
that Intel’s offerings were greater than AMD’s offerings and that Intel’s customer value proposition
(CVP) was closest to their expectations.
Few Benefits Meeting Customer Expectations Purchase managers prefer to do business with
supplier firms who make their product or service offerings superior to the few benefits that matter most
to their firms. These supplier (or marketing) firms demonstrate and communicate the superior value to
the customer firms in a way that show their complete understanding of customer firms’ businesses. For
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instance, Kewaunee Labway India Ltd. undertakes projects to set up scientific laboratories. Once the
project is set up, they validate it by carrying out internal audit, which is not provided by any competitors. When we asked two of their customers—Hikal Limited and Biocon Limited, they confirmed that
Kewaunee had a complete view of their businesses and met their expectations better than other players
in the market.
Another example: Agritech Engineering Pvt. Ltd. developed the latest technology machines under the brand name AGT (Advanced Grain Technology) to manufacture rice mills used for threshing
paddy to rice. Few benefits, in addition to the latest technology, provided by AGT to customers include
superior presales service of planning, designing, building and installing rice mill machines as well as
prompt after-sales technical service. These benefits are meeting the expectations of customers and
hence, AGT branded rice mills have the highest market share not only in India but also in Bangladesh.
Demonstrating and Documenting Customer Value3
Once a salesperson gets a complete understanding of the prospective customer’s specific needs, he/she
modifies the company’s value propositions or benefits in line with the customer’s requirements. Successful marketing firms use “value case histories” in order to demonstrate and document the cost savings and other benefits that customer firms have actually received by using their products and services.
For instance, IBM in their advertisement, headlined “special muffler”, gives the example of how
IBM’s supply chain expertise helped a major European automotive parts manufacturer cut inventory by
over 30 per cent, while keeping (delivery) service levels at 97 per cent. This illustration was based on
IBM’s value chain study.
Another example of how case studies are used in the company websites to demonstrate and document customer value can be seen for Wipro Technologies. In one case study on “quality consulting”,
Wipro has documented improvement in the product performance of a telecom application by 250 per
cent using six sigma methodologies.
Superior Performance When the customer value proposition is developed and delivered properly,
it would result in superior performance of the company. That is the responsibility of the senior management of the company.
Let us illustrate this concept with an example from a service provider. Quality Solutions for Information Technology Pvt. Ltd. (QSIT) is a service provider to many software companies in training and
development, certification programmes, process consulting, and audit/assessment. QSIT’s customer
value proposition (CVP) for executive training is as follows:
• Providing high quality training in software testing and project management
• Providing certification after the training programme—the only company in Asia-Pacific region
to give CSTP (Certified Software Test Professional) certification
The main competitors of QSIT are: QAI (Quality Assurance Institute), Binary Essentials Consulting, Management Professionals International (MPROI), and PMCC (India). Despite competition from
national and international organisations, QSIT has a client base of about 600 companies including
IBM, Microsoft, Motorola, Accenture, and Infosys, and has been growing rapidly, showing superior
performance, since the company has not only developed customer value proposition, but also delivered
the same properly.
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BUSINESS vs CONSUMER MARKETING
The basic tasks of marketing management apply to both consumer and business marketing. These tasks
are: (a) deciding the target markets, (b) finding out the needs and wants of the target markets, (c) developing products and services to meet the needs of those markets, and (d) evolving marketing programme
or strategy to reach and satisfy target customers, better and faster than competitors.
However, there are differences in the characteristics of business and consumer markets.
Differences Between Business and Consumer Marketing
In business marketing, the markets are geographically concentrated; the customers are relatively fewer;
the distribution channels are short; the buyers (or customers) are well informed; the buying organisations are highly organised and use sophisticated purchasing techniques; the purchasing decisions are
based on observable stages.
In comparison to consumer marketing, business marketing is more a responsibility of general management. Sometimes, it is difficult to separate business marketing strategy from the corporate (company) strategy. In consumer marketing, the changes in marketing strategy are carried out many times
within the marketing department through changes in advertising, sales promotion, and packaging.
However, the changes in business marketing strategy generally have company-wide implications.
For example, in 1983, a newly-recruited marketing manager of a precision steel tubes company
wanted to evolve a marketing plan. He initially carried out a market survey to understand the needs and
the requirements of the existing and new customers. One of the major findings of the market survey
was that out of seven different market segments, two segments—namely Bicycle and Automotive—required 70 per cent of the total market of precision steel tubes in India and that their future growth was
much higher than the other segments. However, both the segments needed a higher volume of value
added tubes (called “cold drawn welded tubes”), which were also giving a much higher contribution to
fixed costs and profits. The marketing strategy of focusing (targeting) marketing efforts on Bicycle and
Automotive segments could be achieved only when it became a part of the corporate strategy, by investing C five crores (USD 0.83 million) for increasing the production of cold drawn welded (CDW) tubes
from 80 metric tons per month to 400 metric tons per month. The company could, therefore, achieve its
objective of becoming the market leader by 1986.
While generally it is true that the differences between business and consumer marketing are of degrees, the degrees of differences are substantial. These differences can be seen by comparing the two
markets, as shown in Table 1.1.
Table 1.1 Differences between Business and Consumer Marketing
Areas
Business Markets
Consumer Markets
1. Market
characteristics
ƒ Geographically concentrated
ƒ Relatively fewer buyers
ƒ Geographically dispersed
ƒ Mass markets
2. Product
characteristics
ƒ Technical complexity
ƒ Customised
ƒ Technically not complex.
ƒ Standardised
3. Service
characteristics
ƒ Timely delivery service and
availability very important
ƒ Delivery service and availability
somewhat important
Contd.
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ƒ Involvement of various functional
areas in both buyer and supplier
firms
ƒ Involvement of family members
ƒ Purchase decisions are mainly made
on rational/performance basis
ƒ Purchase decisions are mostly made
based on physiological/social/
psychological needs
ƒ Technical expertise required
ƒ Less technical expertise required
ƒ Stable interpersonal relationship
between buyers and sellers
ƒ Non-personal relationship between
buyers and sellers.
5. Channel
characteristics
ƒ More direct
ƒ Fewer channel levels
ƒ Indirect
ƒ Multiple levels of intermediaries
6. Promotional
characteristics
ƒ Emphasis on personal selling
ƒ Emphasis on advertising
7. Price
characteristics
ƒ Competitive bidding and negotiated
prices
ƒ List prices or maximum retail price
(MRP)
4. Buyer behaviour
ƒ List prices for standard products
Market Characteristics
A large number of households, geographically dispersed all over the country, are included in the mass
market for consumer goods and services. But, in the case of business markets, it is common to find less
than 1000 companies to represent the total market for an industrial product or service. For example,
for a consumer product like toothpaste or soap, a mass market, consisting of all the households in India,
exist. However, for industrial products, such as large power transformers or high tension switchgears,
there are limited numbers of customers—mainly state electricity boards, large private and public sector
organisations.
Product Characteristics
In business marketing, the products or services are generally technically complex. They are used for
serving the operations of the organisations. Because of the importance given to the technical aspects of
products, the purchases are made based on the specifications evolved by the buyers.
The real risk in “falling in love with the technical aspects of a product” in business marketing is to
ignore the flexibility in responding to customer’s needs in a competitive market. Some companies, as a
result, commit the serious mistake of trying to change the customer to fit the product.
For example, the quality control manager of a “cold rolled (CR) steelstrip” manufacturing company
informed an important customer (who used C.R. steel strip for the manufacture of luggage bags) that
the customer was not justified in rejecting his company product, as it was as per the relevant Indian
standard specifications and that the customer’s product specifications were more stringent than the
Indian standard specifications. However, the customer refused to accept the product, as it was failing
at the shop floor operations. The customer, therefore, not only returned the entire rejections but also
cancelled the balance orders. Subsequently, other suppliers supplied the product as per the needs and
specifications of the customer, who placed orders with them.
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As compared to consumer marketing, business customers place a greater importance on service, that
is, timely delivery or availability of product, because any delay in supply will have a significant impact
on the production or operations.
Buyer Behaviour
In business marketing, the buying process is more complex as compared to consumer marketing. The
purchase decisions in business marketing are based on many factors, such as compliance with product
specifications, product quality, availability or timely supply, acceptable payment and other commercial
terms, cost-effectiveness, after-sales service, and so on. The purchasing decisions generally take a longer time and involve many individuals from technical, commercial/materials, and finance departments.
After the initial offer (or quotation) made by a seller (in response to a written or verbal enquiry from a
buyer), there are negotiations and exchange of information between the specialists and representatives
from each functional area, from both the buyer and the seller organisations. Thus, inter-organisational
contacts take place and interpersonal relationships are developed. The relationships between the sellers
and buyers are highly valued, and over a period of time, they become stable because of a high degree
of interdependence.
In contrast, in consumer marketing, the relationship between a buyer and a seller is non-personal.
The consumers change their purchasing habits frequently and the buying decisions are often based on
physiological/social or psychological needs of the members of a family/household.
Distribution Channel Characteristics
As shown in Fig. 1.2, there are fewer channel levels in business marketing as compared to consumer
marketing.
Figure 1.2 Channels of Distribution in Business and Consumer Markets
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Because of the importance of inventory/stock control (i.e. minimisation of inventory carrying cost,
without causing production stoppages due to non-availability of raw material components), the distribution channels are more direct from the manufacturer to the customer in business marketing. Often,
the manufacturers use their own sales/marketing persons (i.e. company sales force) to sell directly to
major customers. However, for selling to small-scale customers, many manufacturers use either distributors/dealers, or agents/representatives, which also helps in minimising the cost of marketing.
In case of consumer marketing, the channel of distribution is longer with multiple levels of intermediaries (also referred to as “middlemen”), since the household consumers are geographically dispersed
all over the country/state.
Promotional Characteristics
While in consumer marketing the emphasis is on advertising, in business marketing, the importance is
given to the personal selling through the company’s sales force. As a result, a much larger expenditure
budget is provided for advertising in consumer marketing in comparison to business marketing.
In business marketing, apart from personal selling, the primary means of reaching the potential
customers is through advertisements in trade journals and business magazines (e.g. Business India,
Business World, etc.), as well as direct mailing of company leaflets/brochures to potential customers.
The sales promotional activities (also referred to as business promotion activities) include participation
in exhibitions or trade shows and conducting technical seminars.
Price Characteristics
In consumer marketing, the products are sold through the retailers to the consumers based on the
“price list” of the manufacturer or the maximum retail price (MRP) for the packaged products. Sometimes, depending on the intensity of the competition, the retailer reduces the price by passing on to the
consumer a part of his margin.
However, in business marketing, price is one of the factors considered in purchase decisions. Competitive bidding and price negotiations are very common in business marketing. When there are no
price negotiations in certain government tenders, the competitive bidding (i.e. quoting a competitive
price against a tender enquiry) becomes very important, as only the lowest bidders are considered for
placement of orders. However, in almost all of the private sector and some government organisations,
price negotiations are held to decide the prices and the volume of orders to be placed on various supplier firms. The payment and other commercial terms are also negotiated at the time of price negotiation.
Dealer (or trade) discounts, and volume (or quantity) discounts on the price list of standard industrial products are widely used in business marketing.
An example on price negotiation of a business marketing firm is as follows. A business
organisation in the private sector had shortlisted two products for diversification. The corporate
planning manager of the company sent the enquiries for carrying out marketing research on “coil winding machines” and “switch mode power supply” to the three marketing research agencies. The objectives and the information required from the market surveys were explained to the marketing research
agencies, who were asked to submit their offers. After the receipt of the offers, the corporate planning manager called the three agencies for discussions as he found that while the delivery period and
payment terms were similar, the fees for market survey (i.e. the prices) varied considerably between
the three offers. After carrying out price negotiations separately with the three agencies, orders were
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released for carrying out market surveys to two agencies for one product each, based on their market
reputation, experience, methodology of research, and the negotiated prices.
From the above discussions, one can appreciate that many basic differences exist between consumer
and business marketing. These differences in characteristics do not make a complete analysis. To understand better the differences between consumer and business markets, it is necessary to understand
the economics of industrial demand as well as planning.
Business Marketing Planning
Planning in business marketing requires a closer relationship to corporate strategy and more functional interdependence as compared to planning in consumer goods marketing. Changes in marketing
strategy are more likely to involve capital investment in new equipment, or departure from traditional
manufacturing approaches, which would have companywide implications. For instance, an engineering firm wanted to change its marketing strategy to superior quality product from average quality. For
implementing this strategy, the company decided to go for backward integration by producing the raw
material internally, since the quality of the raw material received from the only supplier was not good
enough. The company had to make capital investment, resulting in the companywide implications.
Hence, one may conclude that business marketing is much more a general management responsibility
than it is in consumer-goods marketing. In a consumer-goods company, changes in marketing strategy
can be made within marketing function through changes in advertising, sales promotion, or packaging.
Functional Interdependence Effectiveness of business marketing depends to a large extent on
the support from other functions, particularly manufacturing, design, purchase, and logistics. For instance, if a major or key account like TVS wants flexibility in delivery due to frequent changes in the
demand for various types or models of two-wheelers, the suppliers of components who meet this need
get maximum share of business. The supplier firm can meet the key customer’s needs only if other
functions support the marketing efforts, keeping in mind the company objective of profits through
customer satisfaction. In practice, it is seen that if the marketing person talks to other functional people
informally with the intention to have good relationship, it results in greater cooperation for meeting
customers’ needs. In fact, cross-functional teams, with close and integrated relationship between marketing and other functions, have given good results to organisations like Hewlett-Packard and Wipro.
INDUSTRIAL DEMAND
The demand for industrial products and services does not exist by itself. It is derived from the ultimate
demand for consumer goods and services. Industrial demand is, therefore, called derived demand.
Sometimes the demand for industrial product is called joint demand, when the demand for a product
depends upon its use along with the existence of other product or products. Cross elasticity of demand
exists for some substitute products. Let us examine these concepts in more detail.
Derived Demand
Business customers buy goods and services often for use in producing other goods and services. Ultimately, whatever is finally produced will be sold to the consumers. Hence, the demand for industrial
goods and services is derived from the demand from consumer goods and services.
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For example, the demand for “precision steel tubes” does not exist in itself. It is demanded for the
production of bicycles, motorcycles, scooters, and furniture (steel tables and chairs), which are used
by the consumers. Thus, the demand for precision steel tubes is derived from the forecast of consumer
demand for bicycles, motorcycles, scooters, and furniture.
In case of capital goods, such as machinery and equipment (e.g. machine tools, textile machinery,
leather machinery, etc.) that are used to produce other goods, the purchases are made not only for the
current requirements, but also in anticipation of profits from the future usage. If businessmen feel that
there may be a recession in near future, their purchases will be drastically curtailed. On the other hand,
if the attitude of businessmen is favourable (i.e. they feel the business is on the upswing) their investment in capital goods and other industrial products will increase. Thus, the attitude of businessmen is
very important, as it reflects the optimism or pessimism about the future.
During the periods of recession, or reduced consumer demand, business firms reduce their inventories, or reduce the production, or do both. On the other hand, during the period of prosperity, there is an
increased production and sales of consumer goods, which results in an increased demand for industrial
goods. This may be the right time for price increases and building stocks as ready availability and
shorter delivery period become very important to satisfy customers’ needs.
A business marketing firm should be in close touch with customers’ purchase, finance, quality, R&D
and marketing departments, so as to get information on changes in customers’ sales, new product development, financial condition, and the quality of its products. This will help to understand the changes
in the demand for industrial products.
Fluctuating Demand
It has been found that the demand for many industrial products fluctuate more than the demand for
consumer products. For instance, if the demand for consumer durable products like refrigerators,
washing machines, and mixers increase by 10 per cent during the period of prosperity in marketing environment, it can cause rise in demand for industrial products like paint, steel, and electrical motors by
as much as 100 per cent. However, if there is a recession in the economy and fall in consumer demand
by 10 per cent, it may cause a near collapse in the demand for industrial products. This is also referred
to by economists as the acceleration effect, which indicates that the demand for industrial goods and
services are generally more volatile than the demand for consumer goods and services. Consider the
following example:
In 1986, due to recession in bicycle industry in domestic market, the demand for bicycles had fallen
by about 40 per cent. This resulted in the drop in demand for precision steel tubes, which are used for
production of bicycles, by as much as 70 per cent. The precision steel tube manufacturers who had
targeted bicycle segment suffered substantial loss of sales and profits.
Stimulating Demand
As the demand for industrial products is derived from the ultimate demand for consumer products,
it is logical that business marketers should carry out promotional programmes that directly reaches
the ultimate consumers (i.e. individuals and household consumers), so as to stimulate the demand
for industrial products. For instance, Steel Authority of India (SAIL) carried out an advertisement
campaign in newspapers and television, targeting household consumers, to create a favourable
environment for use of steel through household appliances like mixers, washing machines and
refrigerators. Sometimes business marketers stimulate demand for their products by stimulating
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demand for their customers: products. For example, Intel, in their advertisements, were stimulating
the demand for their microprocessors by making customers of Personal Computers (PCs) aware and
more interested by mentioning “Intel inside”.
Joint Demand
Joint demand occurs when one industrial product is useful if other products also exist. For example,
a pumpset cannot be used for pumping water, if the electric motor or diesel engine is not available.
Similarly, the department of telecommunication (DoT), which requires a complete kit, consisting of 12
different items, for joining the underground telecom cables, cannot buy only some of the items from a
supplier as it does not complete the kit. Thus, some industrial products do not have individual demand,
but are demanded only if the “other” products are available from the business supplier.
Cross-Elasticity of Demand
Elasticity is simply the change in demand from a change in price. Percentages are used to measure the
relative changes. Demand is “inelastic” if the percentage change in quantity demanded is less than the
percentage change in price. Demand is “unitary” if the percentage change in price is matched by an
equal percentage change in quantity. Demand is “elastic” if the percentage change in quantity demanded is more than the percentage change in price. This concept is useful as a starting point to understand
the relationship between the price and the quantity sold (or demanded), as shown in Fig. 1.3.
Figure 1.3 Price Elasticity of Demand
In Fig. 1.3, at position “A”, a 20 per cent price decrease is accompanied by a 66.67 per cent increase
in quantity demanded, indicating that at this point, the demand is elastic. However, at position “B”, the
same 20 per cent price decrease is accompanied by only 12.5 per cent increase in quantity demanded,
that is, demand is inelastic. The demand for most of the industrial goods can be inelastic (i.e. insensitive to changes in prices) for a particular industry, but at the same time, highly elastic (i.e. sensitive
to changes in prices) for individual suppliers. This is because, the total industry demand comes from
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the collective needs of all the customers rather than price, and hence it is relatively inelastic. However,
between the various suppliers, a slight change in the price by one firm may create a major change in the
quantity and thereby, be highly elastic for any one firm.
Cross-elasticity of demand is the reaction of the sales of one product to a price change in another
product. This concept is present in both consumer and business marketing, but it is far more important
in business marketing as it can have a dramatic impact on the marketing strategy of a business firm.
For example, the demand for aluminium is related to the prices of wood and steel for the doors and
window frames, as they are close substitutes. Apart from other advantages of aluminium doors and
windows, the cost comparison with steel and wooden door and window frames play an important role
in the purchase decisions in the construction of houses, commercial offices, factories, hotels, hospitals,
and so on. Aluminium extrusion companies regularly collect the information on cost of steel and wood,
and advertise the advantages of use of aluminium in terms of negligible maintenance cost, elegant
looks, environment friendly (in comparison to wood), and so on. Whenever there is a change in the
price of aluminium due to changes in excise duty or other input costs, there is an impact on the sales of
doors and window frames made out of wood or steel. The reverse is applicable for changes in the prices
of steel or wood. Thus, the marketing persons working in the aluminium extrusion companies should
recognise that the cross-elasticity of demand exists for their products.
If the cross-elasticity of substitute products is high, it indicates that these products compete in the
same market. A business marketer must know how the demand for his products is likely to be affected
by the changes in the prices of substitute products. Because of the unique characteristics of derived
demand, the business marketing persons would anticipate an increase or decrease in the demand for
their products, based on the changes in the demand for their customers’ products. They must also find
out if cross-elasticity of demand exists for their products so as to recognise both direct and indirect
competition.
Reverse-Elasticity of Demand
This is an interesting characteristic of industrial demand. In this, a price increase can cause an increase
in demand, and a price decrease would be followed by a decrease in demand—just opposite from what
we would normally expect from business buyers. The reason is that business buyers regard initial price
change as the first step in that direction with expectations of more to come. In order to minimise the
costs, the business buyer increases the purchases immediately after a price increase in anticipation
of further price increases in future. Similarly, for a price reduction, the business buyer decreases the
purchases in anticipation of further price reductions. These short-term reactions are not common for
all business buyers. Normally, when a manufacturer (or a supplier) lowers the price, it should result in
higher level of demand, but in reverse-elasticity of demand, the opposite thing happens.
Bull–Whip Effect
Many firms, marketing industrial and consumer products, have observed the bull-whip effect, in which
fluctuations increase in the orders as they move up the supply chain from dealers (or retailers) to distributors to manufacturers to suppliers. The bull-whip effect distorts demand information within the
supply chain. For instance, H.P. found that demand for printers from customers showed some variability, but the orders from dealers (or resellers) to the printer division showed more variability, and the
orders placed on the integrated circuit division (or supplier division) were highly variable. This made it
difficult for supply to match demand, increasing the cost of filling the orders.
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Circumventing Influences of Some of the Concepts
Some organisations have managed to find a way around the obstacle created by the influence of joint
demand and cross-elasticity of demand. Joint demand occurs when one product is useful if other
product(s) also exist. For instance, a pumpset cannot be used for pumping water, if the electric motor
is not available. Crompton Greaves Company, which manufactured both pumps and motors separately
in two different manufacturing units, circumvented the influence of joint demand, by designing the
monobloc pumpset, which had the motor as an integral part of the pumpset.
Cross-elasticity of demand, as discussed earlier, is the relationship between the price of one product
and the demand of another substitute product. Extending the example we discussed earlier in crosselasticity of demand, the marketing manager of aluminium extrusion manufacturer focused marketing
efforts on the government organisations in coastal towns and cities, where door and window frames
made from steel were not preferred (due to severe corrosion) and the wooden frames were not permitted considering its harmful effect on the environment. Any changes in the prices of steel and wood had
no effect on the sales of aluminium frames used for doors, windows, and partitions in these geographic
areas for government organisations, which was considered as a niche segment.
It should be clear after going through this chapter that business marketing is more complex than
consumer marketing and the marketing success depends on understanding the complexities involved.
Business marketing strategy has company-wide implications and is, therefore, more of a general management function, affecting the various departments or functions in an organisation.
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In this chapter, we have understood business marketing (also referred to as Business-to-Business Marketing,
industrial marketing, or Organisational Marketing) as marketing of goods and services to business organisations.
The business organisations include manufacturing companies, service organisations, institutions and middlemen
in private and public sector organisations, and government undertakings. The differences between business
and consumer marketing exist in certain characteristics such as market, product, buyer behaviour, channel,
promotional, and price.
Customer value is defined as the benefits received by a customer firm in exchange for the price paid or the
cost incurred for a product or service. For estimating customer value, the supplier firms can use some methods,
such as focus group, customer interview, internal test, and conjoint analysis. There are three types of value
propositions developed by supplier firms—(a) many benefits listed, (b) few benefits compared, and (c) few
benefits meeting customer expectations. Successful marketing firms use methods like “value case histories” to
demonstrate and document the benefits to customer firms. This results in superior performance.
Planning in business marketing needs a closer relationship to corporate strategy and more interdependence
between marketing and other functions, compared to planning in consumer marketing.
Unlike consumer products, the demand for industrial products is derived from the ultimate demand for
consumer goods and services. It is, therefore, called as derived demand. Joint demand occurs when one industrial
product is required, if other product also exists. Cross-elasticity of demand is the responsiveness of the sales of one
product to a price change in another product.
Business marketers need to understand some relevant concepts like fluctuating demand, stimulating demand,
reverse-elasticity of demand and bull-whip effect. A few business marketing firms have managed to circumvent
influences of some of the concepts.
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Acceleration effect
Bull-whip effect
Business customer
Business marketing
Conjoint analysis
Consumer marketing
Cross-elasticity of demand
Customer value proposition
Derived demand
Distribution channels
Focus group
Joint demand
Price elasticity of demand
Reverse-elasticity of demand
Value
Note: Glossary of the key terms is given at the end of the text.
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1. Explain the major differences between consumer and business marketing.
2. It is said that as compared to consumer marketing, business marketing is more of a general management
responsibility. Do you agree with this statement? Explain your answer.
3. Define value in business markets. What methods are used to estimate customer value?
4. How are customer values proposed, demonstrated, and documented?
5. Explain with an example why industrial demand is called derived demand.
6. Describe the concept of cross-elasticity of demand. What is reverse-elasticity of demand?
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1. Business marketing is marketing of goods and services to: (a) individuals, (b) households, (c) organisations,
or (d) all of them.
2. In business marketing, buying decisions are mainly made on: (a) social, (b) rational, (c) psychological, or
(d) physiological basis.
3. In business-to-business marketing special importance is given to: (a) personal selling, (b) sales promotion,
(c) advertising, or (d) direct marketing.
4. Demand is elastic, if the percentage change in quantity demanded is: (a) less, (b) more, or (c) equal, as
compared to the percentage change in price.
5. Cross-elasticity of demand is the reaction of the sales of one product to a change in: (a) distribution,
(b) promotion, (c) publicity, or (d) price of another product.
6. Compared to consumer markets, business markets have: (a) less, (b) more, or (c) same number of buyers.
7. One of the definitions of customer value is the ratio between customer benefits and: (a) advantages, (b)
costs, (c) features, or (d) none of them.
8. Developing and delivering superior customer value is the responsibility of: (a) junior executives, (b) middlelevel executives, or (c) senior-level executives.
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1. Illustrate how a company can circumvent the influence of joint demand.
2. Out of the various differences between business and consumer marketing, which characteristics would
have maximum impact on development of marketing strategy for a pump manufacturer? Give reasons.
3. Construct a customer value proposition for a company known to you. Explain how would you demonstrate
and document the customer value.
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1. Anderson and Narus, Business Market Management, Pearson Education, 2nd edition, pp. 5–9.
2. Philip Kotler, Marketing Management, Prentice-Hall India, 11th edition, pp. 11–12.
3. James C. Anderson, James A. Narus, and Wouter Van Rossum, “Customer Value Propositions in Business
Markets”, Harvard Business Review, March 2006, pp. 91–99.
4. B. Charles Ames, “Trappings Vs. Substance in Industrial Marketing”, Harvard Business Review 48 (July/
August 1996), pp. 95–96.
CASE 1.1
MB Ltd.: Nature of Demand for Special Purpose Machines*
Suresh Kulkarni, General Manager of MB Ltd., was wondering on how to meet the demand for special
purpose machines (SPMs) manufactured and marketed by the company in India. The products included
metal cutting machines, grinding machines, honing machines, cleaning machines, and so on.
About the company
Special purpose machines and test equipment are made by “Equipment Division” of MB Ltd. The
focus of the division is to provide total turnkey solutions, special purpose machines, and test equipment to customers with stringent processes and quality systems. The equipment division received ISO
9001:2008 certification for design, manufacture, sales, installation and servicing of SPMs as well as for
test equipment. MB Ltd. is the market leader with the supply of over 2500 SPMs over the past 35 years.
In addition to serving the domestic market in India, the company has exported machines worldwide.
The product mix of the company depended on its role as the provider of appropriate and cost-effective
solutions in precision manufacturing and quality assurance to all its customers.
The demand for these special purpose machines fluctuated due to changes in the external environmental factors like economic and technological. For example, the demand for these machines was less
in 1996, 1997, and 2002 due to slowing down of demand in the Indian economy. However, the demand
went up substantially, much above the production capacity, from 2003 to 2004. In June 2004, Suresh
increased the prices of these machines by about 25 per cent in order to reduce the orders from business
customers like Bajaj Auto, Maruti Suzuki, Ashok Leyland, and others. In spite of increase in prices, the
demand for these machines went up by more than 30 per cent, which was in excess of production capacity. Suresh wondered how to improve the accuracy of demand forecasting. The company had been using
sales force composite method, which has an advantage of giving the break-down of the sales forecast
by product, customer, territory, and salesperson.
*
This case was prepared by Professor Krishna K. Havaldar based on the case data provided by Satya Natesh,
Shivaputhra, Subrata, and Sriram, MBA students of Alliance Business Academy, Bangalore.
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Suresh decided to call a meeting of sales and marketing persons to improve the accuracy of forecasting. He also thought of meeting all the functional managers to discuss and decide how to meet the
fluctuating demand of the special purpose machines.
Questions
1. How would you describe the nature of demand for special purpose machines?
2. What guidelines should be followed to improve the accuracy of the sales forecast?
3. What alternatives are available to the company to meet the fluctuating demand of the special
purpose machines?