Customer BehaviorCustomer BehaviorModule Eight

Business & Government

Customer Decision Making

Customer Behavior2

Module 8

Business Buying Behavior

A business is a licensed entity engaged in the activity of making, buying, or selling products and services for profit or nonprofit objectives. This definition considers any organiza tion that makes and sells something to be a business.

Customer Behavior3

Module 8

Business Buying Behavior

Marketers have developed different ways of serving household and business customers, in part because of differences in the behavior of these two customer groups. Business buying typically differs from household buying in several key ways: greater specialization of roles, more formalization of the buying process, more formal accountability for decisions, greater internal capabilities, and more complex requirements.

Customer Behavior4

Module 8

Business Buying Behavior

characteristichousehold buyingbusiness buying

Specialization of customer roles

Combined or slightlyspecialized

Moderately to very specialized

Formalization of the buying process

InformalSlightly formal (small

businesses) to formal (large businesses)

Accountability for decisions

Usually not formally measured

Strict measures

Internal capabilitiesWeakWeak (small businesses)

to very strong (large businesses)

Complexity of requirements

Little complexityOperational and strategic

complexity

Customer Behavior5

Module 8

Specialization of Customer Roles

Individual buying requires that the three customer roles—payer, buyer, and user—

be combined in a single individual, whereas in household buying decisions,

these roles may be held by a single person or distributed among various

family members.

Customer Behavior6

Module 8

Formalization of the Buying Process

Business buying is formalized with respect to policy, procedures, and beside the

solicitation of price quotes, preferential treatment to a certain class of vendors (e.g.,

minority businesses), and the way the decisions are to be made in the buying firm.

Customer Behavior7

Module 8

Accountability for Decisions

Unlike household buying, business buying holds accountable those who are in

charge of pay ing and buying. This results in more formal evaluation of and

feedback on these purchase decisions. There are also internal and external

audits of the buying process to ensure that value obtained through procurement

is maintained and enhanced by the decision makers.

Customer Behavior8

Module 8

Internal Capabilities

– More often than households, business customers are capable of producing certain items in house rather than buying them from others. This capability requires business customers to analyze the economics of the "make versus buy" options.

Customer Behavior9

Module 8

Complexity of Requirements

Business customers have both operational and strategic complexity

of buying behavior. Operationally, the number of employees who

participate in the buying process, often from several locations, adds

complexity.

Customer Behavior10

Module 8

Components of the Business Buying Process

With purchasing being such a significant and complex function, all but the smallest orga nizations have formal systems for carrying it out. These systems, called procurement sys tems, have several components.

Decision

Process

Manual

Buying Center

Nature of Purchase

OrganizationalCharacteristics

Rules & Procedures

Customer Behavior11

Module 8

Nature of the Purchase

The way an organization makes a purchase decision depends to a large degree on the

nature of the purchase. This nature is defined by the (type of purchase need); the

significance of the decision in terms of perceived risk, importance, and product

complex and the time pressure faced by the decision makers.

Customer Behavior12

Module 8

Buyclass

For an individual, purchase needs may require routine problem solving, limited problem solving, or extended problem solving. Similarly, businesses have three types of procure ment needs, or buy-classes:

Straight rebuy Modified rebuy New task.

Customer Behavior13

Module 8

BuyclassDescription of needBuying center sizeInformation

search

Straight rebuy

Item is frequently needed and has been satisfactorily bought before

Very small; ordering may even be automated

Brief or nonexistent;new suppliers rarely

considered; technical expertise rarely sought Some information is gathered; new suppliers may be considered;

technical experts may have input into decision Extensive; new suppliers often considered experts usually have major input into decision

Modified rebuy

Need is broadly similar to one that has been fulfilled before but requires some change in specifications or the supply environment Need is completely new to the organization

Moderate

New TaskNeed is completely

new to the organization

Large

Customer Behavior14

Module 8

Perceived Risk, Importance, and Complexity

Each type of purchase involves a different level of perceived risk, importance, and com

plexity for the decision maker. Business customers use information such as the type

of purchase to estimate risk, importance, and complexity. Then they adjust their decision-making strategy accordingly.

Customer Behavior15

Module 8

Perceived Risk, Importance, and Complexity

Perceived risk refers to the expected probability that the purchase may not produce a satisfactory outcome. It is a product of two factors:

1. The degree of uncertainty that a choice may be wrong.

2. The amount at stake should a wrong choice occur.

Customer Behavior16

Module 8

Time Pressure

Time pressure re fers simply to how urgently the item is needed. When the item is needed urgently, the purchase decision will tend to short-circuit the usual process, make the process less delib erative, and give more direct role to the user/requisitioner.

Customer Behavior17

Module 8

Organizational Characteristics

Four organizational characteristics of the customer firm affect buying behavior

Size

Structure

PurchaseResources

PurchaseOrientation

Customer Behavior18

Module 8

Size

The size of the business determines not only the customer's potential

dollar volume, but also the sophistication of its buying process.

Customer Behavior19

Module 8

Structure

Refers to the number of departmental units, geographical locations over which the units are spread out, and its degree of centralization. The more departments

a business has, the larger the buying group and more prolonged the buying

process is likely to be.

Customer Behavior20

Module 8

Purchase Resources

Refer to the availability of professional buyers and the extent to which the purchase office is staffed with the

required type and number of experts as well as equipment

Generally, large and professionally managed (as opposed to owner-

managed) firms would have better resourced pur chasing departments.

Customer Behavior21

Module 8

Purchase Orientation

Refers to its purchasing philosophy along a continuum from viewing purchasing

simply as an administrative function that finds the most economical sources of

materials needed as and when they are needed to viewing it as a strategic,

managerial function whose goal is to add value to the organization's ability in turn to offer better value to its customers.

Customer Behavior22

Module 8

Purchase Orientation

As a strategic function, purchasing is engaged in several key activities:

Scrutinizing make versus buy decisionsContinually finding better products, materials, and technology.Developing long-term sources of supply and building relationships with the suppliers.

Customer Behavior23

Module 8

The Buying Center

In all but the smallest organizations, purchase decisions are handled by a formal or informal buying center

The buying center represents a subset of roles within the organization who participate in the buying process.

Customer Behavior24

Module 8

The Buying Center

Several roles have been identified: User Buyer Analyzer Influencer Gatekeepers Decider

Customer Behavior25

Module 8

Rules and Procedures

Businesses generally set up elaborate

policies, rules, and procedures

The degree of formalization and decision freedom

varies from buyer to buyer.

Customer Behavior26

Module 8

Decision Process

Like individual and household buying decisions, organizational buying decisions entail a multistage process. Business buying decisions comprise the following stages:

Need assessment Developing choice criteria Request for proposals (RFPs)

Customer Behavior27

Module 8

Procurement Costs

In business buying, when decision makers weigh costs, they consider the

total costs of a purchase. The total costs are more than the purchase price, sometimes significantly

higher. These costs consist of acquisition costs,

possession costs, and usage costs.

Customer Behavior28

Module 8

Procurement Costs

acquisition costspossession costsusage costs

PriceInterest costField defects

Paperwork costStorage costTraining cost

Shopping timeQuality controlUser labor cost

Expediting costTaxes and insuranceProduct longevity

Cost of mistakes in order

Shrinkage and obsolescence

Replacement costs

Prepurchase product

evaluation costs

General internal handling costs

Disposal costs

Customer Behavior29

Module 8

Psychology of Decision Makers

The decision-making process is primarily driven by two psychological processes occurring in the decision makers: (1)Their expectations (2)Their perceptual distortions.

Customer Behavior30

Module 8

EXPECTATIONS

One factor that sets organizational decision making apart from individual and

household decision making is that the various members of the buying center

tend to have a set of differential expectations. Their expectations are

influenced by their background and their satisfaction or dissatisfaction with past

purchases.

Customer Behavior31

Module 8

PERCEPTUAL DISTORTIONS

Business customers, like individual consumers, encode incoming

information selectively (attending to some and ignoring other information)

and in a biased manner. This tendency is called selective perceptual distortion.

Customer Behavior32

Module 8

Conflict and Its Resolution

When expectations of various members in the buying center differ, conflicts arise. These may concern either the

relative weight of the evaluative criteria or the rating of different suppliers on

these criteria.

Customer Behavior33

Module 8

Conflict and Its Resolution

Problem solving is a rational approach to conflict resolution. It entails a search for more information, further deliberation on the new information, and possibly consideration of new suppliers.

Persuasion, also a rational method of conflict resolution, is used when there is a disagreement on specific criteria for supplier evaluation (but overall agreement on what is to be expected of them).

Customer Behavior34

Module 8

A Comprehensive Model of Organizational Customer Behavior

Customer Behavior35

Module 8

The Future of Business Buying Behavior

In practice, the purchasing function in the future will see two strategic shifts:

(1) a shift from a transaction orientation to a relational orientation(2) a shift from domestic to global sourcing.

Customer Behavior36

Module 8

Forces for Change

Several forces are responsible for these shifts in the procurement strategy of business customers:Global competitiveness.The quality management (TQM) philosophy.Industry restructuring.Technology enablers.

Future procurement practices

Future procurement practices

Past procurement practices

Past procurement practices

Domestic

sourcing

Global sourci

ng

Relational oriented

Transaction oriented

Customer Behavior37

Module 8

Forecasted Changes

The above-mentioned four forces will bring about significant changes. These

include making procurement a core competency, treating suppliers as

partners, considering cross cultural values, and focusing more on

procurement of service

Customer Behavior38

Module 8

Procurement as a Core Competency

In industries where the supply function is strategically critical, companies will

focus on creating a core competency on supply side management. That is, for

these firms, their competitive advantage would stem from the fact

that, among other things, their procure ment is more cost-effective.

Customer Behavior39

Module 8

Suppliers as Partners

Suppliers will be treated less as suppliers and more like partners. This will call for a greater degree of commitment and

trust on the part of the supplier organization as they begin to work

together in a new relationship.

Customer Behavior40

Module 8

Cross-Cultural Values

Business buyers will increasingly rely on "global sourcing". As it becomes

evident to organizations that buying and selling practices differ widely

across the globe, there will be a big push to better understand cross-

cultural values, which differ widely from culture to culture.

Customer Behavior41

Module 8

Service Procurement

Many activities that used to be done by employees are being outsourced:

janitorial services, building security, recruitment, legal services, computer

network and data management, payroll, and so on.

To fulfill this need, new businesses are emerging around these niches.

Customer Behavior42

Module 8

Government Buying Behavior

Governments are legal entities empowered to organize and govern people, processes,

and infrastructure by the resources and compliance mechanisms they possess as

kings and monarchs, dictators and elected presidents, prime ministers, and

governors, the military and the civil service, along with the many

democratically elected or administratively appointed bodies.

Customer Behavior43

Module 8

Government as a Customer

Doing business with the government represents a huge opportunity for

businesses; many, in fact, exist solely as government suppliers. But selling to the government is nothing like selling

to private corporations.

Customer Behavior44

Module 8

Government Buying Procedures

Governments typically follow well-specified and rule-driven buying procedures.

Government buys in two basic ways: Direct purchase Competitive procurement

Customer Behavior45

Module 8

Similarities between Government and Business Procurement

Government spending, especially at the federal level, involves large amounts of money, complex procedures, and red tape in even the smallest purchase. However, there are some parallels between buying and government

buying.

Customer Behavior46

Module 8

Buyclass Parallel

In government, the buying tasks can be viewed asNon-developmentalModified non-developmentalDevelopmental. These classifications are based on the level of analysis and the degree of buyer attention they require.

Customer Behavior47

Module 8

Buying Steps Parallel

BusinessGovernment

Step 1Need IdentificationNeed planning and funding

Step 2Request for quotationsRequest for proposals

Step 3Supplier evaluation/selection

Bid selection

Step 4Finalization of price & delivery terms

Bid negotiation

Step 5Placement of orderContract award

Step 6Follow-up & expandingContract administration

Customer Behavior48

Module 8

Procurement Management Goals Parallel

Both business and government buyers pursue the same objectives in managing their

procurement responsibilities and in reaching their supplier decisions. Both exist to fulfill the

material needs of their user departments, seek to develop component and reliable

sources, must procure at prices most advantageous to the buying organization,

must minimize inventory costs, and encourage competition for their business.

Customer Behavior49

Module 8

How Government Customers Differ from Business Customers

These differences arise mainly in how the tasks

are procedurally implemented.

Customer Behavior50

Module 8

Size of the Average Purchase and Standardization

In the private sector, nothing compares in cost, other than perhaps large construction projects or

the development of commercial aircraft. But even for simple supplies such as stationary, the order size is generally

larger than most private sector orders of similar

products.

Customer Behavior51

Module 8

Legal Restrictions and Compliance Reviews

Laws regulate government procurement

procedures in areas such as competitive bidding, budgetary limitations, auditing of accounts, and the

use of standard specifications.

Customer Behavior52

Module 8

Solicitation of Sellers

Although business buyers also engage in soliciting competitive bidders, nothing in the business sector is comparable to

the active solicitation of potential suppliers in government procurement.

Customer Behavior53

Module 8

Diffusion of Authority

There is much greater diffusion of authority in government than in most private-sector procurement.

One reason is that government procurement uses input from multiple users and advisors.

In addition, authority for subtasks is separated.

Customer Behavior54

Module 8

Procedural Detail and Paperwork

Finally there is the inevitable

paperwork, substantially

more voluminous in government

than in business procurement.

Customer Behavior55

Module 8

Future of the Government as Customer

Just as corporations go through changes in their purchasing functions, so

too government procurement is

experiencing pressures to change.

The resulting changes include downsizing and

restructuring, globalization, and

economic pragmatism.

Customer Behavior56

Module 8

Downsizing and Restructuring of the Government

As businesses have improved efficiency through downsizing and restructuring, people are demanding that their governments do the same.

As a payer, the government is becoming more cost-conscious.

Consequently, it is more concerned about fraud, waste, and misman agement.

Governments at all levels have responded with efficiency improvements of many kinds.

Customer Behavior57

Module 8

Globalization

The government sector enterprises are becoming global.

The Internet is a government network operated by the Advanced Research Programs Agency (ARPA), and the Weather Satellite is operated by the government.

Many government agencies are looking for expansion to global markets.

Customer Behavior58

Module 8

Economic Pragmatism

Governments are reducing their emphasis on social objectives as a component of procurement.

Buying decisions are governed less by concern for affirmative action, minority enterprises

Rather, governments are becoming rigorous in ensuring that procurement decisions are economically sound.

Customer Behavior59

Module 8

Business and Government Customer Decision Making and the Three Customer Roles

Several unique aspects of business customer decision making were identified.Important among these are:

Greater role specialization Formalized process Accountability Internal capabilities Complexity Buyclass Buying center Decision process Conflict resolution process.