Module 05: Business Buying Behaviour and Strategy

Course: MK11x Marketing Fundamentals, IIM Bangalore. Instructor: Prof. Ashis Mishra.

Modules 1 to 4 were entirely about B2C, the end consumer who buys chips, soap, detergent and Coke. This module switches the customer. Here the customer is an organization, and almost everything about how it buys is different: who decides, how many of them there are, how value is judged, how price is arrived at, and how long the whole thing takes.

Memory hook: In B2C you sell a product to a person. In B2B you sell a business outcome to a committee.

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5.1 Introduction to B2B Markets

A B2B market is one in which the customer is another business rather than an end consumer. Think of cement, iron, steel, plastic, rubber, cloth and electronic chips. Consumers almost never buy these directly. They buy the finished goods that these inputs go into.

The professor's anchor illustration is a chain, and it is worth memorising because it shows that B2B and B2C are links in the same value chain, not separate worlds:

The same structure repeats everywhere:

• Agriculture: farmers grow rice, pulses, legumes, sugar and salt. Retailers such as Reliance or Big Basket buy from them (B2B) and sell to us (B2C).
• Capital equipment: manufacturers make X-ray machines, movie cameras and CT scanners and sell them to hospitals, which use them to diagnose patients. This is the setting of the module's case.
• Commercial vehicles: Tata Motors and Mahindra make trucks that fleet owners buy to run logistics operations.

Memory hook: Behind every B2C business there is a logistics and supply chain, and that chain is B2B. There are as many B2B businesses in the world as there are B2C businesses.

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5.2 A Comparative Analysis: Business versus Consumer Markets

Differences between B2B and B2C

Derived demand, the difference students most often miss

In B2C, demand is whatever the customer wants. In B2B, demand is derived: it comes not from the buying firm's own appetite but from the demand for the buying firm's output.

• Tata Steel sells iron and steel to Maruti. If Maruti's cars stop selling, demand for that steel falls, regardless of how good the steel is.
• Tata sells bars and plates to builders. Demand for those bars rises and falls with demand for apartments.

Common trap: Treating a B2B slowdown as a marketing failure. If your customer's own market has contracted, your derived demand contracts with it, and no amount of selling to your customer will fix it. You have to look one step further down the chain.

Value in B2C versus value in B2B

Module 1 defined value as utility per unit of cost and named four consumer values: functional, economic, social and experiential. Those still exist in B2B, but they are not what decides the sale.

Memory hook: In B2C, features decide value. In B2B, usage decides value. The same machine is worth more to a hospital that will run it sixteen hours a day than to one that will run it twice a week.

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5.3 Value Proposition in Business Markets

There are exactly three value propositions available in a business market, and they form a ladder of sophistication.

Resonating focus is the gold standard in B2B marketing. The supplier fully grasps the critical issues in the customer's business and delivers a proposition that is simple yet captivating: here is how our offer improves your business.

Memory hook: All Benefits = I know me. Favourable POD = I know me and my rival. Resonating Focus = I know your business. Treat every B2B account as B2B2C: solve the problem of your customer's customer.

Worked example, All Benefits: the gas chromatograph

A company sold gas chromatographs to R&D labs at large companies, universities and government agencies. Its headline feature was the ability to maintain a high degree of sample integrity. Looking for growth, it began selling the same machine to commercial labs that routinely test soil and water samples.

Those commercial labs maintain high sample integrity anyway as a matter of routine. The company's single most significant USP was a non-issue in the new segment. All the features were real, the quality was real, and none of it was useful.

A second illustration: an international engineering company bidding for a light rail project handed the city administration a chart of ten reasons to award it the project. Both other finalists offered exactly the same ten reasons. Ten genuine benefits, zero differentiation, and the decision fell back to price.

Worked example, Favourable POD: the integrated circuit and the half-million-dollar mistake

This is the module's central numerical example and it is the one most likely to be examined.

Given:

• An integrated circuit (IC) maker hoped to sell 5,000,000 ICs to an electronic device manufacturer for its next-generation product.
• During negotiation the salesperson learnt that the competitor's price was 10 cents lower per unit.
• The salesperson's POD was superior and personalised service.
• He promptly cut his price by 10 cents per unit to match the competitor and win the contract.
• The customer had already built its own value model. In that model, the IC maker's offering was worth 15.9 cents per unit more than the next best alternative.
• In that same value model, the service the salesperson was defending was worth only 0.2 cents per unit.

Step 1. What the price cut cost.

Answer: the price cut destroyed $500,000 of contract value at a stroke.

Step 2. What the customer's value model actually said.

Answer: even at the original, higher price the customer was $295,000 better off buying from this supplier. Its own development team had already recommended procuring the IC at the higher price.

Step 3. The headroom the salesperson threw away.

Answer: the gap between what he did (cut 10 cents) and the most he could have defended on the customer's own numbers was 15.9 cents a unit, or $795,000 on this contract. He could have raised the price rather than cut it.

Answer: the personalised service he built his whole POD around was worth $10,000 across the contract, two percent of the $500,000 he gave away to protect it.

Common trap: Assuming that if a competitor is cheaper you must match them. The competitor's price is a fact about the competitor. The customer's value model is a fact about the customer, and it is the only number that determines what you can charge. The salesperson also overlooked two of the elements the customer valued most, because he never asked.

Worked example, Resonating Focus: Sonoco

Sonoco, a global packaging supplier headquartered in South Carolina, wanted to supply a large European consumer packaged goods manufacturer.

Instead of pushing six favourable PODs, Sonoco cut its story down to two PODs and one POP and branded it a DVP, Distinctive Value Proposition.

Notice what Sonoco did not say: nothing about the quality of its packaging material or its sealant. It talked only about the customer's cost line and the customer's revenue line.

Memory hook: Six PODs is a brochure. Two PODs and one POP is a proposition.

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5.4 Segmentation in Business Markets

Why the purpose of segmentation changes

In B2C we segment to find out who the customer is, because the market is huge and anonymous. In B2B, everybody in the industry already knows who the customers are. There are only a few of them.

So the objective shifts. B2B segmentation exists to know the customer better and to work out how to solve that customer's specific problem. A single B2B segment may contain only one or two customers, each demanding its own customisation of quantity, price and sometimes quality.

Segmentation variables in B2B

Psychographics worked through. If you sell an ERP solution, the product is critical to the customer, so converting that account opens years of further opportunity and you can build a positive imagery. If you sell photocopier paper, it is a bulk purchase but a routine consumable that many suppliers can provide, so durability and quality claims carry little weight and the lowest price wins.

Buying approach worked through. A customer with offices across the country may approve vehicles or chips centrally and roll the decision out everywhere, or may let each location buy for itself. Which of the two it is completely changes who you must sell to.

Common trap: This list is illustrative, not exhaustive. The professor is explicit about that. Exam answers should name the six bases and then say the set can be extended.

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5.5 Benefits and Buying Strategy in Business Markets

Before you can build a strategy you have to know what kind of benefit you are selling. There are four, arranged from easiest to hardest to sell.

Tangibilize the intangible

The professor's coinage, and the single most quotable line in the module.

Memory hook: "If you cannot put your benefit into numbers in an Excel sheet, then it has no value. It is as good as not being there."

Three concrete ways to tangibilize a non-tangible benefit:

1. Build the arithmetic yourself. Show the path: using your analytics on their customer data lets them target better, which lifts repeat orders, which lifts revenue. Show every step of that chain with numbers.
2. Use third-party evidence. Point to comparable firms that used your hardware or software and quantify what they got.
3. Shift the risk. Pay per performance, pay per hour of use, or lease for a fixed period. In effect: try it, and if it does not work I will take it back.

Worked illustration of tangibilizing 24/7 maintenance. Ask how many breakdowns comparable companies had last year, how many of those fell on a weekend or outside service hours, and what each hour of downtime cost. That product is the money the customer saves by buying round-the-clock cover. Now the intangible has a number.

Common trap: Waiting for the customer to do the maths. The professor is blunt: nobody does the maths over here. If you do not build the model, it does not exist.

Selling is the strategy in B2B

Advertising, sales promotion and publicity are not significant in B2B. What matters is personal selling: information, connection, presentations, demonstrations, and multiple rounds of negotiation.

Government and institutional tender selling

Government agencies and institutional buyers run a two-stage sealed-bid process, and this mechanic returns in the MediQuip case.

Where a weighted evaluation is used rather than pure L1, the technical and financial scores are combined in a declared ratio: 70:30, 60:40, 80:20 or 50:50, depending on the buying organization.

Memory hook: Technical bid is a gate. Financial bid is a race. Qualifying technically puts you on the final shortlist; it does not win you anything by itself.

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5.6 The Purchase Process in Business Markets

The buying centre

Buying decisions in companies are not made by individuals. They are made by a group of managers from multiple departments, formally a purchase committee, generically a buying centre.

Size: anything from 3 or 4 people up to 40 people, drawn from 6 or 7 different functions.

The difficulty this creates is the defining problem of B2B marketing:

Memory hook: In B2C, one product has one positioning for one target group. In B2B, one product needs multiple positionings, because each member of the buying centre is effectively a different target segment with a different requirement.

A single USP or a single sales pitch cannot satisfy the whole committee. The marketer must identify each member, work out that member's requirement, and map a benefit to it.

Buying centre roles

Worked example: six people, six different questions

A manufacturer is buying a new machining centre. Six people sit in the buying centre, and each one asks a completely different question:

One sales pitch clearly cannot answer all six. The strategy therefore is: identify who is in the buying centre, establish each one's expectation, and construct a resonating focus for each so that every member sees a benefit.

Not everybody carries equal weight. Committee members are not equally vocal or equally significant. A critical sales task is to work out who is actually driving the decision and how to influence that person. The four diagnostic questions are: who is the major decision participant, what decisions do they influence, what is their level of influence, and what evaluation criteria do they use?

The eight stages of the B2B buying process

The three buy classes, and which stages each one actually runs

This mapping is regularly examined and is the part most often left out of notes.

Memory hook: Straight rebuy skips the middle. Modified rebuy skips the vendor hunt. New task runs the lot. The MediQuip case is a new task, and that is why it takes eight months.

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5.7 Types of Buyers in Business Markets

Organizational buying, defined

Organizational buying is the decision-making process by which formal organizations establish the need for purchased products and services, and identify, evaluate and choose among alternative brands and suppliers.

Every word of that matters: it is a process, it is run by a formal organization, it starts by establishing a need, and it ends by choosing between both brands and suppliers.

The four types of B2B buyer

The ultimate objective of B2B marketing is to develop customers who stay with you, because a long-term supplier and buyer relationship is symbiotic and benefits both sides. So it matters which sort of customer you are dealing with.

Common trap: The professor's verdict on price wars, stated twice: "Unless you have tremendous economy of scale, a price war never wins anyone anything." You cut, the competitor cuts, and only the customer gains. His live example is the online platform sector, where almost every player is in customer-acquisition mode giving discounts, nobody is making money, and switching cost is near zero so no loyalty is created.

The institutional market

A distinct kind of B2B market made up of schools, colleges, universities, hostels, hospitals, nursing homes and jails: organizations providing goods and services to the people in their care.

• They buy finished products in large volumes, with no further processing. This is unlike buying steel to make cars or oil to make soap.
• They are not the users. The people they care for are.
• Characterised by low budgets and captive clienteles.
• They follow the government model: technical qualification, then L1 lowest price.
• They will not pay for high customisation or highly technical products.

Memory hook: The institutional market behaves like a commodity market, or at best like the underperformer segment. Worth entering only if you have scale.

On acquisition: acquisition is the strategy of winning new customers through discounts and promotional offers. It produces short-term gains and can jeopardise long-term profitability, exactly the underperformer trap.

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5.8 Case Study: MediQuip

5.8.1 The setting

The product. CT scanners were first introduced in the late 1960s and radiologists regard them as a major technological breakthrough. A CT scanner combines X-ray equipment with a computer to collect data and translate it into visual cross-sectional images of the human body, at 16, 25 or 40 frames depending on how advanced the machine is.

The seller. MediQuip is a subsidiary of Universal, a French conglomerate. Its product line covers CT scanners, X-rays, ultrasonic and nuclear diagnostic equipment. It enjoys a worldwide reputation for advanced technology and more than adequate after-sales service.

The market.

Who buys. Most sales come from the public sector: government-owned health agencies, and non-profit organizations such as universities and philanthropic institutions. Buyers purchase through formal tenders, must budget at least one year in advance, and once a budget is allocated it must be spent by the end of the year or it lapses. Only a minor share goes to private hospitals and private radiologists.

The competition. Sigma, a subsidiary of a diversified Dutch company, is MediQuip's most serious competitor. In some markets Sigma has been present longer and knows the decision makers better. Other contenders are FNC, Eldora, Magna and Piper.

The selling organization. Eight country sales subsidiaries, each headed by a managing director. Within a country, sales engineers report to a regional sales manager, who reports to the managing director. Product specialists provide technical support to the sales force in each country.

5.8.2 The four groups in a hospital's buying centre

Common trap: Assuming the administrator is always the decision maker. The professor is explicit: the relative power of each group varies from hospital to hospital. In some hospitals the administrator is the top decision maker; in others he is merely a buyer. A key task of the sales engineer is to define the potential account, establish the relative power of the players, and set priorities accordingly.

5.8.3 The Lowman University Hospital account

Lowman University Hospital (LUH) is a large general hospital in Stuttgart, a city of a million residents. It is part of the university's medical school. Its radiology department already runs a wide range of X-ray equipment from several European manufacturers including Sigma and FNC, but nothing at all from MediQuip. The department has five staff and is headed by Professor Steinborn, a senior and nationally known radiologist.

The protagonist: Kurt Thaldorf, a sales engineer in MediQuip's German subsidiary. The order was worth €1.3 million and he worked the account for nearly eight months. For a new sales engineer in a territory, an order of that size makes a career, and losing it puts the job in jeopardy.

Common trap: Note the buy class. LUH had never bought anything from MediQuip, so this is a new task, which is why all eight stages run and why it takes from May to December.

The full timeline

The price ladder

Common trap: The ladder itself is a charge against Thaldorf. Moving 1.6 to 1.5 to 1.3 with no change in the offer tells Hartmann that 1.2, 1.0, or even 800,000 might be available if he simply waits. The professor's question is unanswerable in Thaldorf's favour: "If you are telling me your quality is good and hence your price is more, should you reduce the price? And if you thought this sale was so important, why not reduce the price right at the beginning?"

5.8.4 The three assigned questions

The professor sets three questions and answers them in clips 10 and 11.

1. Who is responsible for killing the MediQuip bid?
2. Which is the key date, the day the order was effectively lost?
3. What could have been done differently?

5.8.5 An answer written before hearing the verdict

Preserved as originally written. Read it, then read 5.8.6, because the professor explicitly rejects most of it. The divergence is instructive: this is the answer a majority of the class gives.

Who is responsible? In my opinion it was not just one person. My observation led me to conclude that three people had a role in MediQuip losing the bid:

• Kurt Thaldorf. He failed to identify and address all the key decision makers in the sales process. As a result he was not able to convince Hartmann, who was very cost conscious, and he did not even try to identify the third key stakeholder. His proposal to organise a visit to MediQuip's headquarters to demonstrate the CT scanner and its applications came far too late in the sales process.
• Carl Hartmann. The hospital's general director was highly price sensitive and showed reluctance to invest in MediQuip's higher-priced system despite its technological superiority. His focus on cost over long-term value may have contributed to the hospital choosing Sigma.
• The unidentified third person. This person, whose role and influence remain unclear, could have supported Hartmann's concerns about price or swayed the decision in favour of Sigma.

What could have been done differently?

• Engage all decision makers. Thaldorf should have engaged the third decision maker in the buying centre and made sure everyone involved understood the benefits of MediQuip's product.
• Address price concerns early, and negotiate earlier. MediQuip could have been more proactive about the hospital's price concerns. A clearer justification for the higher cost, quantifying long-term benefits such as operational speed and lower maintenance costs, might have countered Hartmann's price fixation.
• Foster open communication. Thaldorf should have worked to overcome the communication barrier between Hartmann and Steinborn on pricing. Getting all parties onto the same page could have prevented Steinborn's frustration.

Note on this answer: the first bullet of each set is exactly right and is the professor's own conclusion. The blame placed on Hartmann and on the unidentified third person is what clip 10 rejects. See below.

5.8.6 The professor's analysis, clip 10: who is responsible

The professor works by elimination, and the reasoning is as examinable as the conclusion.

Carl Hartmann is exonerated. "Hartmann seems quite heartless" is the standing joke, and he is the first name the class always offers. But asking hard questions about price is his job. As general director of LUH he is responsible for the budget being spent appropriately, for the hospital not overpaying for a scanner, and for the machine being right for the future as well as for today. Negotiating hard and refusing to be satisfied is what a general director is supposed to do. There is no evidence that he was the one who killed the bid.

Dr. Ruffer is exonerated, on two independent grounds.

1. He is very unlikely to be in the buying centre at all. The secretary said the committee was three people: Hartmann, Steinborn, and one other. A physicist responsible for radiation levels, maintenance and specification compliance is very unlikely to sit on a purchase committee for more than a million euro.
2. MediQuip passed the technical specification. If MediQuip had failed the specification, you could argue that Ruffer wrote the spec to favour Sigma or FNC, perhaps copying their technical manual so that only they qualified. But MediQuip did not merely qualify, it exceeded the specification. Recall the two-stage process: technical bid is a gate, financial bid decides. Once you are through the gate you are on the final shortlist. So whether Ruffer was incompetent or in league with a competitor, it made no difference to MediQuip. And even in the unlikely event that Ruffer was on the committee, he would be one of three; if Hartmann and Steinborn were in favour, he could not turn it.

Professor Steinborn is exonerated. He was a genuine member of the buying centre and MediQuip's product champion. He called Thaldorf in the first place and created the opening. He liked the specifications and was asking about installation. Thaldorf then managed to offend him by refusing to discuss price, to the point where Steinborn said the CT scanner was the last thing he wanted to talk about. But Steinborn is a radiologist of repute and this machine determines his reputation with patients, with fellow doctors and nationally. A poorer machine does not affect Hartmann and does not affect Ruffer, but it does affect Steinborn. He might stop actively pushing for MediQuip, but he is very unlikely to let his ego make him veto a better product that he himself will use.

Which leaves Kurt Thaldorf. The professor's charge sheet:

Memory hook: The professor's framing of the price argument: "Sigma was harping on the procurement cost. MediQuip was talking about the lifetime value." Thaldorf had the better argument and never put a number to it, so it lost to a number.

A share of the blame sits above Thaldorf. He was not guided properly by the regional manager or the managing director responsible for the German wing. The internal handling of the price question was poor.

5.8.7 The professor's analysis, clip 11: which date, and what could have been done

The candidate dates the class usually offers:

On the June 23 offence specifically: the professor is scathing about the naivety. "Who is Hartmann to direct him to tell something to Steinborn or not?" Every office has politics; someone is always speaking for and against someone else. Hartmann is not Thaldorf's boss, and it is very unlikely Hartmann would ever have come back and asked why Steinborn was told the price. Worse, Thaldorf volunteered the question, asking specifically whether the instruction covered Steinborn. Had he not asked, he would have had no injunction to obey, and if challenged he could naively have said he assumed Steinborn was part of the buying group.

The professor's own answer is different from all of them: the sale was doomed from the beginning.

The supporting arithmetic is the account cultivation calculation, and it is what turns an assertion into an argument.

Given:

• A sales engineer's territory contains roughly 10 hospitals.
• Of those, perhaps 5 have the budget for a CT scanner.
• The assumed life of a CT scanner is 5 years.
• Any hospital that bought a scanner in the last 3 to 4 years will not buy another.

Answer: in an entire territory, only one or two hospitals are realistically in the market for a CT scanner at any time.

Why that settles the case. If your whole territory yields one or two live prospects per cycle, you cannot afford to discover the account in May and learn it in December. You should already have been to that hospital, already know who is normally involved in its purchase process, already know what happened last time and what process they followed. That information does not come from a market survey. It circulates in the industry: from your boss, from people who worked the territory before you, from the same hospitals themselves. Thaldorf had none of it, so the eight months were spent learning what he should have known before May 5.

Memory hook: The most important thing in B2B is individual relationships with every member of the buying centre, including gatekeepers such as the secretary. Only through those relationships can you influence them. Relationships are far more important in B2B than in B2C, and this is the thing Thaldorf did not know.

5.8.8 What the case demonstrates, tied back to the theory