LESSON NO. 1: INDUSTRIAL MARKETING SYSTEM

STRUCTURE

1.1 Introduction
1.2 The Concept of Industrial Marketing
1.3 Definition of Industrial Marketing
1.4 Characteristics: Industrial and Consumer Marketing
1.5 Demand in Industrial Market
1.6 Summary
1.7 Questions for Discussion OBJECTIVES

The motive of the lesson is to: understand the concept, meaning and importance of industrial marketing; know the differences between industrial marketing and consumer marketing; and learn the concept of demand for industrial goods and services in the market.

1.1 INTRODUCTION The fundamentals of consumer marketing are equally applicable to the industrial marketing. The work of the industrial market is exclusively different, as all the forces of market that affect industrial demand. The managers of industrial market must react in a different way to change the markets, develop products to meet these changes, and market them in exclusively different ways to the target and sophisticate customers while maintaining corporate policies. Therefore, industrial marketers face many distinctive marketing situations not normally encountered in the consumer market. Further, the industrial market has been the
backbone of the high standard of living enjoyed by consumers in past or since the industrial revolution at global level. It is dynamic and challenging in any nation’s economic growth and development. As and when the principles, knowledge, and practice of marketing cut across all industries, to market effectively in the industrial market than it becomes compulsory for the policy makers to study the industrial marketing differently and to understand the industrial marketing problems.

1.2 THE CONCEPT OF INDUSTRIAL MARKETING

The marketing concept for the business enterprises of industrial buyer is to define the needs of a target market and modify the organization’s product or service to satisfy those needs more successfully than its competitors. The marketing concept is applicable and important in both the industrial and consumer markets due to the differences in terms of the nature of markets. It is evident that consumer marketers have embraced the marketing concept more fully than their industrial counterparts because Industrial customers like organizations-businesses, institutions, and government agencies having unique needs. The industrial marketing concept involves more than facilitating exchange with these customers because it is based upon the structure of a partnership between buyer and seller for the purpose of achieving the organizational goals of both. Generally, industrial organisations tend to be technically oriented-much more interested in a particular product and its technical development. Many managers in such firms are promoted out of engineering and research and development departments. Sometimes technical values tend to dominate their decisionmaking. When it happens, there is a risk of “becoming so charmed with a technical accomplishment or particular product parameters that the necessary flexibility for responding to customer needs in a competitive market place disappears. It is more serious in industrial marketing due to the complexity of the problems customers are attempting to solve. For marketing effectiveness, the product should always be regarded as a variable and should be viewed from the perspective of the customer. Customer benefits and need satisfaction, rather than the physical product, should be the center of attention. Further, customer satisfaction should be dominant in all corporate decision making; so, it cannot be the exclusive domain of the marketing department. Providing customer satisfaction must involve all decision makers and will affect product design, demand analysis, manufacturing techniques, resource utilization, and long-range profits of the business-organisations. Moreover, the understanding of the concept of industrial marketing is compulsory for industrial marketing manger: to provide proper guidance and stimulation for research and development of new products; to exploit and develop markets for new products; to define the methods for promoting products to customers considering the major increase in the cost of media advertising and personal selling; to innovate in distribution and other areas to keep up with changing requirements of industrial customers doing business on a multinational basis; to meet stiff competition through modernised business; to refine and modify product positioning; and to approach problems in the modern ways.

1.3 DEFINITION OF INDUSTRIAL MARKETING

The word Industrial Marketing is also treated as Business-to-Business Marketing, or Business Marketing, or Organizational Marketing. Industrial marketing/business marketing is to market the products and services to business organizations: manufacturing companies, government undertakings, private sector organisations, educational institutions, hospitals, distributors, and dealers. The business organizations, buy products and services to satisfy many objectives like production of goods and services, making profits, reducing costs, and, so on. In contrary, marketing of products and services to individuals, families, and
households is made in consumer marketing. The consumers buy products and services for their own consumption. Further, industrial marketing consists of all activities involved in the marketing of products and services to organizations that use products and services in the production of consumer or industrial goods and services, and to facilitate the operation of their enterprises. The companies/selling organizations that sell steel, machine tools, computers, courier services, and other goods and services to business firms/buying organizations need to understand the buyers’ needs, purchasing power/resources, policies, and buying procedures. They have to create value (benefit) for the buying organizations (customers) with products and services and focus on buying organizational needs and objectives. For example, a company manufacturing and marketing precision steel tubes to bicycle, a manufacturer is doing business marketing. Industrial 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 services) to paintmanufacturers is also doing business marketing. The needs and objectives of industrial buyers are satisfied through the following exchange processes.

1.3.1 Product Exchange The features of a product or service involved have a significant impact on the industrial exchange process. The ease of exchange depends upon the ability of the seller to identify the buyer’s needs and the product’s potential to satisfy those needs. If the exchange is good in terms of price, quality, quantity, and after sale services then it will give a positive symbol for the customer loyalty in terms of product/service loyalty.

1.3.2 Information Exchange The information consists of technical, economic, and organisational questions: pre and post sale maintenance and servicing must be exchanged to the participants of business organisations. Products and services must be planned and designed to serve customers efficiently. To achieve it, buyers and sellers tend to work together, exchanging product specific information over long periods of time.

1.3.3 Financial Exchange The granting of credit or the need to exchange money from one currency to another at the time of dealing with foreign buyers/customers are included in this exchange.

1.3.4 Societal Exchange Societal exchange is important to reduce uncertainty between buyer and seller, avoiding short-term difficulties, and maintaining the long-term exchange relationship to one another. A number of aspects of an agreement between buyers and sellers in the industrial market are based on arbitration and mutual trust, not fully formalized or based on legal criteria until the end of the transaction period.

1.4 CHARACTERISTICS: INDUSTRIAL AND CONSUMER MARKETING

The basics of marketing management: deciding the target markets; finding out the needs and wants of the target markets, developing products and services to meet the requirements of those markets, and evolving marketing programmes or strategies to reach and satisfy target customers in a better and faster way than competitors apply to both consumer and industrial marketing. The industrial 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 industrial marketing. Industrial marketing is more a responsibility of general management in comparison to consumer marketing. Sometimes, it is difficult to separate industrial marketing strategy from the corporate (company) strategy. But in case of consumer marketing, many times the changes in marketing strategy are carried out within the marketing department, through changes in advertising, sales promotion, and packaging strategies. However, the changes in industrial marketing strategy generally have company-wide implications. The differences between industrial and consumer marketing are as shown in Table 1.1.

Table 1.1: Differences between Industrial and Consumer Marketing

Sr. No. Bases Industrial Markets Consumer Markets
1. Market characteristics Geographically concentrated, Relatively fewer buyers Geographically disbursed, Mass markets
2. Product characteristics Technical complexity, Customised Standardised
3. Service Characteristics Service, timely delivery and availability very important Service, delivery, and availability somewhat important
4. Buyer behavior Involvement of various functional areas in both buyer and supplier firms, Purchase decisions are mainly made on rational/performance basis, Technical expertise, Stable interpersonal relationship between buyers and sellers Involvement of family members Purchase decisions are mostly made on physiological/social/ psychological needs, Less technical expertise, Non-personal relationship
5. Decisionmaking Observable stages, Distinct Unobservable, Mental stages
6. Channel Characteristics. Shorter, More direct, Fewer intermediaries/middlemen Indirect, Multiple layers of intermediaries
7. Promotional Characteristics Emphasis on personal selling Emphasis on advertising
8. Price Characteristics Competitive bidding and negotiated prices, List prices for standard products List prices or maximum retail price (MRP)

1.4.1 Market Characteristics Basically, the significant differences exist between industrial and consumer market characteristics that affect the nature of industrial marketing. These differences are: size of market; geographic concentration; and competitive nature of the markets. Size of the Market: Compared to the great number of households that constitute the mass market for consumer goods and services, In the case of industrial markets, it is common to find less than 20 companies to represent the total market for an industrial product or service. In fact, only three or four customers may comprise the major portion of a total market. For example, for a consumer product like toothpaste or soap, a mass market, consisting of all the households in India, exist. Further, in industrial arena, oligopsonistic buying organisations
(very large firms) tend to dominate many markets 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. While there are relatively few industrial customers, they are larger in size, purchase larger quantities, and engage in this volume purchasing on a repeat basis. Geographical Concentration: Industrial customers also tend to be concentrated in specific areas of the India such as Andaman Nikobar, the Leh Hills. Such concentration occurs mainly because of natural resources and manufacturing processes. For example, the geographic location of natural resources explains the concentration patterns of most energy-producing firms. Only a handful of counties in California, Oklahoma,. Texas, and Louisiana produce the bulk of our gas and oil. Manufacturers whose production processes add weight to their products tend to locate near customers, while those whose processes subtract weight tend to locate near sources of input. Manufacturers of computers and other advanced electronic products present an interesting case of plant location. They tend to concentrate in areas that have advanced teaching and research facilities and desirable living locales such as the Silicon Valley in Banglore. Such locations are chosen to facilitate the attraction of intelligent, educated employees, who seek both intellectual challenges and physical pleasures. Competitive Nature: An additional difference between the two markets is the nature of oligopsonistic buying. In the industrial arena, oligopsonistic buying organizations, organizations that are very large firms, tend to dominate many markets. For instance, the small number of large automobile producers in the United States purchase 60 percent of all synthetic rubber, 60 percent of all lead, and 72 percent of all plate glass produced in the United States. These oligopsonists’ reactions to changes in one another's buying practices affect industrial marketing strategy decisions.
Due to the fact that technological or cost-effective advantages override geographical considerations, industrial organizations are more directly involved in international purchasing. Therefore, the major finished goods exports of industrialized nations tend to be industrial rather than consumer goods manufacturers. Industrial demand as well as industrial supply, therefore, is more apt to cross international boundaries than are demand and supply in the consumer market. However, because of increasing improvements in foreign technology and marketing skills, subsidized by government policies, worldwide competition makes it more difficult for Indian suppliers of industrial goods to compete not only in foreign markets, but domestically as well. Industrial marketers, then, are more subject to world political, economic, and competitive changes than are their consumer counterparts.

1.4.2 Product Characteristics In industrial marketing, the products or services are generally technically complex and not purchased for personal use. They are purchased as components parts of the products and services to be produced or serve 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 industrial 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 (C.R.) steel strip” 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 rigorous 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 competitors supplied the product as per the needs and specifications of the customer, who placed orders with them. As compared to consumer marketing, industrial customers place a greater importance on service, that is, timeliness, certainly delivery or availability of product, because any delay in supply will have a significant impact on the production or operations.

1.4.3 Buyer Behaviour In industrial marketing, the buying process is more difficult as compared to consumer marketing. The purchase decisions in industrial marketing are based on many factors, such as compliance with product specifications product quality, availability, timely supply, acceptable payment and other commercial terms cost effectiveness, after-sales service, and so on rather than on social and psychological needs. The buying decisions generally take a longer time and involve many individuals from technical, commercial/materials, and finance departments. After the initial offer made by a seller, there are negotiations and exchange of information between the specialists and representatives from both the buyer and the seller organisations. Therefore, inter-organisational contacts take place and interpersonal relationships are developed. The relationships between the sellers and buyers are highly valued and they become stable in the long run because of a high degree of interdependence. Changes are few and occur relatively slowly. Buyers charge problems in searching out and qualifying suppliers. The cost of selecting a supplier who cannot meet delivery requirements or who delivers an unsatisfactory product can be high. Thus, the purchasing firm must be certain of a potential supplier’s technical, administrative, and financial capabilities. In contrary, in consumer marketing the relationship between a buyer and a seller is non-personal. Consumers change their purchasing habits frequently and the
buying decisions are always based on physiological, social and psychological needs of the members of a family household.
1.4.4 Channel Characteristics Inventory or stock control is very much important factor in the business organisations therefore the distribution channels are needed more direct from the manufacturer to the customer in industrial marketing. There are a few channel alternatives, which are feasible in the industrial market than the consumer market as shown in Figure 1.1.
Figure 1.1: Channel distribution in Industrial and Consumer market
Producer Sales force Representative s Producer Sales force Representative Distributor Distributor Wholesaler Wholesaler Retailer Customer Customer Customer Customer Customer Customer Customer Retailer Retailer Retailer Often, the manufacturers use their own sales/marketing personnels to sell the products directly to major customers. But, in case of selling to small-scale customers or geographically scattered markets, 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/middlemen, since the household consumers are geographically dispersed all over the country.
1.4.5 Promotional Characteristics In consumer marketing, the emphasis is given on advertising whereas, in industrial (or 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 industrial marketing. Advertising is used to lay a foundation for the sales call rather than serve as the primary communication tool. Sales people act more as consultants and technical problem solvers, utilizing in-depth product knowledge and technical understanding of the buyers’ needs, whereas industrial advertising normally stresses more factual and technical data. Some industrial advertisers use television to reach potential consumers, the primary means of reaching the market is through business magazines, traditional trade journals, and direct mail. Sales promotion activities tend to center on trade shows, trade fairs, catalogs and conducting technical seminars.

1.4.6 Price Characteristics The products are sold through the intermediaries/middlemen to the consumers based on the “Price List” of the manufacturer or the maximum retail price (MRP) for the packaged products in consumer marketing. Sometimes, the retailer reduces the price by passing on to the consumer a part of his discount due to different degrees of intensity of the competition. In industrial marketing, price is less critical factors for purchase decisions. Competitive bidding and price negotiations are very common in industrial marketing and financing arrangements are often considered part of pricing package. 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. Almost 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 discounts, and volume discounts on the price list of standard industrial products are widely used in industrial marketing. The above discussion clarifies that there are many basic differences exist between consumer and industrial marketing. But, these differences in terms characteristics do not make a complete analysis. Therefore, it is necessary to understand the concept of industrial demand in the market to analyse completely.

1.5 DEMAND IN INDUSTRIAL MARKET The demand for industrial products and services does not survive by itself. It is derived from the ultimate demand for consumer goods and services. Therefore, industrial demand is 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 in industrial market. These concepts are detailed as follows:

1.5.1 Derived Demand The single most important force in marketing of industrial products and services is derived demand. Industrial customers buy goods and services for making the use in producing other goods and services and finally produced product/service sold to the consumers. In industrial marketing, the demand for industrial goods and services is derived from consumer goods and services. For example, the demand for precision steel tubes does not exist in market. It is demanded for the production of bicycles, motorcycles, scooters, and furniture (steel tables and chairs), which are consumed by the consumers. Thus, the demand for precision steel tubes is derived from the forecast of consumer demand for bicycles, motor-
cycles, 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 profit; form the future usage. If businessmen of 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, industrial firms reduce their inventories/stocks, 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 becomes very important. An. industrial marketing firm should be in close touched 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.
1.5.2 Joint Demand Joint demand is common in the industrial market because it occurs when one industrial product is useful if other product also exists. For example, a pumpsets cannot be used for pumping water, if the electric motor or diesel engine is not availab1e. Similarly, the department of telecommunication (DoT), which requires a complete kit, consisting of different items, for joining the under ground telecom cables, cannot buy only some of the items from a supplier as it does not contented the kit. Thus, some industrial products do not have industrial demand, but are demanded only if the other products are available from the
industrial supplier.
1.5.3 Cross-Elasticity of Demand Simply, elasticity is the change in demand from a change in price. 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 the united needs of all the customers rather than price, and hence it is relatively inelastic. Though, 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 anyone firm. Cross-elasticity of demand is the reaction of the sales of one product to a price change in another product. This concern present in both consumer and industrial marketing, but it is more imperative in industrial marketing as it can have a dramatic impact on the marketing strategy of an industrial firm. For example, the demand for aluminum 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 aluminum 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. Aluminum extrusion companies regularly collect the information on cost of steel and wood, and advertise the advantages of use of aluminum 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 aluminum due to changes in excise duty or other input costs, there is an impact on the sales of doors and windows 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 aluminum extrusion companies should recognize 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. An industrial 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 industrial marketing persons would anticipate any increase or decrease in the demand for their products, based on the changes in the demand for their customers' products. They must know that existence of cross-elasticity of demand for their products so as to recognise both direct and indirect competition. It ought to be clear after going through this lesson that industrial marketing is more multifarious than consumer marketing and the marketing success depends on understanding the intricacies involved in it. Industrial marketing strategy has company-wide implications and is, therefore, more of a general management function, affecting the various departments or functions in an organisation.

1.6 SUMMARY In all, the concept of industrial marketing may be referred as marketing of goods and services to business organisations: manufacturing companies, service organisations, institutions and middlemen in private and public sector organisations, and Government undertakings. The differences between industrial and consumer marketing exist in certain characteristics such as market, product, buyer behavior, channel, promotional, and price. 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 reaction of the sales of one product to a price change in another product.