Market Segmentation

Chapter Three – How do we identify and understand markets? (Market Segmentation)

As a student of marketing, you have already learned that the main purpose of modern marketing is to serve customers. If the organization really believes in this philosophy, that is, “the Customer Rules,” it only remains for the organization to focus on researching and understanding its customers and then delivering products and services to the customer that will not only meet the customer’s needs, but satisfy the customer in a way that will keep the customer coming back to our organization to do business with us. Therefore, often the first assignment for the marketing function is to gather and analyze information about customers. Today, that usually means first attempting to understand the structure of the marketplace.

Understanding the Marketplace and Different Customer Segments

The main goal of market segmentation (dividing the market into different portions based on differences in customers) is to better understand the needs of our customers thus we need a structured approach to attain this goal. A simple seven-step approach follows:

Step One: Identify the type of market with which you will be dealing

Step Two: Analyze the areas of satisfaction you are attempting to provide to this market, that is, what wants or needs do you intend to satisfy?

Step Three: Select dimensions with which to segment the market

Step Four: Based on the selected dimensions, identify the segments in
the market under study

Step Five: Evaluate whether the segment in which you are interested meets the four criteria for effective segmentation

Step Six: Create a profile of the customer identified including purchasing behavior expectations

Step Seven: Combine the segmentation analysis with other analyses related to the product, market, and business strategy.

Step One: Identify the type of market with which you will be dealing

Types of Markets

Market segmentation is an approach by which we identify, define, and understand different sub-markets for products and services. For example, the automobile market is comprised of many segments including passenger cars, vans, sports utility vehicles, pickup trucks, and many others. Notice, that if you
choose one segment, for example, passenger cars, there are many segments within that segment (for example, Two-door sports sedans, four-door station wagons, convertibles, etc.). The first step to market segmentation is understanding and defining the market with which you are working. For example, if we examine the market for toothpaste, we might first look at the type of market we are looking at. Normally, in marketing, we can identify four types of markets.

1. consumer markets – people who buy for their own, personal non-business use (for example, you buy a lawnmower at Wal-Mart to mow your own yard).
2. organizational markets – organizations buy goods and services for use in the operation of their businesses or for resale. For example, Compaq computer buys many of its microprocessors from Intel Corporation and your local dentist must obtain supplies and materials to provide his/her services to patients.
3. government markets – Local, state, and federal governments taken together constitute for the largest demand for goods and services in the U.S. For example, your local police department must buy patrol cars.
4. institutional markets – these markets include universities, hospitals, and other similar organizations. For example, a hospital cafeteria must purchase food and other supplies to run its operation.

Note that each of these types of markets has demand for both goods (tangible products that we can touch, feel and see) and services (intangible products that we cannot touch, feel, and see). After identifying the type of market, we can then begin to identify segments within that market. For example, if we are analyzing the consumer market for toothpaste, we realize that there are many segments identified in that market already: health (that is, fluoride, tartar control, sensitive gums, and so forth), attractiveness (whitening, breath freshener, etc.), special needs (smokers’ toothpaste, kids’ toothpaste, etc.). Note that there are several different dimensions for segmenting markets. For example, the last category we mentioned ‘special needs’ includes both a lifestyle segment – smokers, and an age segment – children. We will address this issue later in the chapter.

Different types of markets often require a separate basis for market segmentation. For example, we frequently use age as a way to understand and segment consumer markets because age often accounts for significant differences in the wants and needs of consumers. For example, consider passenger cars. Many people in their early years choose cars on the basis of styling, economy, acceleration, and, of course, price. Seniors may choose their car based primarily on brand name and safety issues. Thus age is often an important criterion in what satisfies a particular consumer. However, age is rarely used to identify differences between organizations because usually, the age of an organization does not usually significantly impact its particular demand for products and services. As in many cases in marketing, the exceptions to this statement only serve to prove the rule.

Step Two: Analyze the areas of satisfaction you are attempting to provide to this market, that is, what wants or needs do you intend to satisfy?

As we will discuss in following chapters, people and organizations usually purchase benefits: not products or product features. Therefore, market segmentation analysis requires a clear definition of the benefits customers are expecting to receive through purchase. For example, people buy vacuum cleaners to attain their personal goal of having a clean, sanitary carpet. The form of the product doesn’t matter as much as the product’s ability to provide those benefits. What would you do if you were marketing manager of a company that has vacuum cleaner bags as its sole product when more and more vacuums are ‘bagless?’ The implications for product design will be discussed in a later chapter.

When deciding on how to distribute a product, one organization may choose the internet based on its customers’ desire for efficiency in buying and familiarity with the world-wide web, while another organization may choose to distribute its products through a traditional retail outlet because the segment chosen prefers to ‘touch and feel’ the product.

For an additional example, consider a small gift shop. If a market research study indicated that customers of the shop preferred a lot of assistance in the product choice process because over three-fourths of the products purchased in the store were purchased as gifts, the product would be distributed through a physical location within which the customer could compare alternatives. Thus, the primary benefits sought in this shop were finding a good gift idea with a sense of security against giving an inappropriate gift. Notice that the store’s owner might change from an inventory similar to her competitors to a differentiated set of product choices aimed at meeting her customers’ purchasing goals of quality and uniqueness.

Step Three: Select dimensions with which to segment the market

The dimensions used to segment the different types of markets will be organized according to type of market because the dimensions used for segmentation vary substantially.

Dimensions for Segmenting Consumer Markets

As discussed earlier, people in consumer markets buy for their own, personal non-business use, thus segmentation dimensions for this type of market focus on the characteristics of the buyer. Four dimensions are traditionally used to segment consumer markets. These dimensions are:

a. demographic dimensions - demo’ means people, and ‘graphics’ means some representation of thereof. So, demographics consists of all those characteristics of people that are used to describe the size and composition of the population including age, gender, amount of income, level of education, and other such attributes.
b. psychographic dimensions - ‘psycho’ from Greek means ‘spirit or mind’ so while demographics deals with the statistical characteristics of the market segment, psychographics refers to the characteristics of peoples’ spirits and minds. For example, psychographics is usually broken down into personality, life style, and motivation.
c. geographic dimensions – this dimension, not surprisingly, relates to where people live, for example, the demand for snow skis is higher in the mountainous states in the U.S. than it is in the plains states.
d. behavioristic (or intended use) – this dimension relates to benefits sought and expected use by the customer. For example, many products are sold in multiple packages such as six-packs because customers expect to consume multiple units in relatively short periods of time.

Dimensions for Segmenting Organizational Markets

Customers in organizational markets buy products either to use in the operation of their business or to resell to other organizations. For example, Walmart must purchase cleaning products to keep Walmart Stores clean and attractive, but Walmart also buys cleaning products to sell to their customers. Given this situation, different segmentation strategies are required based on the intended use of products bought by organizational customers. Bases often used include:

a. intended use of products bought
b. expected benefits to be provided by products purchased
c. size of organization
d. SIC (or NAIC) code* of organization’s or organization’s products
e. Other characteristics of organization or specific industry

*Standard Industrial Classification or North American Industry Classification System codes are numbers derived from the core business in which the organizations are engaged. These codes are useful for segmentation because all industrial activities are given a code in the U.S. This scheme has been widened to include Canada and Mexico subsequent to the NAFTA agreement. Check out the website at http://www.census.gov/epcd/www/naics.html.

Step Four: Based on the selected dimensions, identify the segments in the market under study

After dimensions have been selected to use in defining the segments, segments then must be identified in the market under study. For example, if we are trying to analyze the market for personal computers, we might choose to identify the following segments: desktop, laptop, PDA (personal digital assistant). Which of the four dimensions did we use to create those segments? Primarily, behavioristic (intended use), because portability and computing power are two important benefits sought by different pc users.

Step Five: Evaluate whether the segment in which you are
interested meets the four criteria for effective segmentation

To be useful, an approach to segmenting markets, the segments must be:

1. measurable (we can estimate how many people or organizations are in the segment)
2. accessible (we can reach the segment through available means)
3. compatible (the segment is consistent with the overall goals of the organization)
4. substantial (the segment is large enough to justify our develop of products or services just for that segment)

These four dimensions are helpful for understanding any market structure. However, we must first understand the market, itself. For example, try using this information to analyze a market with which you are familiar. Identify the different segments in that market and list the four factors above, and the concerns for each factor as it relates to the product or service you picked. For example, segment the market for shampoo or soup, listing each criterion above followed by an explanation about how this characteristic will be present in the target market.

Step Six: Create a profile of the customer identified including predictions of expected purchasing behavior

As one might expect, there is a large body of literature related to buying behavior in marketing because marketing focuses on the buyer and his/her characteristics. While we will cover parts of this literature the reader should realize that there are hundreds of thousands, if not millions of pages published in this area.

Usually when we attempt to model the buying process of our target customer. Of course, this process differs considerably across different types of markets as well as across different types of customers.

Understanding the significance of the purchase for the target customer

Very often, marketers overestimate the importance of purchases to consumers. Naturally, if one researches, manufactures, and distributes a product to consumers, one is intimately involved with the product often virtually every working hour. This circumstance often results in a heavy emphasis on customer decision-making when in fact the customer may only react on a very shallow psychological plane to products offered and the purchase decision is in reality almost an afterthought. However, it is important for marketers to attempt to model the expected buyer behavior involved for their product. We will discuss this issue further in the following chapter.

Marketing Strategy

We will define ‘marketing strategy’ as “a marketing mix aimed at a specific target market.” While this definition is a use of the ‘lower level’ of the term strategy, we believe that the definition is appropriate for beginning students in marketing. If we look closer at this definition we can see that a marketing strategy is:

A Marketing Product or service
Mix Price AIMED AT a → Target Market
Distribution (Place)
Promotion

We will use this definition throughout our study of marketing principles and you will soon become comfortable thinking in these terms.

Example of seven-step segmentation process
‘Let’s Get It Together’ Family Organization Services

Step One: Identify the type of market with which you will be dealing

“The consumer market”

Step Two: Analyze the areas of satisfaction you are attempting to provide to this market, that is, what wants or needs do you intend to satisfy?

“We seek to enhance family life for parents and children alike by providing
practical tools to improve organization in family life”

Step Three: Select dimensions with which to segment the market

Demographic, Psychographic, Geographic, Behavioristic
(a note to the reader: segmentation doesn’t always requires the use of all four of these factors in creating a profile, but we suggest you always use each dimension in your analysis, whether or not you decide to drop one later on in the process)

Step Four: Based on the selected dimensions, identify the segments in the market under study

Demographic – household income over $80,000, at least one parent is college educated, both parents work, two children or more in household
suburban location in medium to large city
Geographic – every geographic region of the U.S. has families who fit our profile, also see Demographic, above
Psychographic – ‘busy or hectic’ lifestyle as described by people in segment
Behavioristic – family perceives life is ‘too hurried, too complicated, too little quality time together’

(Please note: Our marketing research studies indicated these facts and allowed us to formulate our customer profile)

Step Five: Evaluate whether the segment in which you are interested meets the four criteria for effective segmentation

Measurable – we were able to assess this segment and understand by using only the census data published by the U.S. Bureau of the Census
(Website is http://www.census.gov/ )
Accessible – we can easily identify and communicate with households in profile. However, selecting specific households that may want our service is much more difficult.
Compatible – our organizational mission is aimed at serving this segment, so, yes, the segment is compatible with our organization and other products/services
Substantive – our research and projections indicate that there are millions of households in our target market. Therefore, we are starting our service in one city and expanding the service over the coming years.

Step Six: Create a profile of the customer identified including purchasing behavior predictions

See Step Four above. Also, we know that purchase behavior is a high
involvement transaction for our target families.

Step Seven: Combine the segmentation analysis with other analyses related to the product and market

While we believe our concept has a lot of promise, we must continue to flesh it out and do research. Organizational research will continue while we conceptualize and offer our first seminars to keep track of changes in the social environment of our chosen geographic markets. We will also maintain a research effort with all people contacted in relation to our concept including families who participate, healthcare professionals, and community leaders.

Chapter Three Glossary

market segmentation - dividing the market into different portions based on differences in customers

demographic dimensions – grouping potential customers on objective factors, for example, age/income/gender/ethnicity and level of education

psychographic dimensions – grouping potential customers on psychological factors including personality, life-style, and motivation for purchases

behavioristic (or intended use) dimension –used for market segmentation, this dimension relates to benefits sought and expected use by the customer

marketing strategy - a marketing mix designed for and aimed at a specific target market

Chapter Four - Why do we study buying behavior in Marketing and what have we learned?

In Chapter Three we explored the different types of markets and the process of dividing those markets into small portions called market segments. In this chapter we examine a few basic concepts related to buying behavior. We use the term “a few” because in marketing, more has been written about buying behavior than in any other area. Why do you suppose this it true?

Of course, you already know the answer: Marketers believe the “Customer Rules” thus we know our primary responsibility to the organization is to gain an intimate knowledge of our customers: what satisfies them and makes them happy and what benefits they are seeking in the marketplace.

Consumer Buying Behavior

Researchers in marketing have studied most areas of consumer behavior including the impact of everything from music to lighting on how people behave and how they consume products. This is not surprising considering the fact that we live in a consumption-driven culture. We will focus on the basic constructs accepted today in the study of buying behavior.

Consumer Decision-Making

Most studies of the decision-making process in marketing have used an adaptation of the scientific method. This decision-making process is as follows:

a. Problem recognition – the consumer recognizes a problem. For example, her car has had major mechanical problems for the last two months.
b. Information search – internal and external. The consumer thinks about options she may have to remedy her situation (internal search). And then she seeks external sources of information such as friends, newspapers, TV, and the internet.
c. Alternative identification and evaluation – she has some ideas about what alternatives she has and how to approach them. She now must compare and contrast the options she has.
d. Choice and purchase – based on this process of consideration the consumer now purchases the most attractive option she has identified.
e. Post purchase evaluation – the consumer experiences her choice and determines if she is happy with it.
f. Feedback learning for future consumption behavior – the consumer remembers how she feels about her purchase and makes note of it for future reference (internal search).

As a student, learning this approach is worthwhile for you so that you will have a general framework to understand your purchasing behavior and the purchasing behavior of others for purposes of marketing research.

Of course, there are exceptions to the rather rigid, mechanistic process
above. First, we often don’t go through all of the steps. This fact sometimes has to do with ‘involvement’. Involvement can be defined as the personal importance and social significance of the purchase. The importance can be a function of how much the product or service costs and whether there are any social risks involved. Involvement is often classified as ‘high’ or ‘low’. We would add ‘medium’ to the categories, because many products we buy fit into that area. For example, we rarely buy new cars, laser surgery for vision correction, and new houses (all three of these would be high involvement) and while we frequently buy low involvement products (coffee, soft drinks, chewing gum) we also buy many more durable products that can be considered medium involvement. For example, if a college student buys a new CD player for his car or a new sports-coat, both of these would probably be considered medium involvement because they are in the medium price range as far as his budget is concerned and there is some level of risk surrounding the purchase.

There is also another important consideration called situational effects. Situational effects are all of the circumstances surrounding our purchases that may strongly impact our decision-making process. For example, a female college student is preparing to go out with her friends for the evening. She and her ‘buds’ have decided to go to a club where there will be music, dancing, and, most importantly, young men. The student decides to go to Dillard’s and buy a new blouse and a pair of new ‘dressy’ slacks in preparation for the night out. She also buys some makeup and fragrance. Just last night in the midst of studying for an exam when the same student went out with her friends for pizza at a local pizza parlor, she wore jeans and a ragged sweatshirt. Why was there such a difference in her dress and preparation? The social nature of the two evenings was very different, thus situational effects strongly impacted this person’s buying behavior. We have all had a battery ‘go out’ in our car and most of us don’t think of shopping for a battery until our present battery goes dead. Again, the situation strongly impacts what are willing and able to do as far as buying behavior. Usually, we just try to find a battery wherever we can and as soon as we can to solve our problem.

We, as consumers, feel no responsibility ‘to follow the rules’ thus we may engage in unorthodox buying behavior that defies classification. For example, go to Walmart and observe customers there. You will see all types of people buying all kinds of things: some of those purchases will be planned and some will be unplanned, although, of course, you won’t be able to tell which is which. Often, a ‘shopping trip’ is directed not to a specific, planned purchase but just to ‘see what available’ – so while the cognitive perspective on shopping is useful, there is also a lot of buying behavior that defies understanding. For example, think a situation in which you engaged in an ‘impulse purchase.’ An impulse purchase is an unplanned purchase in which we just decide to buy the product with very little prior consideration.

Group/Social Variables that impact Buying Behavior

While there are many different impacts on consumer buying behavior that have to do with groups, we consider the following three as the most important overall.

Reference Groups

First, reference groups are collections of other people who strongly affect what we buy and how we go about buying it. What do you think is the most influential reference group for most people? If you guessed “family” you are absolutely right. The family is not only the most important reference group for children, a person’s family background can impact his or her buying behavior throughout life in many ways. Sometimes adults buy ‘what our family bought’ and sometimes they ‘won’t touch what my family liked’. This has been shown to be true in durable goods such as cars and appliances, as well as, nondurable goods like laundry detergent and shampoo. The family is a membership reference group whereas other reference groups may be nonmembership reference groups. The U.S. Marines recruits people based on the attractiveness of being “A U.S. Marine, the Few, the Proud.” This brings another factor into consideration. If you consider the reference groups available to you, some will be groups you would like to be a member of but are not (for example, Beta Gamma Sigma, the business student honor society (http://www.betagammasigma.org/) and other groups you would not like to be a member of: perhaps an example would be the “winning lottery ticket losers club.”

Groups you would like to be a member of but are not, are called Aspirant Reference Groups, groups to which you don’t really expect membership, but still want to be somehow related to are called Associative Reference Groups and groups in which you would not seek membership are termed Disassociative Reference Groups.

Many adopt the appearance of their aspirant or associative groups by engaging in consumption behavior to express their personal sentiment. For example, one may buy a Colorado Rockies Hat and wear in public because s/he is a fan of that particular baseball team. This person would belong to an associative reference group but not be a member of an aspirant reference group because in our example the fan does not really expect to be able to join the Rockies team in any official capacity.

Ethnicity - Culture/Sub culture

The ethnic landscape of the U.S. has changed constantly over the last few thousand years and that process continues. Native Americans continually shifted geographic habitat due to weather and other human adversaries. As our country developed in the eighteenth, nineteenth, and twentieth centuries, different ethnic groups joined the growing population. Today the ethnic composition of the U.S. is still changing. An excellent overview of this important material can be found on the internet at http://www.census.gov/population/cen2000/c2kbr01-2.pdf.

Incumbent in these changes in ethnicity are changes in Culture for the U.S. Historically dominated by the thoughts and mores of a Western European tradition, the U.S. is changing rapidly to accommodate many new ideas and ways of doing things. We define “culture” as the totality of artifacts and behaviors handed down from one generation to the next. A subculture can be any segment of society that hands down its own beliefs across an extended period of time. If we look at the great blues music tradition of the U.S. We see a subculture of music, introduced by the music of African-Americans and adopted by large segments of the white population. Thus, different subcultures intermingle their ideas and art forms in an ethnically diverse society.

Individual/Psychological Variables that Impact Buying Behavior

Learning

We, as human beings are constantly learning about our environment and a portion of this learning is related to what we consume and when and how we consume it. Therefore, learning is an important concept in consumer buying behavior. Learning can be defined as “changes in attitudes or behavior based on experience.” We learn constantly about products and services available and adjust our consumption patterns to what we learn. However, we sometimes obtain knowledge that does impact our consumption patterns for some time. Marketers cannot assess such learning easily. Although as a marketing person you can’t assess it, you must remain aware and track changes occurring in the environment. For example, today most people do not perceive significant risks in consuming hamburger meat, however, that may be changing quietly across our U.S. population in response the “Mad Cow” and “foot and mouth disease” outbreaks in the United Kingdom (check out this website:(: http://www.mad-cow.org/). Many people are aware of this threat presently, and it would not take much to drive them away from consuming beef and hamburger meat in all forms. If you were a marketing manager for a food company, you would be well advised to continually gather information on and be aware of this trend as consumers become more aware of this threat to health.

Attitude

There are probably more studies of attitude in the marketing literature than any other individual variable affecting consumer buying behavior. An attitude can be defined ‘predisposition to respond to stimuli.’ In plain English, an attitude is simply how we feel about something. If you are apathetic about a certain product or issue, you don’t really have an attitude related to it. “Neutral attitude” is an oxymoron, it is internally contradictory. Attitude formation can follow several different patterns. However, we can use a simple approach to understand how people form an attitude towards a product or service. Attitudes are usually comprised of three parts: cognitive, evaluative, and behavioral. That is, a consumer normally goes through three stages when forming an attitude. The stages may differ in the order they occur. For example, for a high involvement product, most consumers will probably first think about a product (cognitive stage), develop a feeling towards that product (evaluative stage) and then, if s/he likes the product, purchase it (behavioral stage). We will expand our discussion of attitude formation in the chapter on marketing communications.

The most common attitude model applied in business is the ‘belief/importance weight model’ also called the ‘multiattribute attitude model (MAM).’ The MAM orientation to measuring attitudes is a simple but effective way to understand how people feel about products and services. The MAM can be expressed in formula as follows:

A = ∑Ei*Ii

Where: A = an attitude toward a product, service, or idea
E = evaluation of attribute ‘i’
I = importance of attribute ‘i’
A brief example will be offered to explain this approach.

Let us say that Mike has just graduated from college and is preparing to buy a new car. He has visited several dealerships, talked to his friends, and read product reviews on the internet (external search). He has prepared the following list of products and his evaluation of each product across four attributes (cost, economy, quality, and acceleration):

Saturn Ford Contour Pontiac Grand Am

Cost 5 7 7
Economy 7 5 4
Quality 8 7 6
Acceleration 4 5 8

Mike’s importance weights are as follows:
Cost = 40, Economy = 10, Quality = 10, Acceleration = 40
( Mike used the ‘constant sum scale for his importance weights and the weights add up to one-hundred)

What is Mike’s attitude toward the brands he is considering?

Solution
Saturn – 5*40 + 7*10 + 8*10 + 4*40 Attitude toward (Saturn) = ?
Ford Contour – 7*40 + 5*10 + 7*10 + 5*40 = Attitude toward Ford = ?
Pontiac – 7*40 + 4*10 + 6*10 + 8*40 = Attitude toward Pontiac = ?

This approach to assessing attitudes is easy and can be a helpful tool for marketers attempting to understand how to improve their product offerings.

Perception

Perception can be defined as ‘the way we experience life.’ That is, perception is how we attach meaning to all of the inputs that we are exposed to in daily living. These inputs can be new words, a new song, or an advertisement about a product. Marketers have been interested in perception because they are constantly trying to communicate product and service ideas to their target markets and they need to understand how that information will be received and understood. Humans normally go through several stages in the process of perceiving meaning. These stages include exposure, attention, attached meaning, and retention. You may see a TV ad for Coca Cola (check it out at: http://www.cocacola.com/ ). For example, first, you were present by the TV to be exposed to the ad. Second, it may have gained your attention because you liked the music in the ad. Third, you attached meaning to the ad, recognizing the product and the musical theme, and finally, you find yourself humming the musical theme “Life tastes good” later in the day.

Much has been written about ‘subliminal perception’ over the years. Several popular writers have made considerable money on books they published warning consumers that “You are being manipulated and you don’t even know it.” While, this is really an exciting conspiracy theory that persists in media study, you as a college student, and soon to be graduate, should be in possession of the facts.
Subliminal perception means literally ‘below the level of consciousness’ thus if you can identify symbols or words in an ad, you are not dealing with subliminal perception. Research indicates that while subliminal perception exists, if exposed to subliminal stimuli, you may see a red bottle of Coca-Cola and decide you are seeing Santa Claus. That is, subliminal perception is not efficient at all. However, check out the following website for research on the matter of subliminal perception before you make up your own mind: (http://www.parascope.com/articles/0397/sublim.htm.)

Perception remains an important construct in marketing because the study of perception can give information to marketing communications professionals about when and how people receive and make sense of information.

Risk

Risk, in the consumer buying behavior area, can be defined as the potential negative consequence of a certain action including buying or using a certain product or service. In marketing, we usually use the term ‘perceived risk’ because the person or persons we are trying to understand determine the amount of risk. That is, we can advertise that there is no risk associated with taking aspirin for a headache, but some of the populace will perceive a health risk (physical risk) because they have heard that aspirin is dangerous. There are several types of risk that have been identified in research. We will cover four kinds of risk:

a. Physiological risk - associated with threats to one’s health
b. Financial risk – risk associated with the loss of economic wealth or financial security
c. Psychological risk – threats associated with some psychological construct, for example, a threat to one’s self-esteem
d. Social risk – a threat to one’s social standing or social comfort

Surely, you are familiar with each type of risk as a consumer. You can see that marketers want to understand not only how they can use risk to make their products more appealing for purchase (for example, home security systems). Also, one can see how companies live in fear of hoaxes that will cause consumers to avoid the company’s products (check out these websites to see some present hoaxes in our society. (http://search.yahoo.com/search?p=hoaxes&n=25
http://hoaxbusters.ciac.org/ )

Organizational Buying Behavior

Organizational Decision-Making

Organizations often make decisions in a very similar fashion to consumers. In fact, there has been substantial disagreement about whether the differences in consumer decision-making and organizational decision-making are adequate to justify separate models of decision-making for the two. We agree that the differences are small, and don’t necessarily justify separate treatment. However, we do want to point out a couple of important differences that exist in a fairly universal way. First, organizational purchase decisions are frequently made by a group of individuals. One might argue that families are similar and we would agree. However, the group decision-making approach is consistent across most organizations whereas families may be less oriented to this form of decision-making at least for many decisions. Second, the decision-making process for organizations is certainly more formalized. Most families don’t consider any structured approach to their decision-making as a group and many organizations find it necessary to codify many details about how purchase decisions shall be made. Government agencies are legend for incredibly complex buying approaches.

Thus, marketers must strive to understand how organizations in their chosen markets reach the buying decision. In considering the organizational purchase process we would recommend that the student remember two differences between consumer decision-making and organizational decision-making related to purchasing. First, we would suggest adding a stage to the consumer decision-making process covered earlier in this chapter. Organizations often solicit bids from an approved bidder list or publish specifications related to the product they are seeking to obtain. Second, there has been considerable research on the ‘roles’ assumed by people who impact the buying decision. These people, taken as a group, are called the buying center.

A list of the roles usually existing in the buying center might include:

a) initiator – this person first recognizes the need for the product or service and may or may not have a say in the purchase decision.
b) user – this person will be responsible for operating the product that is bought or consuming the service that is purchased. Again, this person may or may not have a say in what is purchased.
c) influencer – this person’s role may be only tangential to product use, but s/he will still have an impact on the purchase decision.
d) buyer – this person is responsible for obtaining the product, though s/he may or may not have any impact on what is purchased.
e) decider – this person is responsible for the final determination of what will be purchased.

You should become familiar with these roles and be able to understand how they would be expressed in a group-buying scenario. You should also be able to explain why a marketer would be interested in who plays what role.

Group/Social Variables that impact Organizational Buying Behavior

While there are group variables that affect organizational buying behavior, the amount of research in this area is relatively small. Certainly, organizational relationships and organizational culture, for example, may have a strong impact on what is ultimately purchased.

Individual/Psychological Variables that Impact Organizational Buying Behavior

While there has been a limited amount of research regarding these variables, the average business-to-business marketer doesn’t really have easy access to much knowledge in this area. There are some studies on perceived risk that indicate risk is an important personal consideration for industrial buyers as supported by the saying “No one have ever been fired for buying from IBM.”

Other individual/psychological variables including learning, perception, attitudes, and organizational culture also are important considerations in organizational buying as well as consumer decision-making. There is still a lot to be learned in this area.

Customer Relationship Management (CRM)

This area of organizational marketing is one of the most vibrant, intriguing areas in today’s marketing landscape. While many marketers have realized for years that the key to long-term success is at least in part customer knowledge and customer care. However, this initiative is often lost in promotion without creation of a service delivery system to ensure that customers are treated as ‘number one.’

While this catch phrase has gained added space in trade magazines and academic journals, some companies will see this as another opportunity to be ‘sales driven’ and use the concept as a way to promote their ‘customer care’ programs. Sadly, such programs often are not really directed at customer satisfaction and relationship building but only represent something else to advertise that may increase sales. Many organizations that aggressively advertise such programs haven’t really done the research and made the commitment necessary to make the programs successful in the long term.
However, many businesses in organizational markets have realized the importance of relationship building and have made this a priority in their business planning activities.

Chapter Four Glossary

consumer behavior - the processes people employ to obtain and use various products and services.
consumer decision - making the approach that a consumer employs in arriving at a purchase decision
consumer involvement - the personal importance and social significance of the purchase
reference groups - collections of other people who strongly affect what we buy and how we go about buying it
culture - the totality of artifacts and behaviors handed down from one generation to the next
learning – changes in behavior based on experience
perception – the manner in which we experience our environment
attitude – the magnitude of either positive or negative feelings about something
risk – the potential negative consequence of a certain action including buying or using a certain product or service
buying center – the group of individuals who play a role in the process of acquisition of goods and services for the organization
Customer relationship management – the overall process of establishing and sustaining positive interactions with the organization’s various stakeholders