 What do you expect from the course?

Overall CLO
Assessment Weightage
Schedule Weightage Number
Component %
%

Quiz-1 10
After 8th, 16th, and
Quiz 2 10 30 1,2,4
& 22nd sessions
Quiz 3 10
Continuous
(Case/Article
Group Assignment 1 15 2,4
Presentations)
30
Group Assignment 2 15 To be given in 14th
2,3
session & Submission
by 21st session
As per Exam. Office
End-Term Exam 40 40 1,2,3
schedule
 Class Coordinator
 Group size: 6 members
 Total number of groups: 11
 E-commerce
/Technology
side

Purchase side B2B Marketing Sales side

Supply Chain
Side
 Role of personal selling in b2b market
 Relationship building
 Team selling approach
 Key/Major account management
 Purchase process
 Buying center
 Roles of buying center in purchase decision
 Buying situations
 Toolkit for purchase managers
 Role of e-commerce in purchasing
 E-commerce business models
 Reverse auctions
 Cloud computing in b2b firms
 Online selling to business customers
 Supply-chain integration
 Role of technology in integration
 Quality management in supply-chain
 Types of channel
Channel structure & Design Distribution
Role of channel in service Strategy

Pricing Methods
Value based pricing

Product Effective Marketing Pricing

Strategy Strategy Strategy

Branding of b2b Products

Product Innovation
Types of Products
Customization
Services
Advertising & Sales Promotion
Promotion
Personal selling
Strategy
Social media
 Sales manager
 Purchase manager
 Marketing manager
 Key account manager
 System integrator/consultant (e.g. ERP)
 Brand manager
 Supply chain manager
 It is a marketing of products/services to business
customers for:
 Incorporation – e.g. components or raw materials
(Intel to HP)
 Use – e.g. Packaging system, Equipment (GE to
Zydus)
 Resale – e.g. Air compressor (Atlas distributor to
Amul India)
 Consumption – e.g. office supplies or consulting
service (BCG to Tata)
 Key factors: Nature of customer, and intended use
of the product.
  B2C is everywhere.
Car
Power B2C Buyer
Steering Dealer
Individuals/
System
Households
Johnson Control
B2B B2B
Dow Chemicals
B2B
ABS Dash Honda
Styrene
B2B Plastic B2B Board B2B (Mfg)

DuPont
B2B
B2B

Fleet Owners Car

Production Buyer
Travelers
System
e.g. Ola, Uber
 Commercial Manufacturers, Construction firms
Firms Wholesalers, Retailers etc.

Central State
Governments
Government Government
Municipal Corporation
Educational Healthcare Org.
Institutions
Institutes Nonprofits Org.
Three categories of Commercial Customers:

• Users
• OEMs
• Dealers and distributors
 Users purchase industrial products or
services to produce other goods or services
that are, in turn, sold in the business or
consumer markets.

 Example: Tata Motors buys machines (e.g.

Production system or equipment) to produce
automobiles that are sold to consumers and
businesses.

 Tata Motors is a user.

 Organizations that buy business goods and
incorporate them into the products that they
produce for eventual sale to other producers or
to consumers.
• Honda is OEM while buying tires from CEAT
• HP is OEM while buying microprocessor from
Intel
Sr. No. Criteria Consumer Business Marketing
Marketing
1 Customers Numerous, Widely Few, Concentrated
dispersed geographically e.g. Pharmaceutical
e.g. drugs buyers companies
2 Demand Primary Derived demand
e.g. 2 wheelers buyers e.g. Tires manufacturers
3 Buying behavior Simple Complex (Professional
(Individual/household is buyers)
involved) e.g. Buying an ERP
e.g. buying a car system

4 Buyer/Seller Very little Very close, long-term

Relationships relationships.
Interact regularly
5 Product Standardize Complex, Technical &
Buying several items from service is very
D’Mart. important e.g. Air-
compressor
Sr. No. Criteria Consumer Business Marketing
Marketing
6 Price Fixed price, e.g. MRP Negotiated, Bidding
process,
List price for standard
products e.g. office
supplies
7 Distribution Mostly indirect, several Mostly direct, few
intermediaries are intermediaries are
involved involved
8 Promotion Heavy, Mass advertising Selective, Primary
personal selling
 The Consumer Market (B2C) and the Business Market (B2B) at

Wipro
Infotech

B2C B2B

Customers: Individuals Global firms Institutions Government

& Large corporations Healthcare State
Households Small & Medium Education Central
sized businesses

Selected PCs PCs

Products Printers Enterprise Storage
: Laptops Servers
Simple Service Complex Service
Offerings
• Used to manufacture
other products
• Become part of another product
• Aid in the normal operations of
an organization
• Are acquired for resale
without change in form
• A product purchased for personal
use is considered a consumer good
 Classifying Goods for the Business Market

Classify industrial goods by

asking the following:
How does the good or
service enter the
production process?

Source: Adapted from Philip

Kotler, Marketing Management:
Analysis, Planning, and Control,
4th ed. (Englewood Cliffs, N.J.:
Prentice-Hall, 1980), p. 172,
with permission of Prentice-Hall,
Inc.
 Entering Goods Foundation Goods Facilitating Goods

Mostly Standardize Mostly Customized Mostly Standardize except

e.g. Coal, oil, steel, e.g. production, packaging services
tires etc. systems, elevators, buildings, e.g. Lubricants, screw, paints,
JCB etc. spanners etc.

Purchase in large Product is technical and Intensive distribution is

quantities important required to provide goods.
Competitive price Service capability is very E-procurement is used.
Reliable delivery critical Efficient ordering system

If customized, Direct channel is required, Catalogue advertising, and

Personal selling & CRM Personal selling is crucial, less personal selling,
is important Less price sensitivity, Personal selling for channel
Focus on advancing Quality is more important, management,
customer’s competitive Product’s technical Price is very competitive
position. knowledge is important (commodity),
Broad product assortment
and fast delivery
 Internal External
Business Linkage Linkage Customer
Sales
Marketing Organizati
Person
Firm (Mfg.) on

• Inter-functional Coordination within Organization

• Information sharing with customer and marketing
firm
• Integration of manufacturing operation with
purchasing requirements of customers
28
 Why marketing communication is important?
 Marketers have learned that not even the best
products sell themselves.
 Benefits, problem solutions and cost efficiencies need
to be sold through effective communication from users
to influencers to decision makers.
 In B2B market, communication is more important due
to:
◦ Product complexities (technical),
◦ The small number of buyers,
◦ The high price of several products/services, and
◦ Extensive negotiation process
 The primary communications tool for selling business
products/services is the:
 Personal Selling
 Other Non-personal communication tools are:
 Advertising
 Catalogs
 Internet/social media
 Trade shows
 Sales promotion
 All tools have a unique way of getting the message out,
however, they don’t close deals similar to personal
selling.
 Integrated Communications is the integration of all
communication tools to achieve desired objectives.
 In B2B Marketing, primarily focus is on personal selling
and integration of all non-personal communication
tools to enhance its effectiveness and efficiency.
 For example,
◦ Advertising creates awareness
◦ Tradeshow generate quality sales leads.
◦ Sales promotion offers an incentive to buy
◦ Public relation build credibility of the claim
◦ Personal selling – customize the product, persuade the
customer, handle objections, and close the sale.
 Enhancing Sales Effectiveness
 Combining advertising and personal selling makes the
selling job easier and more efficient.
 People who were aware of the ad thought the
salesperson was more knowledgeable than companies
that don’t advertise.
 Profits and gross m a r g i n s a l s o i n c re a s e w h e n
advertising is employed.
 Enhancing Sales Efficiency
 Educate the customers and serves as a reminder
 Informs the market about new product or service.
 Reduce sales person’s burden – most expensive
compare to advertising.
 Business advertising creates:
 Awareness
 Brand preference
 Conviction that a brand will meet their requirements
 Facilitate purchase
 Create 2 way communication
 The Internet has created a two-way communication
process, permitting the marketer to rapidly exchange
information. E.g. Toll free No., E-mail, WhatsApp.
 This flexibility has allowed the marketer to personalize
communications and customize solutions.
 Cannot create product preference for many products
e.g. commodity products.
 Cannot close a sale!
 Cannot substitute for personal selling.
 Can supplement personal selling but not replace it.
 Marketing managers realize that advertising’s objectives
flows directly from the marketing strategy.
 Advertising’s job is to:
 Create awareness, and provide information
 Influence attitudes, and remind buyers about product
 Advertising objectives must be realistic, measurable,
and specific.
 Example: To be effective, the advertising campaign shall
increase awareness from 15% to 30% during the period
from April 1st to June 31st.
 Advertising should improve the customers attitude
from negative to neutral or neutral to positive (e.g. on
the scale of 1 to 5)
 Marketers must understand who the target market is
and how to reach them for an advertising campaign to
be effective.
 Target market consists of all the people involved in the
purchase decisions.
 Target market selection has important implications for:
◦ Media selection
◦ Message formulation
 E.g. Specific trade journal (print media), and message
should be rational – attributes and benefits that solve
customers problem.
 How much to spend on the advertising?
 Several methods are available:
 1. Percentage of sales method
 E.g. Advertising budget (2021) = 5% of sales (2020)
 Highly used method – simple and easy to implement.
 Problems:
 It makes advertising a consequent rather than a
determinant of sales and profits.
 It suggests that marketer should reduce the advertising
when sales volume declines – just when advertising
may be more appropriate.
 The purpose of advertising is to inform and influence
sales, but it is not to create sales.
 2. Competitive matching
 Focus on competitors but ignore firm’s financial
conditions and other factors.
 3. Objective and Task method
 A better approach for allocating advertising costs is to
relate them to advertising objectives.
 T h e O b j e c t i v e - Ta s k M e t h o d f o c u s e s o n t h e
communications effects of advertising.
 Establish marketing objectives in terms of sales volume,
market share, and profit contribution.
 Assess all communication functions to realize these
objectives. E.g. awareness, education, attitude ,
persuasion etc.
 Define specific goals required to meet these objectives
such as market share.
 E.g. 60% awareness level, 45% of the customers should
have positive attitude and knowledge, 20% should
believe that new product has extra benefits.
 Select appropriate media for achieving above goals e.g.
print advertising.
 Estimate the budget needed to accomplish them.
 Advertising message should focus on purchase criteria:
Benefits
 Benefits: Solving customers problem- Faster delivery
time, cost reduction or performance improvement, and
other competitive advantage.
 Message should have direct appeal to customers and
should trigger their actions e.g. Toll free number,
we b s i t e a n d d i s t r i b u t o r i n fo r m a t i o n , p ro d u c t
demonstration.
 If product is new, marketers should conduct research
to identify the buying criteria.
 Analyze most appropriate language, format and style to
present message.
 Manager should select media based on message
budget and access to target audience.
 Several options are available:
 1. Print media e.g. news paper, trade journals etc.
 2. Online media e.g. micro-website, social
networking site, you tube, LinkedIn etc.
 3. Direct mail – Email and Mail through courier.
 There are more than 2700 business publications—
selecting the right ones is another difficult task.
 2 type of publications
 Horizontal Publications are directed at the specific task,
function or technology regardless of industry.
 E.g. targeted to multiple industries and product is
useful in all industries (general purpose)- office
furniture.
 Vertical Publications are oriented to readers in a
specific industry.
 Directed towards specific industry/profession.
 E.g. medical products are advertised in medical
marketing journals.
 B2B marketers are always looking for ways to
communicate better with customers & prospects.
 Use of Internet microsites (specialized web pages that
prospects jump to from an email that contain videos) is
providing excellent results. E.g. vertical net.
 Videos are particularly effective for telling the story
and producing serious leads.
 Search engine - use of proper key words or key
phrases within the site is an absolute necessity for
driving leads to that site. E.g. google
 Direct Mail is commonly used for:
 Sales force support by providing leads
 Distribution channel communications
 Getting pertinent information directly to influential.
 Direct mail is efficient providing the list is good.
 Direct mail is 10 times more expensive than e-mail
 Email:
 E-mail campaigns often yield more responses and
results are quicker.
 Example: 1/3 of all responses were generated within
24hrs.
 Many firms integrate their CRM programs with e-mail.
 Several firms provide an e-mail alert service and/or an
e-mail newsletter.
 How to measure effectiveness of communication?
 Direct communication is measured by: “percent
awareness.”
 Indirect communications are measured by: “word-of-
mouth”.
 Awareness and Knowledge
 Recognition and Recall
 Preference and Motivation
 It is not always possible to measure effects on actual
sales.
 Thanks
 Customize seller’s offering
 Identify profitable market segments (e.g. buying
criteria such as price, service etc.)
 Design effective marketing strategy, specifically
sales presentation.
 2. General
1. Problem 3. Product
Description
Recognition Specifications
of Need

Organizational 5. Acquisition
4. Supplier
Buying and Analysis
Search
Process of Proposals

6. Supplier 7. Selection
of 8. Performance
Selection Review
Order Routine

• Buying is a process, not an isolated events

• Process involved series of decisions (stages)
Internally:
 A machine breaks down
 Someone needs to order an MRO product
 Someone recognizes an opportunity that can be
c ap t u re d by a c q u i r i n g t h e p ro d u c t e . g . 4 k
technology in mobile
Externally:
 Salesperson who precipitates the need for a new
product e.g. CRM software
 Advertising also can influence purchasing
O n c e a n e e d i s r e c o g n i z e d , t h e p u rc h a s i n g
department works with the buying group to define
what is needed by asking:

 What is the extent of the problem?

 What alternatives can solve the problem?
 Where can the solution be purchased?

Each small decision ultimately helps define the

product specifications.
 Buyers try to be objective and prepare the detail
specification of product.
 Professional sellers try to influence this decision
as early as possible in the buying process—if they
can!
 Who will be the supplier?

 If a salesperson creates the need, often the specs

are written so that only the salesperson’s firm is
able to fulfill the contract.

 In established businesses, often only approved

vendors are considered.
 Proposals are analysed in detail often by a team-
engineers, users and purchasing agents.

 Successful proposals determine the supplier.

 The buyer may have already determined the

preferred vendor, but legally it may be necessary
to seek other vendor proposals to attain
government contracts.
At this point, negotiation includes not only price, but
also:
1.Quantities
2.Delivery times
3.Level of service
4.Warranties
5.Payment schedules
6. Other important things
 Rating
Supplier attribute Very poor Poor Fair Good Excellent
(1) (2) (3) (4) (5)
Price competitiveness x

Product quality, reliability x

Service and repair
x
capabilities
On-time delivery x
Quality of sales
x
representatives
Overall responsiveness to
x
customer needs
Overall reputation Average
x
Score = 4.29
 Once the supplier is selected, the order
routines are established.
 Ordering formalities
 Placing orders
 Lot size and lead time
After receipt of the product or service, a
performance review asks:

1. Did the supplier meet delivery time?

2. Did the product meet the specs?
3. Does the contract need to be modified?
4. Did the vendor live up to expectations?
 Stages in the buying process are not as sequential as
suggested by the model.
 Sometimes steps are skipped or compressed.
 For example, to buy stationary items, purchase
manager directly select the supplier and place the
order.
 For buying an AC, mostly all the steps may be
followed.
 What will decide the number of stages in the
purchasing process?
 Firms having significant experience in buying specific
product approach the decision quite differently than
first-time buyers.
 So focus should be on buying situation rather than
the products.
 Buyers face the purchase situation first time.
 Having no previous experience for buying a
particular product.
 Need may be totally different.
 Huge information is required to explore different
‘products’ and ‘suppliers’.
 Buyers lack well defined criteria for comparison of
‘product’ and ‘suppliers’
 E.g. Buying ERP, Diesel engine first time
 In B2C context, buying home first time.
 Decision making process: Extensive problem solving
Out-Supplier
 Best opportunity to enter
 Participate actively in the initial stages of buying
 Collect information about customer’s problem and
offer best solution

In-Supplier
 Have edge over out supplier
 Know the problem early and are familiar with
buyers
 Should understand changing needs of customers
and respond accordingly.
 Recurring requirements of products
 Buyers have substantial experience in buying these
products, and no additional information is required.
 Have well defined criteria for ‘product’ and
suppliers.
 Mostly give orders to ‘in suppliers’
 E.g. maintenance and repair items, office suppliers
etc.
 In B2C context, buying daily items from retail store.
 Decision making process: Routine problem solving
Out-Supplier
 Very few chance to get business
 First build relationship and become approved or ‘in’
supplier.
 Convenience the buyers to break the routine – to
get extra benefits

In-Supplier
 Mostly they will get business
 Use e-procurements or efficient ordering system
 Reinforce the relationship and satisfy their needs.
 Buyers believe that they can derive significant
benefits by reevaluating alternatives.
 Have enough experience of buying the product.
 S e e k fo r a dd i t i o n a l i n fo r m a t i o n fo r q u a l i t y
improvements or cost reduction.
 Mostly buyers have well defined criteria for
‘product’ but uncertain about ‘suppliers’.
 E.g. Buying truck, JCB,Ventilator
 In B2C context, buying second laptop .
 Decision making: Limited problem solving
Out-Supplier
 Hold the buyers in the modified rebuy
 Provide information regarding alternative solutions
and its benefits.
 Offer performance guarantee.

In-Supplier
 Move buyers into straight rebuy
 Try to understand buyers new needs and
convenience them you are capable to supply it.
 Solve buyers’ problems.
 Buying situations
Stages of the buying
New Modified Straight
process
task rebuy rebuy
1. Problem recognition Yes May be No
2. General need
Yes May be No
description
3. Product specification Yes Yes Yes
4. Supplier search Yes May be No
5. Proposal solicitation Yes May be No
6. Supplier selection Yes May be No
7. Order-routine
Yes May be No
specification
8. Performance review Yes Yes Yes
If you are a purchase manager at fleet management
co. and are required to buy cars.
What criteria you will use?

1. Brand name
2. Price
3. Quality perceptions
4. Safety
5. Maintenance cost
6. Aftersales service
7. Resale value
8. Mileage per litter of petrol/diesel
 Managers uses the concept of ‘Total Cost of Ownership’.
 TCO considers the full range of costs associated with the
purchase and use of a product or service over its complete
life cycle.
 Acquisition costs: selling price, transportation costs &
administrative costs of evaluating suppliers, expediting
orders, and correcting errors in delivery.
 Possession costs: include financing, storage, inspection,
taxes, insurance, and other handling costs.
 Usage costs: associated with ongoing use of the purchased
product such as installation, employee training, user labor,
and field repair, as well as product replacement and
disposal costs.
 Implications for seller
 Can charge premium price for the high quality
product subject to lower total costs.
 Can pursue value-based strategies that provide
customers with a lower cost-in-use solution.
 Should have total costs sheet while making sales
presentations.
 Segmenting purchase items into 2 categories
 1. Products having strategic priorities/high impact on
performance
 E.g. advertising, ERP, critical equipment
 Mostly fall under new task or modified rebuy.
 Focus on developing long-term relationships
 2. Products having less strategic priorities/low impact
on performance
 E.g. office supplies, maintenance and repair items.
 Mostly fall under straight rebuy
 Use standardize purchasing process
 Implications for seller
 Seller should first identify where its products fall and
decide selling strategy accordingly.
 Strategically important
 High price can be charged
 Strong long-term relationship can be developed
 Strategically less important
 Offer complete product assortment
 Competitive pricing
 Timely delivery and limited service support
 Simple and efficient ordering system e.g. E-Procurement.
 Why E-Procurement is important?
 Purchasing managers use the Internet to find new
suppliers, communicate with current suppliers, or
place an order.
 E-procurement can:
 cut purchasing cycle time in half,
 reduced material costs by 14 percent and
 purchasing administrative costs by 60 percent,
 allow to identify new suppliers on a global scale.
 Involves one buyer who invites bids from several
prequalified suppliers who face off in a dynamic, real-
time, competitive bidding process.
 Buyers create competition among suppliers to offer
the products at the lower price, may result into thin
margin for the suppliers.
 Reverse auctions are best suited for commodity-
type items such as diesel fuel, metal parts, chemicals,
and many raw materials.
 1. Prevent the auction:
 Convince the buyer not to go forward with the
auction because you have a unique value proposition
and are not inclined to participate.
 2. Manage the process:
 Influence bid specifications and vendor qualification
criteria.
 3. Walk away:
 Simply refuse to participate
 A group of individuals involved in purchasing
decision and share the risk and goals arising from
that decision is called buying center.
 Sales person must predict the buying situation to
anticipate the size and composition of buying center.
Buying Center
Size Composition
4 to 20 Depends on the effects of the
Depends on buying situation product on various functional
Vary from stage to stage in areas of the firm.
buying process e.g. New sound system in
Television - Production, Marketing,
Finance.
 Buying Center
New Task Straight & Modified Rebuy
Buying center is large Buying center is small
Slow decision making Fast decision making
Uncertain about need and Certain about need and solution
solution
Price insensitive Concern about price and supply

Prefer out suppliers Prefer in-supplier, may be out-

supplier in modified rebuy
More influence by technical Influenced by purchasing agents
people than purchase manager
 Role Description
User Uses the product, sometime initiate the purchase
process and develop product specification
e.g. Operator of Packaging machine
Gatekeeper Regulate the flow of information to buying center
Allow selected sales person to meet buying center
e.g. purchasing agent, receptionist
Influencer Influence purchase decision by providing information
about product specification and evaluation.
e.g. Engineering, quality control department
Decider Make the buying decision
Do not have formal authority but approve the
purchase. e.g. MD, President of the company
Buyer Has formal authority to select supplier and
implement all procedures related with purchase.
e.g. Purchasing executive/manager
 Users- Marketing department
 Influencer- IT manager, Consultant
 Gatekeeper – Purchase executive
 Decider – MD or President of the company
 Buyer – Purchase Manager
 Observations about roles of buying center
 One person can assume all roles or separate
individuals can assume different roles
 Each individual has varying level of influence
based on expertise e.g. finance-price.
Industrial product users value:
1. Prompt delivery
2. Efficient and effective service

Engineering values:
1. Product quality
2. Standardization
3. Testing

Purchasing values:
1. Price advantage and economy
2. Shipping and forwarding
90
 Managing Innovation
and New Product Development
 Why new product/innovation is important for firms?
 New product is the answer to all problems of firm:
◦ Growth of the business e.g. sales
◦ Product differentiation
◦ Premium price/good margin e.g. profit
 According to recent survey,
◦ 45% of profit and sales derived from the new products
introduced in last 5 years.
◦ New products profit margin is approx. 33%
 Most of the top performing firms regularly introduce
new products in the market.
 E.g. Apple, GE, IBM, 3M.
 How many companies actually innovate /introduce
new products regularly?
 Very few
 Why?

 New Product Risks

 Significant investments/resources are required,
 Likelihood of failure is high
 According to one study,
- Failure rate in new product development is from 40 to
60%.
 5G Wireless
 3D Metal Printing
 Block chain
 Google Translate
 Google Lens
 Artificial Intelligence
 Derivative projects
 Incremental product enhancements e.g. feature
 Incremental process improvements e.g. low cost mfg.
process
 Incremental changes on both dimensions
 E.g. a feature enhanced and cost reduced mobiles
 Platform projects
 It create design, technology and components shared
by set of products.
 E.g. Android operating system 6-sense technology by
Whirlpool
 Breakthrough projects
 Establish new core products or new core processes
that differ fundamentally from previous generation of
process/product.
 E.g. 3-D printing technology, Robotic manufacturing,
Internet.
 Research and development projects
 It creates knowledge of new materials/technologies
that eventually leads to commercial development.
 E.g. satellite based communication technology
 Seattleite phone, d2h services
 Pharma firms develop new molecules that can be
used to make drugs and vaccines.
 Internally from:  Externally from:
1. Salespeople 1. Channel Members
2. Employees 2. Competitive Moves
3. R&D 3. Industrial Customers/
4. Marketing Research Lead users
5. Serendipity
 What kind of strategies or behaviors are appropriate
for innovation?
 Induced Strategic Behavior or Intended Strategy
 Top down approach
 Formal and in-line with existing strategy (products &
markets) of the firm. E.g. Savlon
 Influence behavior through rewards and monitoring
 NPD department identify the opportunity for new
product development.
 Formal project approval process
 Structured communication
 Formal group is formed for the new product idea
 Administrative process
 Induced Strategic Behavior or Intended Strategy
 Autonomous Strategic Behavior or Realized Strategy
 Bottom-up approach
 Depart from the current strategy (products &
markets) of the firm. E.g. 3M
 High autonomy and freedom
 Individuals work on their personal ideas
 Organization provide free time and resources for
working on personal ideas.
 Informal group and ‘product champion’
 Similar to entrepreneurship
 Political process
 Once ideal is finalize, it follows the formal process.
 Autonomous Strategic Behavior or Realized Strategy
 Disruptive innovation occurs when a totally new
innovative product is developed that interrupts the
way business does things.
 Examples: Train, automobile, mobile, computers, TV
and Internet. (when introduced first time)
 A disruptive innovation represents the product or
service that is not as good as currently available
alternatives.
 Disruptive innovation offers other benefits such as
products are simpler, more convenient, and less
expensive products that appeal to new or less
demanding customers.
 E.g. Xerox high-speed photocopier machine v/s
Canon’s simple table top copier.
 Sustaining product innovation often leads to product
developments that offer much more capacity than the
“mainstream” market needs.
 A sustaining innovation targets most demanding, high-
end customers with better performance than what
was previously.
 Sustaining innovation lead to incremental product
improvement or breakthrough feature of the product.
 E.g. TV has been improved from black & white to
color, flat screen, hd, smart tv, 4k tv etc.
 I m p ro ve m e n t i n p h o t o c o p i e r m a c h i n e f ro m
photocopy to scanner and printer (All in one).
Performance

s
rogres
P
ogi cal
l
echno
e of T
Pac
s
vation
g Inno Range of
stainin
Su Performance
that Customers
Performance that
Can Utilize
Customers Can Utilize
or Absorb

Disruptive
Innovations

Time
 Disruptive strategies can take two forms:
 1. Low-end disruptions 2. New-market disruption
 1. Low end Strategy
 In this strategy, product performance should be good
enough to meet the performance requirements at the
low end of the mainstream market.
 Serve the over-served customers in the low end of
the mainstream market.
 Uses a distinctive business model or discount
strategies to win the business.
 There should be customers at the low end of the
market who are ready to by good enough product at
low price.
 E.g. Indigo Airlines
 2. New-market disruption
 In this strategy, product performance will be lower
on key attributes but enhanced performance on new
attributes. E.g. simplicity and convenience
 Target those customers who lacked money or skills
to buy and use the product. (They must be there)
 Business model must make money at lower price per
unit sold and at small production volume.
 E.g. Cannon desktop photocopier, sales force CRM
for SMEs.
 Approach: Build from the ground, reflect the reality
of the users, deliver solution not features.
 Focus on the customers and their problems.
 Do not use disfeaturing for new product.
 Technology: Latest technology or better than the
existing one.
 Price: Affordable to masses
 E.g. Lullaby primer by GE for Rural India
111
 It is a process of directly selling products/services to
customers or resellers.
 Personal selling plays dominant role in the success of
the company.
 It is the most expensive one among all the
communication tools.
 Companies spend around 10% of their overall budget
on personal selling.
 Why personal selling is important and feasible in b2b
market?
 Relatively less number of business customers
 Customers’ purchase in large quantities
 Product is generally complex and technical in nature
e.g. ERP, Air Compressor, Production System
 Several customers buy customized products
 Relationship building is important
 Buying process is more complex due to involvement of
multiple people.
 How to organized personal selling efforts in business
market?
 1. Geographical organization
 Each sales person sells all the products of a firm to all
the customers in a defined geographical area. E.g.
Pearson publication house.
 Advantages
◦ It reduces the travelling distance and minimize costs.
◦ Sales person knows all the customers and prospects.
 Disadvantages
◦ Each sales person is responsible for all the selling tasks for all
the products and customers.
◦ Sales person can choose the specific products to sell and
which customers to serve.
 2. Product organization
 Each sales person sells a specific set of products of the
firm to all the customers in a defined geographical area.
 E.g. Sun Pharma has three division – cardiac, pedestrian,
and surgery.
 Used when product is large, diverse or complex, and
sales person’s need a high level of application
knowledge.
 Advantages
◦ Sales person can develop the level of product knowledge the
enhance the value of the firm’s offering.
 Disadvantages
◦ Cost is high for developing and deploying a specialize sales
force
 3. Market organization
 Organize personal selling efforts around customers
type or industry.
 Sales person can better understand customers need
and can serve them well.
 E.g. HP has separate sales person for retailers, financial
institution, and oil and gas firms.
 Each target segment should be large enough to justify
separate sales efforts.
 Several software firm employ separate sales person for
small size and large size customers.
 Business customers vary in terms of:
 1. Purchasing power e.g. order size or quantity
 2. Level of customization of products
 3. Need of value added services e.g. product
development, cost reduction, JIT.
 4. Purchase mix and order pattern e.g. regular

 All these characteristics of customers have major

impact on marketers cost to serve them and its
profitability.
 Many companies find that 80% of their
business/costs/profits comes from 20% of their
accounts.
 Personal selling is the most expensive tool, so it should
be used wisely to enhance company’s profitability.
 Rather than using uniform sales strategy, marketer
should identify most important/profitable customers
and organize sales efforts accordingly.

 How to identify major or key accounts?

◦ Purchase a significant volume as a % seller’s total sales.
◦ Involve several people in the purchase (buying Center)
◦ Buy for a number of geographically dispersed units
◦ Expect specialize products and services
 How to select Key accounts?
 Capacity Utilization (Order size)
 Price & Margins (Profit)
 Order Patterns (Regular orders)
 Customer maintenance costs
 Interested in long-term relationships
 How to manage the key accounts?
 Assign a Key Account Managers and a team for major
accounts, or on one account.
 Team consist of individuals from Sales, Marketing,
Finance, Logistics, Engineering and other functional
areas.
 Key account manager directly reports to a senior
executive
 How to manage the key accounts?
Technical Service for Purchase Early access
Assistance repair and Criteria in purchasing
maintenance process

Building
Seller’s relationship by Buyer’s
Org. KAM at Org.
Multiple levels

Logistic/Inven Production Buying center – New purchase

tory support urgency role & composition opportunity

Resources mobilization and Access to

cross functional coordination information

Integration of buying process of client and internal operations

of the selling firm through communication and coordination
 Solving Customer Problems
 Improving Customer performance
 Reducing Customer costs
 Generating profit for own company
 Traditional Selling vs. Key Account Selling
Traditional Selling Key Account Selling Focus
Focus
Sales Volume Varies Large volume of purchases by the customer often
across multiple business of the seller
Nature of Core product/service Core product/service plus customized
Product/Service applications and value-added services

Time Horizon Short-Term Long-Term

Benefits to Lower prices & higher Lower total costs; Broader set of strategic
Customer quality benefits
Information Limited: Narrow focus Extensive: Broader focus as firms share strategic
Sharing on price goals
and product features
Sales Force Maximize revenue Become preferred supplier; Lower customer
Objectives Satisfied customers firm’s total costs; Enhance learning in the
relationship
Structure of Individual salesperson is Many individuals from multiple functional areas on
Selling Center primary link to the selling side interact with counterparts in the
customer organization customer organization
Structure of Purchasing Manager and Many individuals within the customer
Buying Center a few other individuals organization interact in making decisions and
are involved in buying evaluating the relationship
decisions
 How to evaluate sales person’s performance?
 1. Behavior based
 Sales manager monitor and direct salespeople activities.
 A c t i v i t i e s : s a l e s p e r s o n ’s p ro d u c t k n ow l e d g e ,
presentation and selling skills etc.
 Subjective in nature
 Used:
 When sales reps are inexperienced,
 Firm wants to control how products are presented to
customers,
 When sales reps are asked to perform more non-
selling activities.
 How to evaluate sales person’s performance?
 1. Output based
 Sales manager directly monitor the outcomes of
salespeople.
 O u t c o m e s : s a l e s vo l u m e , m a r ke t s h a re g a i n ,
profitability, new product sales etc.
 Objective in nature
 Used:
 When skills and efforts of sales rep are directly linked
to sales.
 Sales reps are experienced
 Sales managers generally use the combination of both
behavior and output based measures.
 Objective : to match sales resources to market
opportunities or market potential.
 How to deploy sales resources effectively?
 1. Define the planning and control units (PCUs) e.g.
group of customers or sales territory.
 2. Assess the market potential in each of the PCUs e.g.
sales territory
 3. Assess the selling firm’s strength and level of existing
sales resources in each PCUs. E.g. number of sales
persons or total available selling time.
 4. Position all the PCUs on the Grid (based on market
potential and selling firm's strength)
 How to deploy sales resources effectively?
 5. Adjust the sales resources based on the market
potential, organizational strength in each PCUs.

 PCUs grid analysis is useful for:

◦ Determining the size of the sales force
◦ Territory design
◦ Allocation of sales call to customers
 Introduction
• Objective of the firm is to create value for the
customers – better than competitors.

• How firm can create value?

• Through marketing mix – product, price distribution,

and promotion.

• Effective pricing can not compensate for the poor

execution of the 3Ps.

• Ineffective pricing can preclude the firm from getting

financial success.
 Factors affecting Pricing

Competition Costs

Pricing
Strategy

Demand Objectives

CUSTOMER VALUE PRICE COST PRODUCT

 Factors affecting Pricing
• Pricing objectives:
• 1. Return on Investment
• 2. Market share
• 3. Meeting competition
• 4. Profit
• e.g. Dow Chemical set low price to build market share.
• DuPont charge high price initially and then reduce it.
• Demand: Elasticity of demand and impact of price on
sales.
• C o m p e t i t i ve R e a c t i o n s : i n c re a s e s p e n d i n g o n
advertisement, reduce price etc.

• Costs: Fixed costs and Variable costs

 Microsoft Xbox v/s PlayStation 2
Microsoft gaming console in 2001 (USA)
Fixed costs: $500 Million
Cost per unit: $375 per unit
Objective: sell 5 million X-Box

Sony PlayStation II: $299 per unit

Nintendo GameCube: $199 per unit (expected)

If price is set at $ 375: Cost recovered

If price is set at $299: Loss per unit : $76
If price is set at $199: Loss per unit: $176

What price do you suggest to Microsoft?

 Microsoft Xbox v/s PlayStation 2
Microsoft priced at $299 per unit

Sony reduced the price of play station ii to $199 in

2002.

What to do?

How to sustain?
 Traditional Pricing Approach
Cost –Plus Pricing Approach

Cost per unit + Mark-up = Price of the product

Disadvantages:
1. Customer’s value of perception
2. Competition

Competitive Pricing Approach: Match the close

competitors’ price
 Pricing Approaches for New Product
• Penetration Pricing:
• Product is introduced at a low price in the market
• Objective: capture market share quickly
• It is appropriate when:
• Targeted customers are price sensitive
• Opportunity for a substantial cost reduction as volume
expand (e.g. iron ore, medical synergies)
• Skimming Pricing
• Product is introduced at a high price.
• Objective: to capture early profit
• It is appropriate when:
• Targeted customers are not price sensitive
• P ro d u c t i s i n n ov a t i ve o r h av i n g s u b s t a n t i a l
differentiation e.g. customized products, G.E. Medical
equipment.
 Value based Pricing: Defining Value
Economic Value
• Value placed by customer on product.
• Calculated using reference value and differentiation
value
ØReference Value
Refers to the price of the consumer’s next “best”
alternative.
ØDifferentiation Value
Refers to the value of whatever (benefits, service
etc.) differentiates the offering from the
alternative(s).
Can be positive or negative.
 Negative
Differentiatio Costs unique to doing
Your Positive n Value business with you
unique Differentiation Price to
value capture
Value
a share
delivery
of this
value

Price of Total
Customer’s Reference Economic
Next Best Value Value
Alternative
 Economic Value Analysis
• Step 1: Identify Reference Value

• Reference value is calculated as the price of the

best perceived alternative.
 Economic Value Analysis
Step 2: Estimate Differentiation Value
• Determine the value drivers – those attributes that
impact customer perceptions and purchase choice.
Are they monetary gains or cost savings?
Are they psychological benefits or costs?
• Identify attributes that differentiate between your
product and the competitive reference product.
• What benefits or costs are associated with your
product?
• E.g. warranty, product specification, technology,
Brand.
 Economic Value Analysis
• How can you quantify each benefit and cost?

• Gather data that can be used to assign the monetary

amount to each value driver (e.g., in-depth customer
interviews, surveys, focus groups).

• Cost Drivers: Create value by economic savings

• Example: Machine can process more material/hr. with less
electricity, training and maintenance and labor costs.

• Revenue Drivers: Add incremental value by facilitating

revenue or margin requirements
• Example: Packaging is more attractive thus increasing sales

• Assign the estimated value to each driver

 Higher residual Add’l warranty
value = $1200 cost = -$1050
Parts inventory Total offering
savings = $1250 economic value
Invoice processing $79,950
consistency savings
= $1500
Differentiation How much of the
Fuel economy Value = $7,450 Differentiation
savings = $2200 Value do you
Increased revenue Capture versus
from higher Share with your
uptime = $2350 Customers

Competitive
Reference price
alternative for
Reference = $72,500
this customer
= $72,500
 Negative
Differentiatio Costs unique to doing
Your Positive n Value business with you
unique Differentiation Price to
value capture
Value
a share
delivery
of this
value

Price of Total
Customer’s Reference Economic
Next Best Value Value
Alternative
 A one-size fits all approach to pricing reduces
profitability and intensifies customer pricing pressure

….leaves money on the table for these customers and

communicates that value does not have to be paid for…
High

Setting price here

Value
A B C D
Low
Segment Size

….and misses growth opportunities by

pricing these customers out of the market
 A B C D E Total
Percent of Market 5 15 35 25 20 100%

Segment Size 50 150 350 250 200 1000

Reservation Price = $20 $15 $10 $8 $6

Maxim. contribution w/:

1 Price ($10) $10 $10 $10 $10 $10
VC equal to $5 $5 $5 $5 $5
Contribution equals
$250 $750 $1750 $0 $0 $2750
2 Prices ($15, $8)
$15 $15 $8 $8 $8
VC equal to
$5 $5 $5 $5 $5
Contribution equals
$500 $1500 $1050 $750 $0 $3800
5 Prices ($20  $6)
VC equal to $20 $15 $10 $8 $6
Contribution equals $5 $5 $5 $5 $5
$750 $1500 $1750 $750 $200 $4950
 Market Traditional Metrics Value-based Metrics

Real Estate Want Ads $ / column inch $ / property value

Light bulb $ / unit $ / hours of use

Internet service $ / minute $ / download

 iTunes

Old New
Metric Metric
$ / CD $ / Song

Overpayment
Value
Inducement
Value Price Value Price
of of of of
CD CD Song Song
◦ Price Fences are a means to charge different
customers different prices.
◦ Types include
 Buyer identification fences (e.g., airlines)
 Purchase location fences (e.g., real estate)
 Time purchase fences (e.g., fashion, yield management - hotels,
airlines…)
 Purchase quantity fences
 Volume discount
 Order discount
 Two-part pricing (e.g., printer and cartridges)
◦ Significant business is done through competitive bidding,
especially in government purchase.
◦ In bidding, firm has to develop a price rather than
relying on list price.
◦ Mostly suitable for commodity type of products e.g.
MRO materials.
◦ It can be done online or offline.
◦ Types of competitive bidding
◦ Closed bidding
◦ Open bidding
◦ Closed bidding
◦ It involves the formal invitation to suppliers to submit a
written bid on a specific contract.
◦ All bids are opened simultaneously and often job goes
to lowest bidder who meet desired specifications.
◦ On-line sealed bids: on-line auctions e.g. AMC invites
online closed bids from real estate firms to sell land.
◦ Open bidding
◦ It is more informal and allow suppliers to make offer up
to a certain date.
◦ It is appropriate when specific requirements are hard to
determine or competitors offering vary significantly.
◦ First suppliers capabilities are evaluated then prices are
negotiated. E.g. customized production system.
◦ Online open bidding (reverse auction)
◦ All qualified suppliers are invited online for live bidding.
◦ All participants can see the bids of other suppliers.
◦ Goal: push price down.
◦ Can damage supplier-customer relationships.
◦ E.g. Zydus use it for by medical products
(standard/commodity type)
153
 Physical Product e.g. Elevator
 Service e.g. Consultancy
 Core
Benefits
Add-on

Customer Value
Price

Sacrifices Acquisition
costs

Operations
costs

Source: Adapted from Ajay Menon, Christian Homburg, and Nikolas Beutin, “Understanding Customer Value,”
Journal of Business-to-Business Marketing, 12, no. 2 (2005), pp. 4–7.
 Benefits:
1. Core – requirements a product must possess for a
relationship to exist.
2. Common across all suppliers e.g. Transportation
3. Add-ons – attributes that create differentiation &
provides more value than competition. e.g. AMC,
buyback guarantee, new product development
assistance.

 Sacrifices:
1. Price
2. Acquisition costs (e.g., ordering & delivery costs)
3. Operations costs e.g. inspection costs, installation
and training costs.
Add-ons: All qualified vendors provide equal
core, so add-ons are the differentiators,
which include:
a. Differing attributes
b. Relationships
c. Advice
d. Product support Services – Pre & Post sale
 Offered in limited configurations. e.g. standard product
 Produced in advanced in anticipation of orders. E.g.
make to stock
 Product line decision: adding, deleting or repositioning
product.
 E.g. Fastener, Gasket, rivet, electric motor, water pump.
 Offered as a set of basic product with numerous
options and accessories.
 Product line decision: offering the proper mix of
options.
 E.g. dell laptops, CRM and ERP software, Forklift truck
 Products are created to meet the need of a customer
or small set of customers.
 Product line decision: developing marketing capability
to produce customized product.
 E.g. power plant, pressure vessel, building etc.
 Buyers purchase company’s capability to solve their
problems.
 Product line decision: developing service capability
 E.g. maintenance & repair, consultancy, technical service
etc.
 Technology based products influence customers
to change their behavior with the promise of
gaining dramatic new benefits.
 Examples:
o Cars replaced horse-drawn carriages
o Computers opened the doors to
revolutionary new products
o Internet changed the way we do business
 Technology enthusiasts
 Visionaries
 Pragmatists
 Conservatives
 Laggards
 Technology enthusiasts (innovators) -
explore new products, influence buyers, and lack
of resources.

 Visionaries (early adopters) – exploit

innovation for CA, have access to resources,
demand modification that difficult to provide.

 Pragmatists (early majority) – bulk of

technology purchase, believe in evolution, and
buy from proven vendors.
 Conservatives (late majority) –
pessimistic about value of technology, price
sensitive and reluctantly purchase high tech
products.

 Skeptics (laggards) – critics of the high

tech products.
1. P u t i n n o v a t i ve p ro d u c t s i n t h e h a n d s o f
technology enthusiasts.

2. After a while visionaries will see the value of the

new technology and will begin to view it in
business terms.

3. New technologies usually enjoy a honeymoon

reception from enthusiasts and visionaries,
however sales begin to falter… a chasm forms…
 A Chasm is a period of time where sales falter due
to differences between Visionaries and Pragmatists.

 Visionaries want change (revolution) whereas

Pragmatists want change (evolution). But
Pragmatists make most buying decisions in
organizations.

 Pragmatists are the gateway to the mainstream

market. If that chasm gap can’t be bridged, often
products become part of ancient history.
 One strategy to cross the chasm is for the
marketer to provide pragmatists with 100%
solutions to their problems using the new
technology.

 Goal: Win a niche foothold with a small group of

pragmatists as quickly as possible … that is what
crossing the Chasm means.

171
 Each market is like a bowling
pin.The momentum of moving
one pin (with good technology
products) successfully carries
over into surrounding segments.

 The bowling alley is where

mainstream market segments
begins to accept the new
product, but it still has a way to
go.

 Strategy: Win one niche, then

work on another.
 This strategy assumes a product has very
wide appeal. The seller’s strategy is to:
1. Move as quickly as possible in getting the
product out to the market.
2. Build distribution ASAP.
3. Drive price down to next lower price break
ASAP.
 This strategy demands product leadership,
operational excellence in manufacturing
and distribution.
Once the mainstream has adopted the
product, the aftermarket phenomenon
occurs:
a. Mass marketers of the products begins to
subside.
b. Competitors force supply to exceed demand.
c. Prices fall.
d. High tech product becomes a commodity.
e. Profit growth can no longer come from selling
the commodity.
f. Profit can only come from extending the
platform of the product to other niche-specific
needs.
175
 Research by Consulting firm suggests that:
 1. 30 to 50% of the marketing and customer
service costs are wasted on efforts to acquire and
retain customers.
 Several firms do not generate profit out of 1/3 of
its customers.
 What is the problem?
 Business firms deal with multiple customers e.g.
c o m m e rc i a l e n t e r p r i s e s , gove r n m e n t s a n d
institutions.
 E.g. Dell sell its computers to all the 3 types of
customers.
 These customers have
 diverse needs
 Use different purchasing structure
 Have different purchasing criteria
 Use different decision making styles
 How to deal with such diversity?
 Segmentation

 What is segmentation?
 It is a process of dividing the present/potential
customers/firms in to separate groups with some
common characteristics which is relevant in
predicting their response to a firm’s marketing
stimuli.

 E.g. price, after sales service, delivery etc.

 Why Segmentation is important?
 Analysis of market- understanding why and how
customers buy the products.
 e.g. Large firms are quality conscious, and often buy in
large quantities.

 Selection of key profitable segments- rational choice of

key segments that match with firm capabilities.
 E.g. small firms are price conscious – sales force.com
offer ERP on subscription basis.

 Management of marketing efforts – design of customized

marketing program to satisfy the customers’ need
profitably.
 E.g. Annual maintenance contract/ extra warranty etc.
 What basis of segmentation company should use?
Geographic Location

Customer Size
Macro-
segmentation Customer Usage rate

Product Application

Purchasing Criteria

Purchasing Strategy
Micro-
segmentation Importance of Purchase
Personal
Characteristics
 Firm can divide the market based on geographical location.
 E.g. GE divide its market in to different countries e.g. India,
Australia, USA etc.
 GE healthcare further divide the Indian market into rural
and urban market.
 Companies can geographically segment the markets into
different zones/regions e.g. east, west, south, and north
zones in India.
 Why? –
 Regional variation in buying
 Effective organization and deployment of sales staffs.
 Designing customized marketing offers
 Firm can segment the market based on firm size e.g.
small and large.
 E.g. sales force sell ERP software to small firms
whereas Oracle, SAP mostly focused on large firms.
 Why? – Large and small firms differ in buying patterns.
 Large firms : influence of purchase manager is high
relative to top management e.g. MD.
 Small Firms: Owners are involved in purchase and have
more influence then purchase managers.
 Designing customized marketing offers – both
customer have different types of need.
 Firm can segment the market based on customers usage
rate of the product e.g. Heavy, Light and Non-users.
 Why? – users have different kinds of need in the same
product based on the usage rate.
 Heavy users demand advanced technology and support
services than light users.
 Light users are mostly satisfied by standard product.
 Non-users provide information for why they are not
buying the firm’s product/brand. E.g. resource constraint.
 In packaging system and conveyor belt, companies use:
nylon and metal gears.
 If you are a sales rep. of nylon gear company, where would
you focus.
 Customers can be segmented based on centralized v/s
decentralized purchasing approaches.
 Why?
 Centralized purchase: Account Manager
 demand for high quality and specialize services.
 Focus on long-term relationships with few suppliers.
 Purchase in large quantities.
 Decentralized purchase: Sales Force
 Emphasized on short term benefits e.g. cost efficiency,
fast delivery.
 Bose corporation uses centralized approach for
strategically important products and decentralization
for remaining ones.
 Customers can be segmented based on product
application because it has major impact on purchase
criteria, and selection of vendors.

 Why: Application will drive purchase criteria.

 E.g. microchips are used in
 Household appliance
 Retail terminals
 Toys, cell phone, computers, air craft etc.
 E.g. Loctite
 Three types of purchase situations
 New task, Modified rebuy and straight rebuy
 All the three types of buying situation required:
 Varied level of information about product and supplier.
 Prefer ‘in’ and ‘out’ supplier based on purchase
situation.
 Help to design the selling strategy to sales
representatives.
 E.g. modified rebuy – performance guarantee by out
supplier.
 What basis of segmentation company should use?
Geographic Location

Customer Size
Macro-
segmentation Customer Usage rate

Product Application

Purchasing Criteria

Purchasing Strategy
Micro-
segmentation Importance of Purchase
Personal
Characteristics
 Firm can segment the market based on purchasing
criteria.
 Key Criteria: Price, quality, service, brand
reputation, technical support, delivery.
 Identify the most important criteria for the
customers and design your offer accordingly.
 E.g. government contracts awarded based on low
price bidding.
 MRO materials are purchases mostly on the basis
of price.
 Business customers use 2 types of purchasing
strategies:
 1. Single or few suppliers
 2. Multiple suppliers
 Business marketers can categories its customers
into 2 segments based on purchasing strategy.
 E.g. Honda uses multiple suppliers strateg y
whereas Bosch uses single or few supplier strategy.
 Understand implication of each strategy and
design offering accordingly. E.g. single supplier –
relationship is important.
 Business marketer should analyze the importance
of product for customers:
 Strategically important e.g. advertising services
 Strategically not important e.g. housekeeping
service or office suppliers.
 Importance of purchase will drive purchase
criteria.
 Software purchase may be routine for large
organization but may be very important for small
firms.
 Segmentation is made on the basis of:-
◦ Individual preference – vendor or brand
◦ Risk Management Strategy
◦ Risk Averse buyers – do not buy new products,
and do not prefer untested vendors.
◦ Risk Receptive – explore new products from
several vendors and buy.
 Individual customer is a segment
 Useful in growing and consolidated industry.
 E.g. Commercial Air Craft Industry
 Boeing, Airbus
 Cisco and Motorola supplies products to
telecom industry in india.
 Customers: Jio, Bharati Airtel and VI
 How to use these bases of segmentation?
 Firms use multiple bases of segmentation.
 Begin the segmentation process with macro-
segmentation bases. E.g. geographical location, size,
product application etc.
 If Information is sufficient for designing tailored
marketing program (based on similarities/difference).
 If not, use micro-segmentation basis (e.g. price, quality,
importance of purchase) for further dividing segments
identified based on macro-criteria.
 Why do not need to use all the criteria all the time?
 Cost of getting information from macro to micro
bases is high.
 Few sources of information:
◦ Industry oriented directories
◦ Government statistics
◦ Report by market research firm
◦ Firm’s visit by marketer
◦ Purchasing executives of the customer firm
◦ Reengineering of customer product
◦ Sales information system.
 Demand analysis
 Demand estimation involves: Market potential +
Level of sales and marketing investments +
competition
 Demand estimate helps to plan the marketing
strategy.
 Where to locate the outlet and how many?
 What should be the size of sales force and
target for them?
 Estimate firm’s revenue, costs, and profitability
from each segment.
 Thanks
 Establish social networks
 Create personal & professional identity of individual.
 Facilitate information flow in the network
 Build reputation and relationships
 IBM 2006 conference video uploaded on social media
resulted in:
 Double visits on websites
 Increased demand of computers for computers
 1. change in user demographics
 >50% of users on Facebook are over 35 years
 Majority of users on Twitter, and social communities
are over 35 years

 II. Shift in usage from personal to personal &

professional
 47% of people use social media to connect to clients
and market their skills.
 55% of people use social media to share knowledge
and best practices.
 E.g. LinkedIn
 Chat –
 Microsite – LinkedIn Marketing site for B2B
 Social network – Facebook, LinkedIn, Twitter
 Viral marketing – Use of social media for
marketing
 Virtual worlds - Cisco Launched Virtual Trade
Show
 Blog - https://www.b2bmarketing.net/
 Wiki – Wikipedia
 Search engine - Google
 LinkedIn & Plaxo – 40 million members profile – key
decision makers.

 Spoke & Zoominfo – 40 mn business profile-sales leads.

 Online community – build and improve relationship.

 Microsoft employees have created connections with

thousands of customers through blogs.

 American express created the conneXion website to

share knowledge and drive sales.
 Most of the social media are free – Facebook, blogs,
and wikis.
 More targeted and customized marketing efforts
(e.g. sales call, advertising)
 Broaden the reach outside of the usual target
market.
 E.g. visa targeted fragmented customers through
Facebook application – visa business network.
 Created the group of 70,000 user for small business
credit card users.
 Facebook allow companies to deliver customized
messages to their audience based on profile.
 Shor ten sales cycle – decision makers get
information and testimonials from current
client/experts through social media.
 B u i l d c re d i b i l i ty o f t h e m e s s a g e , i m p rove
relationships with customers, and loyalty.
 Social feedback – oppor tunity to improve
products and services for company.
 Mean to provide customer service e.g. review of
product/service.
 Unpredictable nature – negative comments,
complaints become visible to all.
 Reliable matrix for performance – no. of hits,
visitors, time spend etc.
 Sharing information on social media may give
competitors an edge.
 S k i l l s re q u i re d – h ow t o i n t e r a c t w i t h
customers, how to build community, game
design, how to build virtual environment etc.
 Understand customers and their requirement
 - what information customers want
 - what tools & features customers need
 -what social media customers used
 What are the marketing objective of firm
and customers need.
 Sales cycle Social media
 Awareness social network
 Interest blog, video
 Evaluation wiki, blog
 Decision social network
 Purchase microsite
 Account maintenance chat
 Allow two way communications
 Make a conversational writing style
 Keep direct advertising to a minimum
 Provide valuable content
 Refresh content regularly
 Create customized environment
 Invest in social media for long-run
 Thank You
 Why business marketers need to develop and
maintain relationships with their key customers?
 Business marketers invest more resources at the
individual customer level.
 To retain the customers or make them loyal because:
◦ 1. Established customers buy more
◦ 2. Costs of serving loyal customers decline overtime
◦ 3. Less expensive than acquiring new customers
 To create competitive advantage – relationships are
difficult to imitate.
 What are the different types of relationships?
 A business marketer may begin the relationships as
a supplier or with a customer e.g. Minda Industries
to Tata Motors.
 Relationships may unfold in the following manner:
◦ 1. Minda is one of the supplier to Tata Motors.
◦ 2. Minda becomes a preferred (one of a few) suppliers to
Tata Motors.
◦ 3. Minad becomes a sole supplier for a particular product
(e.g. Air filtration system) to Tata Motors.
 R e l a t i o n s h i p s a re d e v e l o p e d o v e r t i m e a n d
considered as continuum.
The Relationship Spectrum
 Focus on timely exchange of standard products at
highly competitive market prices. e.g. Packaging,
Cleaning or Commodity-type products.
 These types of transactions are autonomous,
meaning that there is little or no customization of
products.
 B u s i n e s s m a r ke t e r ’s o b j e c t i ve i s t o a t t r a c t
customers.
 The customer’s focus is on short term benefits e.g.
low price.
 Example: A person comes into a store and buys a
hammer. The buyer wants a hammer and the seller
sells him one.
 Occurs when alternatives are few, the purchase is
complex, customer required higher level of
customization and the price is high. E.g. ERP
software purchase.
 Features close relationships (e .g. trust &
commitment), high level of information sharing and
strong operational linkages (e.g. sharing production
plan, JIT). E.g. Honda & Suppliers
 It is long-term in nature, focus on mutual benefits
and joint problem solving.
 Switching costs are extremely impor tant to
collaborative customers.
 Value-Added Exchanges fall between Transactional
and Collaborative Exchanges.
 Feature moderate level of customization, and
information sharing. e.g. Financial services
 Value-Added Exchanges are those where the selling
firms shifts from just attracting customers to
keeping them by:
◦ Provide additional services
◦ Developing services/products that are customized to meet
the buyer’s needs
◦ Providing continuing incentives that promote repeat
business
 E.g. Asset management firms offer financial service
to corporate clients.
 H o w b u s i n e s s m a r ke t e r s h o u l d s e l e c t t h e
appropriate relationship strategies for various
customers?
 It depends on several factors:
◦ Customer’s orientation
◦ Market conditions
◦ Characteristics of the purchase situation
◦ Importance of purchase
◦ Nature of the product
Spectrum of Buyer-Seller Relationships
 A major consideration before changing from one
supplier to another is the switching costs.
 Organizational buyers invest heavily in their
relationships with suppliers. e.g. software – money,
training, equipment etc.
 Buyers hesitate to switch because it can cause
costly disruptions.
 Collaborative exchange – switching costs are high.
 Buyer can switch the supplier when the benefits
exceed the switching costs.
 Transaction exchange – switching costs are low.
 Why selection of appropriate relationships
strategies are important?
 A specific strategy affects resource allocation
decision and consequently costs to serve the
customer.
 For example, resource requirement and costs to
s e r ve c u s t o m e r s a re h i g h i n c o l l a b o r a t i ve
relationships than transaction exchanges.
 What to do?
 In addition to previous marketed related factors,
business firm should carryout profitability analysis.
 How to measure customers’ profitability?
 Activity based costing
 Measure profitability at customer level rather than
product/territory level.
 Identify all the activities associated with customers
and its linkage with costs and revenues.
 Classify the customers in to ‘High Versus Low-
Cost-to-Serve Customers’
 ABC analysis usually coincide with 80/20 rule.
 High Cost to serve Low Cost to serve
Customers Customers

Presale Costs Extensive presale support Limited presale support

required (i.e. technical, required
marketing and sales support) (i.e. standard pricing and
ordering)
Production Costs Order custom products Order standard products
Order small quantities Order large quantities
Unpredictable order arrivals Predictable ordering cycle
Manual processing Electronic processing (EDI)
Require company to hold Replenish as produced
inventory
Delivery Costs Customized/Fast delivery Standard delivery

Post Service Extensive post-sales support Limited post-sales support

Costs (i.e., installation, training,
warranty, field service)
 High

Passive Costly to service,

Product is crucial but pay top
Net Margin Realized

Good supplier match money

ro fits
P s
Price-sensitive but o sse Aggressive
L
few special Leverage their buying power
demands Low price and lots of
customization
Most challenging
Low
Low High

Cost-to-Serve

SOURCE: From “Manage Customers for Profits (Not Just Sales)” by B.P. Shapiro et al., September-October 1987, p. 104, Harvard Business Review.
 20/80 Rule says “20% of customer provide
80% of sales
 Whale Curve reveals:
◦ 20% of customers generate 150–300% of total
profits
◦ 70% of customers break even
◦ 10% of customers eat 50-200% of total profits
◦ Leaving company with 100% of total profits
 Profitable customers
 Develop collaborative relationships with most
profitable customers.
 Break-even customers
 Reduce the cost of pre and post sales activities
 Improve process e .g. make deliver y process
standardize.
 Convert them from value added to collaborative
relationships if possible.
 Look for long-term profits
 Unprofitable customers
 Low margin / high cost customers are the most
challenging one to manage for mangers.
 Start with ways to reduce costs e.g. minimize
errors in ordering
 Maintain transactional relationships with such
customers e.g. online purchase and post sales
support.
 Explore opportunities for cross selling
 Charge for extra services e.g. urgent delivery.
 Fire them – raise prices, withdraw all supports, and
eliminate discounts.
 CRM is a cross-functional process for achieving:
◦ Continuing dialog with customers across all contact
points
◦ Personalized service to the most valuable customers
◦ Increased customer retention
◦ Enhanced marketing effectiveness
 CRM programs are software systems that capture
information and integrate sales, marketing and
customer service information.
 CRM programs can gather information from many
sources including email, call centers, service and
sales reps.
 Based on the information from CRM program,
identify the activities, its costs, revenues, and
profitability for all the customers.
 Categorize the customers into profitable, break
even, and unprofitable and select appropriate type
of relationships.
Types of Customer Type of Relationships

Profitable Collaborative
Break-Even Transactional or Value added
Unprofitable Transactional
 Firm should customized its offering based on types
of relationships and customers requirements.
 1. Flaring out by Unbundling
 Product and services are unbundled.
 E.g. software (core product) + Installation
(chargeable) + training + upgrading
 Offer basic price, quality, and availability for core
product.
 Each additional service is offered on menu or a la
carte basis with incremental price.
 Suitable for transaction relationships/unprofitable
customers.
 2. Flaring out by Augmentation
 Products are offered in portfolio of enriching
features and services.
 E.g. software + Installation + training + upgrading +
technical assistance etc.
 Premium price is charged.
 Overall price should be lower than the price
charged to transactional customers (menu based)
 Suitable for collaborative relationships/highly
profitable customers.
 2. Flexible services
 Products are offered in customized portfolios with
flexible services.
 Minimum requirements for the segment:
 P1: (software + Installation)
 P2 : (software + Installation + training)
 P3: (software + Installation + upgrading)
 Overall price should be higher than the
collaborative relationships but lower than the
transactional relationships.
 Suitable for value added relationships/break-even
customers.
 In b2c market, D2H service providers use the
similar strategies.
 1. Basic package : Rs. 153 + taxes + A- la carte
channels (menu based)
 2. Flexible services:
◦ basic package + sports channels
◦ basic package + Hindi movies
 3. Airtel package for Gujarat (basic + sports +
movies)
 Social RM Programs
 Structural RM Programs
 Financial RM Programs
 Social RM programs:
◦ Social engagements (sporting events, meals, etc.)
◦ Frequent and personalized communications that
develop personal bonds
◦ Make the relationship special like friends.
 Results:
◦ Customers reciprocate with repeat business and
referrals
◦ Difficult for competitors to duplicate
 Affect:
◦ Has a direct affect on profits & is long lasting
 Structural RM programs:
◦ Provide a service/product to increase productivity
and/or efficiency for customers through targeted
investment that customers would not make for
themselves.
For example they provide:
 Order-processing interfaces
 Free analysis of operations
 Results:
◦ Creating a structural bond makes it difficult for
companies to switch to competitors
 Financial RM programs provide economic
benefits such as:
 Discounts
 Free shipping
 Extended payment terms

 Results:
Companies respond financially to protect customer
relationships, but they do not necessarily enhance the
relationship because all companies do it.
 Some companies are Relationship Oriented
(RO), and some are not.
◦ RO companies seek to develop relationships with
current or potential supplier.

 RO buyers look for companies that:

◦ Offer expertise
◦ Are able to be flexible (i.e., payment terms, R&D,
etc.)
◦ Help reduce risk for both parties benefit
◦ Help both parties benefit from the relationship
 HIGH RO: Target those with high RO goals since they
are looking for and are open to developing
relationships

 LOW RO: For these companies, the strategy is to

create high switching cost:
◦ Tie them into electronic ordering interfaces
◦ Align RM resources as closely as possible to the
customer’s needs
 Thanks
Managing Business Marketing
Channels
 The effective go-to-market (channel) strategy is
important for the company to generate:
◦ Sales
◦ Market share
◦ Profit

 T h e b u s i n e s s m a r ke t c h a n n e l s t r a t e g y h a s 2
important dimensions:
◦ 1. Channel structure
◦ 2. Channel Management (design & administration)
 Appropriate channel structure is required to achieve
marketing objectives of the firm.
 However selecting the best channel structure is
difficult due to:
◦ The alternatives are numerous
◦ Marketing goals differ between channel and mfg.
◦ Multiple markets segments are targeted, thus it may
require numerous channels concurrently. E.g. Loctite
adhesive products, Atlas Copco air compressors.
 Once a channel structure is specified and goals are
set, marketing managers need to:
◦ Develop procedures for selecting intermediaries
◦ Motivate them to meet goals
◦ Resolve conflict between them
◦ Evaluate performance
 The link between the manufacturer and the customer
is called the Channel of Distribution
 The channel accomplishes all the tasks necessary to
get the product/service to market
 Tasks can be performed by the manufacturer or be
delegated throughout the channel
 The question is: “What is the best way to execute the
tasks?”
 Contacting potential  Financing
buyers
 Servicing the product
 Negotiating
 Inventorying
 Selling
 Transporting
 Contracting
 Storage
 Transferring title
 Training
 Channel structure depends on who perform the
marketing tasks.
 T h e s e t a s k s m ay b e e n t i r e l y p e r f o r m e d b y
manufacturer or by intermediaries or may be shared
between them.
 Direct is when the manufacturer performs all the
marketing functions.
 E.g. online marketing or direct sales force.
 Indirect is when some type of intermediary sells or
handles the product.
 E.g. distributor sells products.
 Objective: to structure the channel so that tasks are
performed optimally.
 Manufacturer

Direct Channels Indirect Channels

Direct Online Telemarketing

Sales Marketing
Manufacturers’
Representatives

Industrial
Distributors

Customer Segments
 Direct channel is a strategy that does not use
intermediaries.
 Manufacturer's own sales force deals directly with the
customers and has the responsibility to perform all
the channel tasks.
 Direct sales approach is used when:
◦ Sale and Products are complex
◦ Product/service is highly customized and
◦ Customers are large/major accounts
◦ Sales involve extensive negotiations
◦ Customer requires direct contact
◦ Superior selling skills and product knowledge
◦ Relationships building is important
◦ E.g. selling ERP, Compressor, Production system etc.
 Indirect channel uses at least one type of
intermediaries. E.g. distributor
 Business marketing channel generally include lesser
number of intermediaries than consumer market.
 Indirect sales approach is used when:
◦ Markets are fragmented and widely dispersed.
◦ Low transaction amounts prevail.
◦ Buyers typically purchase a number of items.
◦ E.g. industrial motors, electrical switches, industrial
paints, maintenance and repair items.
 G e n e r a l ly m a r ke t e r s u s e m u l t i p l e c h a n n e l s :
combination of direct and indirect.
 It is used when company wants to reach a large
business market that is composed of large, mid- and
small-sized customers. E.g. industrial paints, tires
 Goal: coordinate the activities of the many channels
e.g. sales person, distributor, call center and web in
order to enhance experience, profitability and reduce
costs.
 In a multi-channel approach, different channels
perform different tasks within a single transaction
with a customer.
 Typical sales cycle include the following tasks:
◦ Lead generation – web, tele-channel, direct mail (low
cost)
◦ Lead qualification – distributor (medium cost)
◦ Negotiation and sales closure – direct sales force (high
cost)
◦ Product delivery - distributor
◦ Customer care and support - internet
 There are two types of intermediaries:
◦ Industrial distributors
◦ Manufacturers’ representatives
 Distributors are full-service intermediaries, that is
they take title and carry inventory for the products
they sell.
 They provide credit, deliver, offer an assortment, offer
technical skills, maintain customers and find new ones.
 Distributors are in every industry - MRO supplies,
Hardware, Electronics and Fabrication, Furniture,
Automobile etc.
 Responsibilities of distributor
 Contact – reach to customers through own sales
force.
 Product availability – provide local availability of
products and support services – credit, delivery,
order processing and advice.
 Repair/service – provide easy access to local repair
facilities.
 Assembly and light manufacturing - purchase material
in bulk and assemble it for the customers. E.g.
computer distributors.
 General-Line Distributors
 Stock extensive variety of standard products.
 Cater to diverse customers.
 E.g. Medical instruments distributor, hardware
products distributor.
 Specialists
 Focus on one or few related product lines.
 Target around specialized industry or customers.
 E.g. cutting tools, oil free compressors, cement
distributor.
 Combination House
 Operates in two markets: industrial and consumer
 E.g. auto parts and paints distributors
 Manufacturer's representative are sales people who
work independently or (for a different company)
represent several companies in the same geographical
area and sell noncompeting but complementary
products. E.g. computer products and software
 In simple words, out sourcing of sales force from the
other company.
 They perform a much higher level of service. They
◦ Are technically advanced
◦ Know their territory better
◦ Are able to sell professionally
◦ Are experienced in the industry
◦ Usually represent several companies
 Used by small, medium and large firms.
 Often, small and medium firms cannot support a full
time salesperson.
 Large firms use them to supplement their direct force
for to an area not covered by their sales force.
 They are cost effective relative to own sales force.
Little or no training costs, no benefits, and Reps are
highly motivated.
 Reps do not take title nor hold inventory
 Reps are normally paid commission – 7 to 15 %.
 Used when market potential is limited.
 Servicing distributors.
 Channel Function Customer Need
1. Product Information Customer seeks more information for new or more
complex products especially in rapidly changing
environments.
2. Product Customization Some products must be technically modified or need to be
adapted to meet the customer’s unique needs.

3. Product Quality Because of its importance to a customer’s operation,

Assurance product integrity & reliability might be given special
emphasis.
4. Lot Size Purchase of products with a high-unit value or those used
extensively represents a large dollar outlay, thus being
important.
5. Assortment Customer may need a broad range of products and may
assign special importance to “one-stop shopping.”

6. Availability Some customers’ environment demands that the seller

support a high level of product availability.

7. After-Sale Service Customers require a range of services from installations

and repair to maintenance and warranty.

8. Logistics Customer may require special transportation and storage

services to support its operations strategy.
 How to select good channel members?
 Finding and selecting good people is a very difficult
tasks.
 Business marketers can identify potential channel
members through:
◦ Existing sales people
◦ Existing and potential customers
◦ Industrial Distribution magazines
◦ Manufacturers’ Rep Directory
◦ Advertisements in business newspapers
 Criteria: financial stability, market coverage, product
lines, personnel, growth, experience etc.
 How to motivate channel members?
 Distributors and Manufacturers’ Reps are:
◦ Independent and profit oriented
◦ More concerned about their customers’ situation than
the manufacturer’s state of affairs.
 Motivate them through:
◦ 1. Relationships and partnerships
◦ 2. Involving in decision making e.g. policy formation
◦ 3. Margin and incentives
◦ 4. Cooperative marketing program
276
 What e-commerce does?
 It brings buyers and sellers together.
 It automate transactions.

 What are the benefits of e-commerce?

 Benefits: Buyers:
 Can purchase product at true market price.
 Get large assortment of the products.
 Convenience and rapid procurement.
 Saving on information search and transaction costs.
 Access to new sellers.
 Benefits: Sellers:
 Access to new and difficult to reach customers.
 Alternative channel to sell products.
 Lower marketing and transaction costs.
 Option of price discrimination.
 Customize marketing.
 Why e-commerce business is attractive for Venture
capitalist?
 Easy to scale up without much additional investments.
 High profit potential
 Attractive return on investment (e.g. IPO)
 What kind of business model is used by e-commerce
firms?
 Business model can be specified in terms of expenses
and revenues generated by the company.
 Expenses:
 R&D costs: Technology, Platform, services, employee
cost etc.
 Marketing costs: supplier and buyer relationships,
promotion, branding and operating costs.
 General costs: employees cost, fee paid to consultant,
partnering cost, and facility management.
 Revenues:
 Revenue from selling of products (own or purchased
from the supplier)
 Transaction fee charged to buyer or seller or both.
 Advertising income.
 Va l u e a dd e d s e r v i c e s – c o n s u l t a t i o n , s y s t e m
integration, hosting, software licensing etc.
 What business customers buy from the e-players?
 At the broadest level, customers’ purchases can be
classified into 2 categories:
 1.Manufacturing inputs
 Are the raw materials that go directly into a product
or process.
 Generally purchased from industry specific or vertical
suppliers. E.g. chemical, steel, automobile.
 It requires specialized logistic and fulfillment
mechanism.
 2. Operating inputs
 Maintenance, repair and operating products. E.g. office
supplies, airline tickets, tools, paint etc.
 It is not industr y specific and purchased by all
companies form horizontal suppliers.
 Delivered by general logistic firms e.g. UPS
 2. How businesses buy products/services?
 Companies can either engage in systematic sourcing
or in spot sourcing.
 Systematic sourcing:
 It involves negotiated contracts with qualified
suppliers.
 Due to long-term nature of contracts, buyers and
sellers often develop close relationships.
 Spot sourcing:
 Buyer’s goal is to fulfil an immediate need at the
lowest possible cost.
 Involves commodity trading like oil, steel, and energy.
 It rarely involve a long-term relationship.
 MRO Hubs:
 Provide systematic sourcing for operating inputs.
 Operating inputs tend to be low-value with high
transaction costs.
 Provide value largely by increasing procurement
efficiencies.
 Can use third party logistics suppliers to deliver
goods.
 Reduce existing middlemen.
 Yield Managers
 Creates spot markets for common operating inputs
like manufacturing capacity, labour, advertising.
 Allows companies to expand or contract their
operations on a short notice
 Adds value in a situation with a high degree of price
and demand volatility or with assets that cannot be
easily acquired
 Exchanges:
 Provide spot sourcing for manufacturing inputs.
 Making it easy for them to conduct business without
negotiation.
 Maintains relationship with buyers and sellers
 In many transactions, buyers and sellers do not know
each other.
 Catalog Hubs:
 Automate the sourcing of manufacturing inputs
through systematic sourcing and reduce transaction
costs.
 Bring many suppliers to one easy to use website.
 Industry specific.
 Work closely with specialized distributors to safe and
reliable deliveries.
 Can be buyer focused or seller focused.
 What kind of market making mechanism is used by e-
commerce?
 Aggregation and Matching
 Aggregation
 It brings together a large no. of buyers and sellers
under one virtual roof.
 Reduce transaction costs by providing one stop
shopping – meta-catalogue.
 It is static in nature because prices are pre-negotiated
or fixed.
 Adding another buyer/seller benefits only the
sellers/buyers respectively.
 It is useful when the cost of processing a purchase
order is high and buyers do not understand dynamic
pricing.
 Matching
 It brings buyers & sellers together to negotiate prices
on dynamic & real-time basis
 It is required for spot sourcing situations, where
prices are determined at purchase moment.
 It works best when trading volumes are massive,
demand and prices are volatile.
 It is more powerful business model than aggregation,
but is more complex.
 Most of the e-hubs are neutral—they’re operated by
independent third parties and don’t favor buyers or
sellers.
 Biased towards sellers- Act as forward aggregators
that accumulate supply and operate downstream in a
supply chain or as forward auctioneers that host
auctions for buyers. 
 Biased towards buyers- Act as either reverse
aggregators or reverse auctioneers.
 They attract a large number of buyers and then
bargain with suppliers on their behalf.
 Neutral e-hubs are the true market makers because
they are equally attractive to buyers and sellers.
 To succeed, neutral e-hubs must attract both buyers
and sellers quickly.
 Neutral e-hubs also have to overcome the sellers’
channel conflict.
 Neutral e-hubs need to be careful when taking equity
investments from large buyers/supplier as it can
create a perception of bias.
 Biased e-hubs just have to hitch their wagon on one
side of the transaction. 
 Biased potential to grow more quickly than neutral e-
hubs.
 Neutral e-hubs are most likely to succeed in markets
that are fragmented on both sides.
 Biased e-hubs can succeed as long as one side of the
transaction is fragmented.
297
 What is Reverse Auction?
• Dynamic bidding events initiated by a buying
company sending out a request for quotation.
• Suppliers communicate their best offer via an online
system.
• Supplier cannot see the identity of competitors, but
can see the current quote in relation to the other
bids.
• Supplier may submit multiple bids during auction in
order to underbid a new lowest quote.

• Very competitive setting can result in true market

price.
 Benefits of Reverse Auctions
• Cycle time saving for buyer & sellers

• Increased buyer reach

• Creation of new markets for sellers

• Price visibility & efficiency

 Disadvantages of Reverse Auctions
• Possible deterioration of trust and long-term
relationships.

• Resistance from suppliers

• Retaliation from suppliers

• More preparation for suppliers & buyers

• E.g. Data gathering & Analysis, Detail Request for
proposal (RFO)
 Overall Opinion about Reverse Auctions
• Mixed

• Conflicting reports

• Due to common myths about reverse auctions

 Common myths about reverse auctions
• Reverse Auctions are only About Price

• Reverse Auctions are only suitable for

Commodities

• Reverse Auctions damage the Supplier-Buyer

Relationship

• Repeat Reverse Auctions result in decreasing

savings

• Reverse Auctions are dying

 Myth 1
• Reverse Auctions are only About Price

• Received negative notion that it drives supplier’s

price toward zero.

• Overshadow other performance attributes of a

product.
 Reality :Reverse Auctions are only About
Price
• Several buyers use TCO approach in buying. e.g.
usage, disposal, storage costs.

• Multiple attribute weighting system is used. e.g.

quality, delivery, service - lowest bid did not
guarantee the business.

• Several buyers used reverse auctions to shortlist

the competitive suppliers and keep the price out
of discussion for post bid negotiation.

• Accept it as effective mean to reduce price.

 Myth II
• Reverse Auctions are only suitable for commodities

• Generally used for standard or less complex

products.

• In standards products, number of suppliers are

higher – result in more price benefits.
• Reality : RA are only suitable for Commodities
• Several buyers used it for complex engineering
products.

• Most important is to do homework before RA

• - Selections of suppliers based on capability
• - Precisely specifying product specification
• - Preparing the RFO
• - Use consultant for market knowledge and RA
• - Use two-stage purchase process
 Myth III
• Reverse Auctions damage the supplier-buyer
relationship

• Pressure on price make suppliers hostile towards

buyers.

• Suppliers retaliate in the forms of secrecy about

cost saving developments and assign low priority to
buyers.

• Trust and commitment can be lost.

• Reality : RA damage the Supplier-Buyer Relationship
• Supplier perceive RA as a negative Phenomena

• 2/3 of the buyers feel that RA improved the

relationships with suppliers.

• Educate the supplier about RA & its benefits

• Use third party for RA to maintain integrity
• Provide help during the auction event –
communications.
• Specify and follow rules for selection of bids
• Obtain feedback.
 Myth IV
• Repeat RA result in decreasing savings

• First time RA can result in 20 to 50 % of costs

saving.

• Repeat RA save up to 2 to 5 %.
• Reality : Repeat RA result in decreasing savings
• One firm reported 25% savings with reverse
auctions in the first year,
• Followed by 20%, 17%, and 15% in years two, three,
and four, respectively.
• Repeat RA reduce saving but validate the price,
and largely depends on market conditions
• - Technology improvement/innovations
• - Supply & demand
• - New suppliers or customers
• - productivity gains/capacity of suppliers
• Generally repeat RA offer less saving.
 Myth V
• Reverse Auctions are dying

• Several firms do not plan to use RA.

• Overall use of RA is declining.

• Reality : Reverse Auctions are dying

• Other firms suggest that:

• It’s a valuable buying tools, but usage will depends

on type of product or situation.

• Used for identifying competitive suppliers.

• Then, buying products offline based on other

attributes.

• Make the vendors honest about their costs and

margins.
314
o Prospects for B2B e-commerce were very promising in 1999 and 2000.

o A consultancy firm forecasted more than $6 Trillion online B2B e-

business in 2001.

o Expected 20 fold growth between 2000 and 2005.

o In 2000 beginning, there were 587 B2B exchanges which increased to

1700 by April 2001.

o B2B exchanges were among the hardest hit.

o 120 firms have been shut down or acquired.

o Prediction for B2B e-commerce have been tempered.

o B2B e-commerce solution was predicted to increase from $282

in 2000 to $4.3 trillion by 2005.

o Establishing successful B2B on-line strategies can be tough and
complicated.
o It appears that buying the technology is easy; rethinking and
redesigning work processes and activities to capitalize on
these technologies is not.
o B2B sector remains optimistic and executives still seem to
believe that the promise of B2B e-commerce is real.
o HM – known for its high-end, office furniture.
o HM used internet to reach new customers without cannibalizing the sales of their
existing distributors.
o HM began to reach out via the internet to its individual and SME customers.
o HM were successful in convincing their dealers that Internet channel will not erode their
existing contract customer base.

Compaq – known for its computers.

o In order to compete with Dell, Compaq created Prosignia computers for Internet only
sales.
o Compaq began to reach out to customer via internet for its new brand.
o The dealers view this activity as a sign of indifference towards their role and ultimately
stop selling any Compaq PCs.
o Due to different types of organizational relationships.

o HM and their dealers had a history of working cooperatively.

o The HM dealers worked in collaboration with the company.

o Compaq’s relationship with its dealers were historically controversial,

with Compaq attempting power plays on the dealers.

o With the introduction of Prosignia line, Compaq began to deal in more

rigid fashion with dealers.

o Dealers of Compaq were not convinced that Compaq had their

interests in mind.
o By designing e-commerce strategies that are compatible
with the types of buyer-supplier relationships.
 Transactional exchanges
◦ Firm and its supplier compete for a fixed pie of benefits.
◦ Each side focuses on maximizing its own position at the other’s
expense.
◦ Suppliers are selected by a competitive bid process and simply
evaluated on price.
◦ Contracts are short-term, oriented around specific activities and
timelines.
◦ Communication with the supplier is directive, one-way, and
doesn’t take into the interests of the supplier.

 Relational exchange
◦ Firms work together to grow the pie of benefits between them.
◦ Suppliers are selected on the basis of their capabilities.
◦ Contracts are long-term and less specific.
◦ There are considerable expectations beyond the contract terms.
Information sharing-The Internet can enable

 improvements in the sharing of manufacturer, supplier, and distributor

information all along the value chain.

 Enabling each firm to better understand end-user needs.

Increase reach-The Internet also can

 Enable manufacturers to increase their reach to new customer

segments in a cost efficient manner.

Dynamic pricing

 Enables real-time, dynamic pricing.

E.G. Herman Miller & Compaq
 Thank You