Question 1
Define Industrial Marketing. Differentiate Industrial
Marketing from FMCG or B2C Market.
The word Industrial Marketing is also interchangeably used as Business-to-Business
Marketing, or Business Marketing, or Organizational Marketing. Industrial
marketing/business marketing refers to marketing of the products and services to
business organizations: manufacturing companies, government undertakings, private
sector organisations, educational institutions, hospitals, distributors, and dealers. The
business organizations, buy products and services to satisfy many objectives like
production of goods and services, solving problems related to product usage, reducing
warranty claims , making profits, reducing costs, and, so on.
In contrary, marketing of products and services to individuals, families, and households
is made in consumer marketing. The consumers buy products and services for their own
consumption.Further, industrial marketing consists of all activities involved in the
marketing of products and services to organizations, that use products and services in the
production of consumer or industrial goods and services, and to facilitate the operation
of their enterprises. The vendor or marketer that sell steel, machine tools, computers,
courier services, and other goods and services to business firms/buying organizations
need to understand the buyers’ needs, purchasing power/resources, policies, and
buying procedures. They have to create value (benefit) for the buying organizations
(customers) with products and services and focus on buying organizational needs and
objectives. For example, a company manufacturing and marketing precision steel tubes
for bicycles, a marketer involved in business marketing. Industrial marketer of the
Precision Steel Tube Company must understand the needs of bicycle manufacturers such
as Hero Cycle and Atlas Cycle, and such alikes in terms of their quality requirements,
applications of tubes, availability or delivery on daily or weekly basis, and terms of
trade. Similarly, a small and proprietary firm, giving technical advice (or services) to paint-
manufacturers is also doing business marketing.The needs and objectives of industrial
buyers are satisfied through the following exchange processes.Product ExchangeThe
features of a product or service involved have a significant impact on the industrial
exchange process. The ease of exchange depends upon the ability of the seller to identify
the buyer’s needs and the product’s potential to satisfy those needs. If the exchange is good
in terms of price, quality, quantity, and after sales services then it will give a positive symbol
for the customer loyalty in terms of product/service loyalty.
Information Exchange The information consists of technical, economic, and organisational
questions: 1. Pre-sale, sale and post sale maintenance and servicing must be
exchanged with the participants of decision making of business organization or buying
firm. 2. Products and services must be designed, planned and implemented to serve
customers efficiently. To achieve it, buyers and sellers tend to work together, exchanging
product specific information over long periods of time.Financial ExchangeThe granting of
credit or the need to exchange money from one currency to another at the time of
dealing with foreign buyers/customers are included in this exchange. There exists
reciprocity between buyer and seller in reference to financial exchange. As seller give
credit the buyer also given loans to the seller during his shortage of working
capital.Societal ExchangeSocietal exchange is important to reduce uncertainty between
buyer and seller, avoiding short-term difficulties, and maintaining the long-term
exchange relationship to one another. A number of aspects of an agreement between
buyers and sellers in the industrial market are based on arbitration and mutual trust,
not fully formalized or based on legal criteria until the end of the transaction period.
Particular Industrial marketing {B2B} B2C
B2B is business-to-business, and the B2C means business-to-consumer, and the
Definition transaction occurs between businesses or transaction occurs between business entity and
companies. consumer.
Other businesses or companies buy Individual consumers buy the offerings to
End-user
offerings for their work-related activities. satisfy their needs and wants.
Raw materials, manufactured materials,
Offerings Final goods or consumer goods.
component parts, assemblies, etc.
To provide other businesses with their To provide products and services satisfying
Aim
work-related products and services. human needs and wants.
Focus on building strong and good business
Focus Focus on building a strong customer base.
relationships.
A firm sells its products or services to A firm sells its product or services to individual
Function
another firm. consumers.
Size The size of an order will be large. The size of an order will be small.
Example Payroll processing companies Restaurant chains
The B2B business model portrays a commercial relationship between businesses. The
dependence between companies or businesses leads to strong and good business
relationships contributing to the successful growth of the entities involved. An
example of an organization operating strictly on a B2B business model includes a
company offering banking software solutions and cloud services to a bank. Such
products and services generally are used by banks and Financial institution only.
The producers or manufacturers offer capital equipment,raw material , original
equipment manufacturer components, maintenance, repair, and operations (MRO)
items, facilitating services, etc., to the business buyers. Business buyers purchase
these items to produce or develop their offerings. Examples of business or B2B
buyers are producers, resellers, governments, and institutions. In the B2B MODEL a
single order contains a large number of goods or services.
What is B2C?
In the B2C model, the clients of a business entity or a company are the individual
consumers who are the end-users. The end-users or the retail customers won’t
further process the purchases; they consume the things they buy to satisfy their
needs and wants. Retail businesses directly sell their offerings to the end consumers.
It can be online or offline examples include clothing, grocery, drugs, and restaurants.
In a B2C model, businesses spend a significant budget on marketing, advertising, and
merchandising to create strong brand recognition, value, and goodwill because it is
important in the B2C model to build a good customer base.
Consider an example of B2C in the B2B vs B2C construct. A patisserie sells cakes and
pastries to customers who walk into the patisserie or call for home delivery. Here, the
patisserie is the business; the consumers are the households, residents, students, etc.,
and no other businesses are involved between the patisserie and the buyers.
Furthermore, the patisserie can attract more customers by strengthening the aroma,
offering free samples, focusing on décor and packaging, etc.
A company can have its B2B and B2C segments to serve different customers in the
market. For example, a bank offering a salary account to a company for all its
employees is an example of a B2B relationship. At the same time, the bank also has
retail customers retail business that are part of their B2C segment and offer salary
accounts to a company. When companies incorporate B2B and B2C models, they
have to follow different procedures in many events for both segments.
Ouestion 2
Write a short note on Industrial Buying
Behaviour
In marketing process, there is a need to understand why customer or buyer purchases goods
and services. Current literature associated with industrial buyer behaviour that has tended to
focus on modelling and mapping the industrial buyer behaviour (Parkinsson and Baker,
1986). Though, limited research has been found on how the industrial buyer performs when
faced with a drastic product innovation. Buyer behaviour is associated with the operations
and decision processes involved to select between alternatives, procuring and using products
or services. It is occasionally suggested that buyer behaviour is only of interest to marketers
because they desire to influence and change it. Such a statement consistently raises the matter
as to whether marketing is a moral profession. Industrial buyer behaviour is in quintessence
of understanding of how industrial organizations purchase products and services (Dwyer and
Tanner, 2001). It is also identified as organizational buying process or business buying
process. This field is essential to comprehend customer's needs. It is imperative to be
conscious of the differences between consumer buying and industrial buying because the
industrial buyer behaviour varies from consumer buying in many facets such as using more
variables and greater difficulty to identify process participants (Moriarty, 1984). Parkinsson
and Baker (1986) explained as the buy of a product which is made to please the entire
organization instead of satisfying just one individual. Industrial buying behaviour is a basic
concept when evaluates buyer behaviour in all types of organizations. Also, in industrial
buying situations there is an insight of greater use of marketing information, greater
exploratory objective in information collection and greater formalization (Deshpande and
Zaltman, 1987) Process of the industrial market is totally different because the forces of
market influence industrial demand. The executives of industrial market must respond in a
dissimilar way to modify the markets, develop products to accommodate in changing nature
of market and sell them in completely different ways to the target and new customers while
retaining corporate policies. Therefore, industrial marketers face many distinct marketing
situations not normally encountered in the consumer market. Additionally, the industrial
market is dynamic and challenging in any nation's monetary growth and development.It is
important to understand the reason of buying in market. Parkinsson & Baker (1986)
construed that the industrial buying is the buy of a product which is made to satisfy the entire
organization instead of satisfying just one individual. Industrial buying behaviour is
considered as being a basic concept when investigating buyer behaviour in organizations. In
industrial buying situations, there is an awareness of greater use of marketing information,
bigger exploratory objective in information collection and greater formalization (Deshpande
and Zaltman, 1987). In industrial marketing, the buying process is more complex in
comparison to consumer marketing. The buying decisions in industrial marketing are based
on numerous factors that include compliance with product specifications product quality,
availability, timely supply, acceptable payment and other commercial terms cost efficacy,
after-sales service rather than on social and psychological wants. The buying decisions
usually take more time and engage many individuals from technical, commercial, and finance
departments. After the initial offer made by a retailer, there are negotiations and exchange of
information between the experts and representatives from both the purchaser and the seller
organisations. Therefore, inter-organisational contacts take place and interpersonal
relationships are developed. The relationships between the sellers and consumer are highly
valued and they become stable in the long run because of a high level of interdependence.
Webster and Wind asserted that factors that influence industrial buyer behaviour can be
structured in to two variables such as tasks and non-tasks. Tasks are directly associated with
buying problems whereas non-tasks variable include the aspects beyond the particular buying
Ouestion 3
Explain the concept of Life Cycle Cost (LCC) or Total Cost
of Ownership (TCO) along with suitable examples.
Life cycle costing, or whole-life costing, is the process of estimating how
much money you will spend on an asset over the course of its useful life. Whole-
life costing covers an asset’s costs from the time you purchase it to the time you
get rid of it.
Buying an asset is a cost commitment that extends beyond its price tag. For
example, think of a car. The car’s price tag is only part of the car’s overall life
cycle cost. You also need to consider expenses for car insurance, interest, gas, oil
changes, and any other necessary maintenance to keep the car running. Not
planning for these additional costs can set you back.
The cost to buy, use, and maintain a business asset adds up. Whether you’re
purchasing a car, a copier, a computer, or inventory, you should consider and
budget for the asset’s future costs.
process
Conducting a life cycle cost assessment helps you better predict how much your
business will pay when you acquire a new asset.
To calculate an asset’s life cycle cost, estimate the following expenses:
1. Purchase
2. Installation
3. Operating
4. Maintenance
5. Financing (e.g., interest)
6. Deprecation
7. Disposal
Add up the expenses for each stage of the life cycle to find your total.
You might use past data to help you create a more accurate cost prediction. To
simplify the process, start with your fixed costs. Fixed costs for businesses are
the expenses that stay the same from month to month. Then, estimate variable
costs, which are expenses that change.
Formula
Life Cycle Costing Formula = Initial Cost + PV of All Recurring Costs – PV of
Residual Value
Example of Life Cycle Costing
Let us take the example of John, who wants to purchase a new car worth $12,000.
Calculate the car’s life cycle cost if John plans to sell the car after five years at a
residual value of $3,000. As per estimates, the annual expense for maintenance &
repair will be $1,000, and gas consumption per year will be another $3,500. Please
consider the applicable interest rate to be 8%.
Given,
Initial cost = $12,000
Recurring cost = Maintenance & repair + Gas consumption
= $1,000 + $3,500
= $4,500
Residual value = $3,000
No. of years = 5
Interest rate = 8%
= $12,000 + $4,500 * [1 – (1 + 8%)-5] / 8% – $3,000 / (1 + 8%)5
= $27,925
Applications of Life Cycle Costing
In capital budget , the life cycle costing is a critical component of the decision-
making process (purchase of asset) as it is used to estimate the net cash flows
and the expected (ROI).
In the case of procurement, the department uses it to determine which is the
least expensive item and accordingly place the orders.
In engineering and production, this concept is used in developing and
manufacturing goods that incur the least cost to the customer in terms of
installation, operating, maintenance, disposal, etc.
In the case of customer service, whole life costing is used to minimize the
amount of replacement, warranty, and field service.
TOTAL COST OF OWNERSHIP
Total cost of ownership (TCO) is the purchase price of an asset plus the
costs of operation. Assessing the total cost of ownership means taking a
bigger picture look at what the product is and what its value is over time.
When choosing among alternatives in a purchasing decision, buyers often
look at an item’s short-term price, known as its purchase price. However they
should also consider its long-term price, which is its total cost of ownership.
These are the long-term costs and expenses incurred during the product’s
useful life and ultimate disposal. The item with the lower total cost of
ownership can be the better value in the long run.
How Total Cost of Ownership Works
Total cost of ownership is considered by companies and individuals when they are
looking to buy assets and make investments in capital projects. For a business, the
cost of purchase and the costs of operations and maintenance are often itemized
separately on financial statements. The former is booked as a capital expenditure,
while the latter is part of operating expenditures. A comprehensive analysis of the
cost of ownership is a common practice for businesses.
Companies use total cost of ownership over the long term as a framework for
analyzing business deals. Looking at total cost of ownership is a way of taking a
more holistic approach that assesses the purchase from a broad perspective. This
analysis includes the initial purchase price as well as all direct and indirect
expenses.
While direct expenses can be easily reported, companies most often seek to
analyze all potential indirect expenses that can be of significant influence in
deciding whether to complete a purchase
Total Cost of Ownership Formula
Total Cost of Ownership Formula = Purchase Price + Cost incurred during the
useful life Expand the equation by segregating acquisition cost and salvage value
attributable to purchase price.
= Acquisition cost + Service cost – Salvage value (Remaining value)
Acquisition cost Operating cost Maintenance cost Salvage value
Example: Example: Example: Example:
• Purchase • The remaining cost is derived using
• Insurance cost • Equipment downtime
price/buying price depreciation calculation
• Fuel or energy • Preventive & Routine
• Research cost • Can be zero
cost maintenance cost
Acquisition cost Operating cost Maintenance cost Salvage value
• Administration • Cost of repairing spare
• Logistics cost • Equivalent to resale value
cost parts
• Employee
• Installation cost
training
Benefits and Challenges of TCO
Advantages
Comprehensive analysis of all potential costs involved with an asset purchase
over its lifetime
Providing a framework to compute ROI
Ascertaining the best value asset from alternatives
Supporting strategic cost management by saving on avoidable costs
Enriching decision-making and operational efficiency
Allowing analysis of a single unit of business as well as the whole of it
Challenges:
Time-consuming
Terminologies vary between industry
Valuation of intangible assets using TCO is difficult
Does not consider the risk associated with the alternatives
Practical application is limited.
