How Are Organizational & Consumer Markets Different?

Both individual consumers and organizations need to purchase products and services. This is a fact of life. It’s vital that you, as a business owner or as a hopeful business owner, know the difference between organizational markets and consumer markets. For instance, the U.S. government, Wal-Mart, Apple Inc. and the pharmaceutical wholesaler AmerisourceBergen, are all organizational buyers operating in the organizational market.

What’s more, if you plan to cater to other businesses in your next venture, you’ll need to go the extra mile and provide your customers with a level of service you may not be accustomed to. Read on to find out why.

Consumer buying simply refers to the buying behaviors and habits of end consumers. These are individuals and households that purchase goods and services for personal, and often immediate, consumption. Put another way, consumer buying is made up of the day-to-day purchases that individuals make to satisfy their needs. This is known as the consumer market.

The global consumer market is made up of billions of individuals. These individuals naturally differ greatly in age, income level, education and personal tastes. Consumers collectively purchase a broad range of products and services, and their ability to pick and choose which products and services to buy drives the larger economy. These choices result from several factors: cultural, social, personal and psychological.

As a business owner, neither you nor your marketing team will be able to control all of these factors, but it is important that you keep tabs on them. Understanding your customer’s tastes will help you create products and services that they will find appealing.

Organizational buyers are somewhat more complex. These are organizations or companies who supply goods and services to consumer markets. These organizations are themselves in need of goods and services that are crucial to run their businesses. These entities tend to be very large, and typically, they purchase a vast array of products and services from other companies. Consequently, some businesses cater exclusively to organizational buyers and never come into contact with the end consumer. Companies operating in this space are said to be involved in the organizational market.

There are four types of organizational buyers:

• Resellers.
• Manufacturers.
• Governments.
• Institutions.

Resellers, either wholesalers or retailers, buy goods from one company and sell them to some other entity. The difference is that wholesalers sell to other businesses and retailers sell to the end consumer. For instance, Wal-Mart, Costco and Food Lion are examples of retailers in the U.S. They buy goods from many other producers, and then sell them directly to end consumers. AmerisourceBergen, on the other hand, is an example of a medical wholesaler. They supply brand name and generic pharmaceuticals to private medical practices, and do not sell directly to the public.

Manufacturers produce components for sale to other businesses, government and sometimes, directly to end consumers, and to do so, they often buy components from other companies. This makes them organizational buyers. For instance, although Apple Inc. manufactures many of its own components for its line of tablets, PCs and phones, it doesn’t manufacturer all of them. For the parts it can’t produce on its own, it relies on outside suppliers.

Governments are organizational buyers because they buy products from the private sector. For instance, imagine all the supplies that troops need on a daily basis. The U.S. government can’t produce all of that on its own. Governments buy everything from airplanes to paper clips from the private sector because it’s faster and simpler than trying to produce it themselves.

Finally, large institutions, such as private universities, make enormous purchases on a regular basis - everything from paper to computers to software.

In some ways, organizational buyers and end consumers are similar. In both, someone is responding to a need, analyzing the available options and then making the final buying decision. However, business markets are necessarily much more complex, and there are some important differences: the number of people involved in the buying decision; the market structure; and the decision-making process.

For instance, when Wal-Mart stocks its store, it’s trying to make a profit by meeting the needs of the end consumer. To do that, it buys products from many suppliers. Wal-Mart pays the suppliers and passes the cost on to the consumer. When the end consumer goes to Wal-Mart, they are using the store to meet their needs. The end consumer pays Wal-Mart for the products they buy.

Wal-Mart is an organizational buyer operating in the organizational market. The customer is operating in the consumer market. Now that the relationship is clear, let’s look at a few other ways that the two are different.

Compared to consumer purchases, a business purchase is typically much more complex and often involves more than one buyer. In addition, much more research goes into business purchases, as these purchases directly impact the company’s bottom line. In fact, it is rare to see large businesses making big purchases without setting up buying committees beforehand. These are teams of technical experts who analyze the various options, and they come to a buying decision based on a balance of cost effectiveness and utility.

Consequently, businesses who make products for other businesses must train sales staff to deal with savvy buyers.

On the whole, organizational buyers face much more complex decisions than individual consumers. Consider that when a business is considering the purchase of, say, a new computer system, they must factor in micro and macroeconomic indicators; sales projections; an estimate of the utility they will receive from the new system; as well as any additional costs of the new system. For this reason, such a large purchase may take months or even years to complete.

Complicating this further is the fact that technological advancements are fairly constant. A new computer is one thing, but a new type of computer is another. For instance, there is no doubt that Google’s purchase of a quantum computer from tech firm D-Wave was preceded by months of intensive research and cost analysis.

Organizational buyers are geographically concentrated, whereas consumer markets are more generally distributed. Consider the booming movie industry in Hollywood, California or Mumbai, India, the petrochemical companies in Russia and Saudi Arabia, or the international financial services in the UK, France, U.S. and China.

Consider also that organizational buyers respond to derived demand. That is to say, the demand they respond to is determined from consumer markets. Because organizational buyers respond to consumer markets, the demand they themselves generate tends to be inelastic - it is insensitive to price changes. For instance, a movie studio creates media for mass consumption. This company is going to buy software, film, cameras and other equipment on a regular basis, even if prices go up, because the continued existence of the movie studio depends on those items. Furthermore, this hypothetical movie studio won’t necessarily buy more cameras simply because cameras go on sale - cameras are a business expense and are budgeted for.

However, on a more macro level, organizational buyers can go on spending sprees, if consumer markets respond to their product strongly. For instance, a rise of only 10 percent in consumer demand can generate a 100- to 200-percent rise in business demand over the next quarter. This is because organizational buyers tend to place much larger orders than individual consumers, and they tend to reinvest some percentage of their profits.

To sum, organizational buyers operate within the organizational market, and tend to make long-term purchases. They may work with a supplier at every juncture of the purchase process. End consumers, however, operate within the consumer market and have little to no contact with the manufacturers of the products they consume.