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Marketing Basics - Kotler Philip

The market of industrial goods

Who is on the market for industrial goods?

The first type of enterprise market is the market for industrial goods, which we define as follows:

Industrial goods market - a set of persons and organizations purchasing goods and services that are used in the production of other goods or services that are sold, leased or supplied to other consumers.

The main industries that make up the market for industrial goods are: 1) agriculture, forestry and fisheries, 2) mining, 3) manufacturing, 4) construction, 5) transport, 6) communications, 7) utilities, 8) banking, financial and insurance, 9) services.

By the size of the commodity nomenclature and cash turnover, the market of industrial goods exceeds the corresponding indicators of the market of consumer goods. In order to make and sell an ordinary pair of shoes, it is necessary for the skins dealer to sell these skins to tanners who would sell tanned and trimmed leather to shoe makers who would sell finished shoes to wholesalers, and those in turn to retailers who would finally sell them to the general consumer. In addition, each participant in the production and distribution chain has to purchase many other goods and services. In fig. 39 clearly shows what a significant number of transactions includes the process of manufacturing and selling a pair of shoes.

The market for industrial goods has certain characteristics that sharply distinguish it from the markets for consumer goods. These are the characteristics.

THERE ARE LESS BUYERS . The seller of industrial goods, as a rule, deals with a much smaller number of buyers than his counterpart, who offers consumer goods. For example, the Goodyear Tire Company sells tires both to industry and to the general consumer. In the market for industrial goods, its fate entirely depends on receiving an order from one of the three largest automotive corporations. But when selling spare tires to a wide consumer, the Goodyear firm faces a potential market for owners of 105 million currently used American cars.

Transactions concluded in the manufacturing and sale of a pair of shoes

Fig. 39. Transactions concluded in the manufacturing and sale of a pair of shoes

THESE ARE FEW BUYERS BIGGER . Even in industries with many manufacturers, the bulk of purchases are usually made up of only a few large buyers. In industries such as automobiles, telephony and telegraph equipment, cigarettes, aircraft engines and parts, as well as in the organic fiber industry, more than 70% of total production is accounted for by only four manufacturers. Therefore, it is they who will purchase the bulk of supplies intended for the industry as a whole.

THESE BUYERS ARE CONCENTRATED GEOGRAPHICALLY . More than half of all industrial buyers in the country are concentrated in seven states: New York, California, Pennsylvania, Illinois, Ohio, New Jersey and Michigan. In industries such as oil, rubber and steel, geographic concentration is even more pronounced. Most agricultural products come from just a few states. The geographical concentration of manufacturers helps to reduce costs. Sellers of industrial goods need to monitor trends of increasing or decreasing geographical concentration.

DEMAND FOR PRODUCTS OF INDUSTRIAL PURPOSE IS DETERMINED BY DEMAND FOR GOODS OF WIDE CONSUMPTION. Demand for industrial goods ultimately stems from the demand for consumer goods. After all, animal skins are bought because consumers buy shoes, wallets and other leather goods. If the demand for these goods weakens, the demand for all industrial goods used in the process of their production will decrease.

DEMAND FOR PRODUCTS OF INDUSTRIAL PURPOSE IS INELASTIC . The general demand for many goods and services for industrial use (in contrast to the demand from an individual company) is characterized by low price elasticity. This means that price changes do not entail strong fluctuations in total demand. Shoemakers are unlikely to buy much more leather if the price drops. On the other hand, they are unlikely to buy it much less if the price rises. Demand is particularly inelastic in the short term, because manufacturers of products are not able to make a large number of changes in the technology of their production. At the same time, consumers will proceed from the price, deciding which supplier to purchase goods from. But this again will not have a strong impact on the volume of purchases made by them.

DEMAND FOR PRODUCTS OF INDUSTRIAL PURPOSES IS CHANGING DIRECTLY . Demand for goods and services for industrial purposes usually changes faster than for goods and services of general consumption. This is especially true in relation to the demand for new production equipment. A certain percentage of the growth in demand for consumer goods can lead to an immeasurably greater percentage increase in demand for machinery and equipment needed to produce additional quantities of consumer goods. Sometimes, only a 10% increase in consumer demand can cause an increase in industry demand by as much as 200% during the next short period. This circumstance forces many manufacturers to diversify their product nomenclature in order to be able to somehow smooth over the differences within the business cycle.

INDUSTRIAL PURCHASERS - PROFESSIONALS . Goods for the needs of industry are purchased by professionally trained agents who, all their working life, learn how to make purchases in the most profitable way. Many of them are members of the National Association of Procurement Agents, which seeks to increase labor efficiency and the status of professional purchasers. The general consumer is less sophisticated in the art of forethought when shopping. The more complex the nature of procurement for the needs of industry, the greater the likelihood of a number of people participating in the decision-making process about it. The purchase of the most important goods is usually done by special purchasing commissions, which include technical experts and senior management representatives. This means that firms that offer industrial products must attract well-trained salespeople to work with well-trained customers. Despite the fact that advertising, sales promotion, and propaganda play an important role in the complex of measures to promote industrial goods to the market, personal selling equipment remains the main sales tool.