BUSINESS MARKETING

UNIT II: DEMAND IN INDUSTRIAL

MARKETS

RAKSHIT NEGI, D.PHIL.

ADDIS ABABA UNIVERSITY SCHOOL
OF COMMERCE

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OUTLINE…

• Demand: Definition & Nature

• Derived Demand
• Implications of Derived Demand

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A Review…
• Differences between organizational &
consumer purchase
– Buying reasons (personal or organizational need)
– Types of customers
– Types of products
– Size and location of customers
– Complex and rigorous standards of purchasing
– Nature of business relationships
– Nature of demand
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Demand…
• Determines business requirements in terms
of quantity & quality (attributes)
• Expressed in terms of currency (USD, ETB etc.)
that buyers spent or willing to spend
• Volume of specific product a customer/group
in a particular area buys during a specified
time period.
• Derived Demand
– demand for a business product that is linked to
the demand for consumer goods
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Continued…
• Direct Demand
– generated by individuals who buy goods and
services for personal needs gratification
– Consumer direct demand is the origin of all other
demand
• Inelastic Demand
– takes place if price changes have little impact on the
quantity of goods or services demanded and
commonly witnessed in industrial markets
• Fluctuating Demand
– especially true for the demand of new products and
equipments and following acceleration principle. 5
Continued…
• Joint Demand
• occurs when two or more items are used in
combination to produce a product
• The Chain of Derived Demand
• Each supplier, supplying into a business market,
faces a derived demand, as purchases materials and
supplies from other firms (example: car manufacturer)

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Implications of Derived Demand…
1) Price & Profit Impact
– Difficulty in expanding overall demand
• It is virtually impossible to expand total market demand by
lowering the price of a component sold in the business
market
– Relative price insensitivity (industrial buyers)
• Industries in which industrial products feed production
lines, price is relatively unimportant compared to the
assurance of stability in product specifications and
reliability in consistently meeting deliveries/dates
– Relative price sensitivity (industrial marketers)
• The profit-generating potential, out of any cost reduction,
makes industrial customer more price sensitive
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 Continued…
2) Promotion Impact
– Business marketers need to use pull promotion to
increase derived demand by stimulating their
customer's customer to specify the marketer's
specific material/component/service, thus, pulling
the product through the distribution channel
Telescopic Marketing (TM) Strategy
– In a pull promotion strategy, the marketer sells a
product through the distribution channel, with no
intervening manufacturing or processing stage.
– In a telescope marketing strategy, the marketer sells
to an intermediate manufacturer or processor.
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 Continued…
• Factors Permitting the Use of TM
– A company considering TM should have a high
market share for the product.
• TM is feasible for products/processes that are patentable
or have high entry barriers
• For TM, the end market must be sufficiently large to
generate enough derived demand for the product
• TM is likely to bring the greatest derived-demand benefits
if current penetration of end markets is small
• Since the marketer’s benefits depend solely on the sale of
other company’s products, TM is riskier in poor economies
• It is difficult to use TM effectively if the transition costs to
channel members are high 9
 Continued…
3) Distribution Impact
– The chain of derived demand forms a channel of
distribution characterized by dramatically wide
swings in inventories and expectations
• The Acceleration/Multiplying Effect: A change in direct
demand at the consumer level has an acceleration effect
on the business market (inventories).
• The Whiplash Effect: The small fluctuations in retail
demand that are reflected in inventory patterns at each
level of the channel are called the whiplash effect.
• Volatility in Longer Channels: Demand volatility for
supplies/components is not only the result of shifts in
demand but also inventory policies and expectations.
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 Mini Case…
Mr. Abebe needed a loan. Business was great this year for his
company that made photocopier frames/body. With business
going so well, Abebe wanted to expand his plant capacity by 25
percent. Unfortunately, the bank with which he had done business
for over two decades was reluctant to provide him with the loan.
As Mr. Dawit, manager of the Bank branch, explained, “I know
sales are great this year. But last year, sales were barely at
break-even and two years ago, you lost 10% caused by loosing
one of the local buyers. As it is, you still have four customers
accounting for 75 percent of your business. I think you need more
steady growth.”
“But Dawit, without more plant capacity, I won’t be able to get that
steady growth,” Abebe complained.
“Abebe, let’s look at ways you can get steadier sales first. Then if
the expansion is still warranted, we’ll make the loan.”
• Why would sales vary so greatly for Abebe’s company?
• How can Abebe’s Industries stabilize sales? 11
 Thanks…

Any Query??

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