Organizational buyers (really, buyers of all types, including final consumers) use four basic approaches to evaluating and buying products: (1) inspection, (2) sampling, (3) description, and (4) negotiated contracts. Understanding the differences in these buying methods is important in strategy planning. Let’s look at each approach:
1. Inspection buying means looking at every item. It’s used for products that are not standardized and require examination. Here, each product is different – as in the case of livestock or used equipment. Such products are often sold in open markets – or at auction if there are several potential buyers. Buyers inspect the goods and either haggle with the seller or bid against competing buyers.
2. Sampling buying means looking at only part of a potential purchase. As products become more standardized – perhaps because of careful grading or quality control – buying by sample becomes possible. For example, a power company might buy miles of heavy electric cable. A sample section might be heated to the melting point to be certain the cable is safe.
Prices may be based on a sample. Although demand and supply forces may set the general price level, actual price may vary depending on the quality of a specific sample. For example, grain markets use this kind of buying. The actual price is based on a sample withdrawn from a carload of grain and analyzed.
People in less-developed economies do a lot of buying by inspection or sampling – regardless of the product. The reason is skepticism about quality – or lack of faith in the seller.
3. Description (specification) buying means buying from a written (or verbal) description of the product. Most manufactured items and many agricultural commodities are bought this way – often without inspection. When quality can almost be guaranteed, buying by description – grade, brand, or specification – may be satisfactory, especially when there is mutual trust between buyers and sellers. Because this method reduces the cost of buying, buyers use it whenever practical.
Services are usually purchased by description. Since a service is usually not performed until after it’s purchased, buyers have nothing to inspect ahead of time.
Once the purchase needs are specified, it’s the buyer’s job to get the best deal possible. If several suppliers want the business, the buyer will often request competitive bids. Competitive bids are the terms of sale offered by different suppliers in response to the buyer’s purchase specifications. If different suppliers’ quality, dependability, and delivery schedules all meet the specs, the buyer will select the low-price bid. But a creative marketer needs to look carefully at the purchaser’s specs – and the need – to see if other elements of the marketing mix could provide a competitive advantage.
4. Negotiated contract buying means agreeing to a contract that allows for changes in the purchase arrangements.
Sometimes the buyer knows roughly what the company needs but can’t fix all the details in advance. Specifications or total requirements may change over time. This situation is common, for example, in research and development work and in the building of special-purpose machinery or buildings. In such cases, the general project is described, and a basic price may be agreed on – perhaps even based on competitive bids – but with provision for changes and price adjustments up or down. Or a supplier may be willing to accept a contract that provides some type of incentive – such as full coverage of costs plus a fixed fee of full costs plus a profit percentage tied to costs. The whole contract may even be subject to renegotiation as the work proceeds.
To be sure of dependable quality, a buyer may develop loyalty to certain suppliers. This is especially important when buying nonstandardized products. When a supplier and buyer develop a working partnership over the years, the supplier practically becomes a part of the buyer’s organization.