Why industrial buying behaviour might be different to FMCG

At first glance, industrial buying behaviour appears markedly different to that in FMCG markets. In the commercial aircraft market for example, the purchasing process can take five years, prices, features, timing and finances are highly negotiable, purchasing occurs in stages (order, firm order, secured finance etc), and since the lifespan of an aircraft can be up to 30 years, extensive ongoing service and maintenance are also carefully negotiated, often with subsidiary contractors. 

Industrial goods markets are also very different because: 1) they require highly informed professional buyers and sellers; 2) have long-drawn-out negotiations; 3) involve huge price tags; and 4) often involve a complex capital allocations process. Industrial goods are also evaluated by their effects on a company’s costs and bottom line results and so are sensitive to fluctuations in the prices of inputs, e.g. the price of oil. With all these differences, it is an open question whether generalised models of customer choice behaviour could possibly apply.

What empirical evidence do we have so far?

The analysis of industrial goods buying behaviour is hampered because their sales are generally not tracked by market measurement firms in the way that consumer goods are. So we have to rely on ad-hoc data which is much more difficult to generalise. Until now modelling of customer purchasing in industrial markets has only been attempted a few times, e.g. ready-mix concrete (Pickford and Goodhardt, 2000), aviation fuel (Ehrenberg, 1975; Uncles and Ehrenberg, 1990), prescription pharmaceuticals (Stern, 1994), business-to-business (B2B) services (Bowman & Lele-Pingle, 1997) and industrial resins (Wilkinson et al, 2016). McCabe, Stern & Dacko (2013) analysed customer purchase of the components used in surgical procedures finding a generally good fit, but when there is a dominant supplier, the Dirichlet model under predicts the purchase frequencies. While such modelling strongly suggests that the laws of consumer behaviour might apply in industrial contexts, no attempt has been made to extend the analysis to capital goods, such as aircraft.

Fortunately, we can now investigate whether FMCG patterns such as Double Jeopardy, Pareto Share and Duplication of Purchase laws fit in the industrial market of aircraft brand buying by using manufacturer sales data covering ten years of aircraft purchasing. In this report aircraft buyers are airlines (of which there are 800 or so worldwide – including Delta Air Lines, Ryanair and EasyJet Europe) and leasing companies which are also big buyers of aircraft (like AerCap and GECAS). The aircraft themselves are brands such as Airbus or Boeing. Because many aircraft contracts are cancelled before delivery, we count a purchase as occurring at the ‘delivery of an aircraft to the final customer’. Data is sourced from the aircraft manufacturer’s sales reported to regulatory authorities, and then verified through organisations dedicated to plane-spotting (planespotters.net) who track the delivery of all aircraft to end customers.

Yes, industrial goods such as aircraft are purchased like FMCGs

1. Do bigger aircraft brands have more customers who purchase them slightly more frequently?

The aircraft market is dominated by the two biggest manufacturers (brands) Boeing and Airbus who capture nearly nine in ten sales between them, leaving the smaller brands to share the remaining 11%. This and other common brand performance metrics are shown in Table 1. We also see that the market domination of the two leaders is reflected in much higher penetration levels and the larger number of purchases per airline buyer. All the aircraft brand performance metrics are, therefore, better for the bigger brands – they have vastly more airlines (customers) who buy more often than do the fewer airlines of the smaller brands – an illustration of Double Jeopardy in action. The theoretical values for purchase frequency are modelled using the simple Double Jeopardy equation w(1 – b), giving very close theoretical approximations to observed values.

Table 1 illustrates other common metrics used in consumer markets, the observed ‘Share of requirements’, ‘Once only buyers’ and ‘Purchases per buyer’. Just like McCabe, Stern & Dacko (2013), the aircraft market has dominant suppliers and this leads to a slight under prediction of the purchases per buyer. In addition, Table 1 shows that, on average, just one in ten airlines were loyal to a single brand of aircraft over the past ten years. This is consistent with findings in FMCG categories where about a quarter of buyers are 100% brand loyals in any given year. However, over longer periods, like this, given additional opportunities to switch, the proportion of sole brand buyers drops (e.g. in FMCG, to just 10% in six years (Scriven, Bound & Graham, 2017)).

Taken altogether we see Double Jeopardy effects for all the main brand performance metrics, showing that the market structure, which is derived from the underlying patterns of buyer behaviour, has a form in this particular industrial goods market that is very familiar from consumer markets. 

Table 1: Double Jeopardy pattern with theoretical estimates compared to observed metrics

Key finding #1: Bigger aircraft brands have more airlines buying them and those airlines buy them rather more often (i.e. the Double Jeopardy law).

2. What percentage of sales do the heaviest 20% of airlines account for?

We find that in the commercial aircraft market, even over ten years, the heaviest 20% of an aircraft brand’s buyers account for an average of approximately 60% of that brand’s sales – not the 80% commonly commonly, but erroneously, expected. This is in line with our generalised finding of 50-60%. Pareto Shares increase with time (Sharp & Romaniuk, 2007), and this number reflects long-term findings in Graham et al. (2017) that show a Pareto Share of 60% over six years in FMCG markets for leading brands, but higher for smaller rivals. While Canadair has a higher Pareto Share, this is expected for smaller brands (Sharp & Romaniuk, 2007). But there is a slight deviation for Embraer which has a lower than expected Pareto Share, given its small size. This is caused by the combination of the higher percentage of 100% loyal buyers and the higher percentage of those who purchased the brand just once. This results in the brand being purchased by lighter aircraft category buyers, who by default, account for fewer of the aircraft’s sales – thus a lower Pareto Share.

Key finding #2: The heaviest 20% of an aircraft’s buyers account for just over half of all purchases (i.e. the Pareto Share).

3. Who do commercial aircraft brands share customers with?

We can extend the analysis by looking at how the competition for airlines plays out between the aircraft brands in Table 2. This is a standard Duplication of Purchase table that shows (in the first row, reading across) that 84% of Boeing’s buyers also bought Airbus, 11% bought Canadair and Embraer, and 18% bought Other (several small aircraft brands). So, airline customers are shared between the aircraft brands, but unevenly – sharing is much higher with the larger aircraft brands than smaller ones. Buyers of any aircraft brand are more likely to be shared with the big aircraft brands Boeing and Airbus, than with smaller ones. This nicely illustrates the Duplication of Purchase law, which states that brands share customers in line with the size of the other brands, i.e. brands share more customers with bigger brands than with smaller brands.

Table 2: Duplication of purchase for customers of commercial aircraft brands

Partitions are sometimes found in markets when sharing does not align with size (i.e. more or less than expected) (Ehrenberg, 1995). Such partitions usually have a functional basis – e.g. buyers of a diet soft-drink brand are more likely to buy another diet brand than a regular brand. A similar partition is present in the aircraft market, where the partition between brands is functional. 

Table 2 shows that customers of Canadair and Embraer buy from Boeing and Airbus less than expected and Boeing and Airbus customers buy less than expected from Canadair and Embraer, given the average level of sharing in the market. The explanation is that buyers of Boeing and Airbus buy larger aircraft (up to 450 seats) to serve international networks, while Canadair and Embraer buyers purchase smaller aircraft (up to 150 seats) for shorter regional routes but which have no use for large, long haul aircraft . Those aircraft brands have higher than expected sharing (highlighted in blue), forming a partition. There is, therefore, a functional basis for choosing between suppliers of larger, or smaller aircraft brand. The higher than expected sharing with Other at the bottom of the table is because it includes McDonnell-Douglas which stopped selling large commercial aircraft during the analysis period, and so its buyers were forced to switch to the remaining big plane makers.  

Key finding #3: Aircraft brands share buyers in-line with their size (i.e. the Duplication of Purchase law). Aircraft brands of certain cabin sizes share more with each other than we expect (i.e. a functional partition).

Summary

We show that the competitive structure of the commercial aircraft market is simple and similar to most consumer markets, despite profound differences in the buying decision-making processes between these markets and their customers. 

We see that the brand performance metrics in Table 1 are quite regular and similar across brands of a similar size, highlighting Double Jeopardy and Pareto Share effects.

Just as in consumer markets where buyers are loyal to more than one brand, most airlines have two or more suppliers of aircraft. This polygamous loyalty where purchasing is spread across several brands is typical in consumer markets, but it is perhaps surprising that airlines are also polygamous because, for them, it has cost implications regarding service, training and maintenance. Even so, if negotiation between customers and suppliers results in similar product configurations, costs and contracts, the likely outcome is an as-if random buying pattern of purchases, with contracts spread across the competitive suppliers. 

The patterns closely resemble those found in consumer goods markets, as well as many durable goods (Bennett & Graham, 2010). The large commercial aircraft market conforms to the Double Jeopardy, Pareto Share and Duplication of Purchase laws, suggesting that aircraft brands looking for growth are best served by seeking to gain as many different airline customers as possible rather than focusing on any one buyer, regardless of how big they are.

Implications

The strategy implications set out in the book How Brands Grow (Sharp 2010) appear to be valid in heavy industrial marketing.

While the inclination might be to think that the vast differences in capital goods markets should mean that a plane-maker’s marketing effort should focus on salesmanship, relationship-building, and technical and financial expertise, the evidence suggests that almost every customer will not only entertain competitive offers, but will also buy, repeatedly, from multiple suppliers, and so the marketing effort should be spread across all potential buyers. Being easy to buy from remains a key marketing objective.