Reading: Ethics in B2B Marketing

You will recall that business-to-business (B2B) marketing differs from business-to-consumer (B2C) marketing in key ways. B2B marketers sell to other businesses or institutions, which then consume the product as part of their business operations or use the product in the assembly of the final product they sell to consumers. B2C marketers focus their efforts on consumers—the individuals who consume finished products.

Also, the marketing processes used by B2B marketers are different. One important difference is the tactic of more “personal” selling, in which a sales force builds personal relationships with individuals in decision-making roles in order to facilitate sales within the organizations they’re targeting. Also, because B2B sales tend to be higher-priced, larger-ticket items, marketing tactics often include extensive adjustments in factors such as the selling price, product features, terms of delivery, and so forth.

In the context of ethics, there are some important challenges that are unique to B2B marketing, too. These are discussed below.

The Challenge of Monitoring Ethics in B2B Marketing

Imagine that Banana Republic, the retail clothing store, wants to launch a new promotion with a significant price discount. Banana Republic sells to consumers, which makes it a B2C company. Before the promotion is announced, the corporate marketing team will analyze the pricing discount. The Web site design for the promotion will be throughly reviewed. If this is a new promotion, the legal team will evaluate and approve the official language. The display materials that are sent to stores go through the same review. The marketing team will craft communications for the sales associates in stores around the country, explaining the promotion and scripting how it should be presented to shoppers. It is possible that the marketing team at Gap Inc., Banana Republic’s parent company, will also review the promotion—or they may have provided a “promotion template” that’s been reviewed and approved. For a B2C company selling to a large consumer audience, pricing is fairly uniform for all buyers, and the marketing and legal teams typically review the pricing strategies and communications.

In a B2B sales environment this process is very different. Imagine that a sales representative from Microsoft comes to your college campus to meet with technology leaders about a new software package for student communications. She might meet with the college’s chief information officer over lunch and discuss the college’s current products, as well as the new software package she is hoping to sell. When the discussion turns to price, the sales rep will try to present the right price to close the sale. She will be thinking about what the college has already purchased, what else she hopes to sell to the college, and how she might “bundle” this product to drive the largest total sale. She will also care about the timing of the sale. Does she want the college to buy the product this year or this quarter in order to maximize her commission? That will make a difference in whether she presents more aggressive pricing now or tries to create a larger deal that may take longer to close. The individual sales rep has significant discretion in crafting the right deal. Often the company’s sales leadership will not have visibility into the details of this deal until she is well into the sales process, and the legal team will not review it until it is in a formal contract that the company is preparing to sign.

B2B sales processes generally have fewer controls than B2C processes for a number of reasons:

1. Personal sales are relationship based, requiring the seller to tailor the process according to the buyer’s personality and approach
2. B2B sales are often large and complex, which necessitates personalizing the marketing mix to the individual buyer
3. Pricing is negotiated between the buyer and seller, rather than being set and uniform across all customers
4. Communication about the product and pricing takes place mainly through informal or formal verbal presentations and discussions

The B2B sales process is difficult to monitor and control. It is also very high stakes. There are approximately 320 million potential consumers in the United States. There are just over 5.7 million firms doing business in the United States.^[1] B2B firms market to a much smaller number of customers and are often selling products with a higher total cost.

Structural Challenges in Personal Selling

The challenges of creating appropriate controls in the B2B sales process places special pressure on the individual sales representatives to make good judgment calls in a very flexible environment. In addition, personal selling almost always uses an incentive structure, which puts immense pressure on the sales rep to close large deals.

Often a B2B company will spend approximately 20 percent of its total revenue on sales costs, with a significant portion of that paid out in commissions. In other words, if a company buys a software package that costs $1 million, as much as $200,000 will be paid in sales commissions. This is generally distributed through the sales management chain, such that an individual sales rep is paid a commission on his sales, and a sales manager is paid a commission on the sales from all of the sales reps that she manages.

Let’s look at an example of a commission plan and consider how it might impact ethical judgment calls during the sales process.

Each salesperson has an annual sales quota that he is expected to meet—in this case, $1 million in annual sales. On top of a base salary, sales representatives are paid a commission on their sales. Often, either no commission is paid (as in this example) or a very low commission is paid until the sales quota is met. Once the sales quota is met, the sales rep earns a percentage of all sales. In this example, if the rep sells a $1 million deal, then he will meet his quota and be paid a $100,000 sales commission. There is also an accelerator: If the sales rep sells more, he will earn a higher-percent commission. B2B sales representatives have a personal financial stake in closing deals.

Besides the financial incentive they face, sales reps are also motivated to meet (and exceed) sales quotas because they don’t want to get fired (which is a pretty common, legitimate worry).

Let’s revisit the scenario above where a software sales rep is on your college’s campus. Will she act differently if she is approaching the end of the year and has only closed $800,000 in sales? In that case should would not have met her sales quota for the year, and both her compensation and her job would be at risk. She might be tempted to oversell the features and benefits of the product this one time in order to close a sale before the end of the year. She would also be more likely to advocate for steep pricing discounts that might bring the price of the software right to the $200,000 she needs to meet quota.

What if she has exceeded her quota but needs a few big sales once the new year starts? In that case, our sales rep might be tempted to slow down a sales deal in order to push the sale into next year. While that doesn’t present an ethical dilemma for the customer, it does create an issue for the company. If an employee is purposely reducing the company’s sales this year in order to profit, does that constitute ethical behaviour?

Companies understand and expect that the sales compensation structure will influence behaviour, but they try make adjustments that lead to smaller ethical issues (slowing down a sales process, e.g.,) rather than larger ethical issues (promising value that the product cannot deliver, e.g.). B2B marketers must carefully consider the sales-compensation and incentives structure and identify where it creates unnecessary ethical risks or puts sales reps in an ethical bind.

Diverse Policy Requirements

Finally, while all marketers are required to be aware of provincial and federal laws that impact their work, B2B marketers must also understand the procurement (https://www.investopedia.com/terms/p/procurement.asp) policies of the organizations to which they sell. The policies and guidelines can vary significantly depending upon the structure of the organization.  For example, the Government of Canada is one of the largest public buyers of goods and services in Canada, purchasing approximately $22 billion worth every year on behalf of federal departments and agencies and has very specific purchasing processes.^[2] This would be very different than a private company or social enterprise’s approach to purchasing. Company policies will generally define:

• The total purchase authority of a single individual or department
• The threshold at which a purchase decision must go out for competitive bid
• The circumstances under which the company’s status as a customer can be disclosed
• A dollar threshold for gifts from vendors

It is the responsibility of the employees within the company to follow the policies, so why does this matter to the marketer? Let’s return to the example of a software rep selling a product to your college or university. The chief information officer is responsible for understanding and following the college’s policies. Still, the software company and its sales rep are in a position to conduct sales and marketing efforts that either respect and support the college’s policies or push against them. Even when issues arise from the vendor’s ignorance about the college’s policies, such lapses can create a tone in which the vendor is seen to be undercutting the college’s requirements instead of understanding and supporting ethical behaviour.