Conducting business in today’s dynamic world has become much more complex and competitive. This is primarily due to the wide array of choices available to a firm in every aspect of conducting the business. This decision-making process becomes much more complex if the firm is bigger as complexity increases with the size of the company.
Cost considerations and choosing options which are cost-effective are very important in ensuring that the business is profit-yielding. Even in terms of buying, there are various parameters to be considered before finalizing on the type of purchase by the decision-making authority of the company.
Procurement, being an important aspect has to be decided on the requirements on the company in the most cost-effective way. The new school of buying categorizes the buying procedure into two – Transactional Buying and Relationship Buying – based on the relationship and terms between the buyer and the seller.
What is Transactional buying?
Transactional buying, as the name suggests, is limited to buying one transaction at a time. In this type of buying, the procurement managers are chiefly concerned about “today’s” purchase wherein the buyer thinks and acts in the present. The pricing and terms of sales drive the buying process. The buyer negotiates aggressively with the service provider and tries to get a better deal for themselves. The procurement team often demands more concessions and frills from the purchase. Once the transaction is over, the contract between the seller and buyer ends.
From the seller’s perspective, the only exciting thing is the limited duration of the service period. However, this type of buying is not lucrative for the seller as the negotiation is tough and the salesperson might end up giving a lot of concessions than originally decided. In case of a pure transactional buying, complex/critical tasks should be avoided.
There is another kind of transactional buying called the ‘Pseudo Transactional Buying’. Here, the service provider extends the services on the product sold over a longer period of time. They maintain the product on an ad hoc basis based on the buyer’s need. Here, the contract is limited to the single task/s however the buyer will avail the services over a pre-decided period of time.
What is Relationship buying?
The aim of this type of buying is to maintain a strong relationship with the seller for a long period of time. The buyer and the seller tend to enjoy a mutually beneficial relationship. The seller is considered as a business partner of the buyer. Trust and confidence of the buyer, coupled with delivery and demonstrating expertise of the seller is the key to success in relationship buying. Both the parties look for a win-win situation before entering the partnership. As the relationship is for a longer term, the buyer should ensure that the seller also gets a handsome profit from the partnership and extend the help and support to the seller.
We have mentioned that a large firm, with complex operations should not conduct a transactional buying process. Does this mean that big firm or even a medium-sized firm should go for relationship buying and a small firm should go for a transaction buying? No, the decision of the procurement process does not just depend on the size of the firm. There are criteria to be considered based on which such decisions are taken.
Few of the criteria are as follows:
Relationship Buying Transactional Buying
Nature of Work Complex Simple
Volume of Work High Low
Frequency of work Daily/Weekly/Monthly (Periodic) Ad Hoc
Involvement of the buyer High Low
Transactional buying vs Relationship – Which is better?
To sum it all up, a firm, whether it is a big, medium or small-sized, can choose either transactional buying or relationship buying or even pseudo transactional buying. Considering the hassles of contract creation process, many firms generally prefer relationship buying. The frequency of contract creation is more in a transaction buying process vis-à-vis a relationship buying process. However, due to the constant pressure to reduce cost, transactional buying is also being considered. This type of buying comes to the rescue when there is a cost constraint. It is a boon for the small/ sole proprietorship firms as it is easier for them to follow it. Even the large companies do not fall behind in experimenting this type of buying. The bigger firms are either floating a separate unit/company so that they can take the advantage of transactional buying. Transactional buying and Relationship buying both have their own pros and cons. A good business manager should select the procurement process based on the requirement of the company. Considerations should be made based on what product should be sourced, whether it is periodic or not, how involved the firm wants to be and if the maintenance is complex or simple.