In this Pricing Nugget we share some piece from own research and shed light on psychology in pricing in B2B settings. We show that psychological pricing effects also work in a – presumably – fully rational context.
Imagine you are selling heavy manufacturing machines to other companies for six-digit or even seven-digit prices, like molding presses or laser cutters. Since few years, your company pursues a strategy of “servitization” meaning inventing and selling services in addition to the core product, machines, to improve margins and customer loyalty.
The Challenge and the Research
How would you approach your sales call? The ancillary services carry a price tag that is a fraction of the machine price. Should you sell these services at all? At which price? When should you introduce them into the negotiation – earlier or later? And how should you frame the benefits of these services that your client might add to the machine?
Based on a unique dataset of 400+ actual decision makers in B2B buying decisions, we found that an entitlement effect exists also in B2B settings. In plain words, B2B buyers paying half-a-million Euro for a machine simply expect that a service priced at twenty-five thousand Euro is included. In particular, we found that this entitlement effect kicks in after a certain threshold (in our study ~150K Euro). We also found that if the B2B buyer perceives a higher personal or reputational risk if the procured machine turns out being a failure, the higher is her/his willingness to pay for ancillary services.
What Do These Insights Mean for Your Sales Call?
- If services have a downstream impact of higher loyalty, cross- or up-selling potential for more and other machines or any other monetary benefit that outweighs their cost of provision, you should give them away for free.
- To reduce the entitlement effect, you might consider splitting up the total machine price into subcomponents of the machine or into different phases of an installation project (e.g. feasibility study during planning phase, training services during installation phase, remote maintenance services after go-live) to stay below the entitlement threshold.
- As (B2B) customers mentally depreciate payments, you could also offer your additional services later on when your client does not perceive the paid price as so high anymore as s/he does during the hot phase of negotiation when the price is at the center of discussion.
- Lastly, you could stress how these services contribute to the odds of making the procurement of the (core) machine a success and implicitly relate this success to the buyer’s standing within the company.
Markus Husemann-Kopetzky, Andreas Eggert, Wolfgang Ulaga, Michael Steiner (2020): The Influence of Attribution and Entitlement Effects on Industrial Customers' Willingness-to-Pay for Ancillary Services In 2020 AMA Winter Academic Conference Proceedings: Consumers and Firms in a Global World.