[Pricing Nugget #033] Servitization: Divide and Prosper

Pricing Nuggets seem to focus heavily on business-to-consumer markets. However, I will tell you a secret: procurement managers who make buying decisions for a company might even shop for themselves after working hours, maybe during, who knows .

So, many effects we have discussed in B2C might also apply to B2B. Why? The same people with the same brains might rely on the same mental shortcuts when shopping for themselves and making buying decisions for the company.

Today, we turn explicitly to a B2B context and put ourselves into the shoes of a salesforce selling machines. We are not only selling machines; we are also selling ancillary services. And the question is, how should we frame and present the different services and their prices to increase the willingness to pay of their B2B customers?

To tap into additional sources for growth and profitability, more and more manufacturing companies add services to their offering portfolio. This trend of adding ancillary services to a core product and selling both is called servitization.

What are ancillary services in this case?

Ancillary services include, for example:

• Machine status monitoring,
• Warranty extension,
• Price stability for spare parts,
• Guaranteed maintenance
• Installation of the machine,
• Remote service,
• Service hotline,
• guaranteed trade-in value at market value,
• 3D CAD data of the machine,
• Marketplace for free machine capacity,
• and so on and so on.

So there are many, many additional services that you can add and sell in addition to the core machine.

How do salespeople usually sell these ancillary services?

Marketing managers in B2B are not very familiar with assessing customers' willingness to pay for ancillary services and setting appropriate prices.

To avoid a sequence of pricing decisions and tedious price negotiations, they put all relevant services into a customized service package and sell the whole package at once to a customer.

That is the standard way of pricing and ancillary services in B2B.

Is this the best way of selling services?

You have at least two options.

First, you offer and present the relevant services as a packaged service offer. So you put all relevant services into one package and ask for a total price for all these services.

Second, you split the separate services and present the price for each of these services separately.

Does this make a difference at all?

The answer is… DRUMROLL… yes.

B2B customers prefer a separate presentation to a packaged presentation for ancillary services.

The reasons are twofold. First, it is about choice bracketing. People, in general, do not like to make complex decisions all at once.

It is mentally too taxing, so they prefer to split a big complex decision into multiple separate choices.

As people like to make these smaller decisions, it is more convenient for B2B procurement managers to evaluate every single service one by one instead of the customized service package with all included services simultaneously.

The second reason is paying for confidence. The packaged presentation is like a black box. Buyers do not know whether they are spending too much on individual service components or not. Therefore they like to have more information about what they are going to buy, and they are even willing to pay higher prices for more details.

That is why customers have a higher willingness to pay and a higher preference for a separated presentation of ancillary services over an aggregated presentation.

The study with 450+ procurement managers

Researchers ran a study, and they invited more than 450 procurement managers who considered a current or immediately planned procurement decision.

The researchers invested a lot of energy and money into this study because they conducted computer-aided telephone interviews with these real procurement managers they solicited from a commercial list of procurement buyers. With this setup, the researchers ensured that not an intern was answering the survey but real procurement managers.

They ask them, in essence, three sets of questions.

In the first set, they asked about the relevancy of individual services and whether they applied to the given procurement decision.

In the second set, the researchers asked participants about their separated willingness to pay. Each service, like warranty extension, came with different levels. The warranty extension could be none (level 1), it could be six months (level 2) or twelve months (level 3).

And for each of these service level combinations, the participants were asked to indicate their willingness to pay.

In the third set, they asked the participants about the packaged willingness to pay. The researchers created packages and asked participants to evaluate the overall package in terms of their willingness to pay.

What did the researchers find out?

Comparing the separated willingness to pay through the packaged willingness to pay, they found out that in the separated format, the willingness to pay is about 4.6% higher for the same ancillary services.

What about demanding customers?

Your customers might differ a lot, and you might have customers with high purchasing power. Still, for customers with high purchasing power, the difference in willingness to pay might be more pronounced.

Why is that? Customers with high purchasing power expect they can enforce their better conditions onto the seller. If you offer a packaged service offer, customers with high purchasing power might expect even lower prices for these bundled services.

So the researchers found that the willingness to pay of customers with high purchasing power is much lower for the same services in an aggregated format, which means that for a separated presentation, it is much higher.

What did we learn?

Today we looked into a study specifically designed around a B2B context, and we saw that a seemingly irrational behavior also affects B2B procurement managers.

We found that the best way to present your ancillary services is not in an aggregated format – like the customized service packages that we frequently see in the market – but in a separated presentation because it increases your customer's willingness to pay.