Many manufacturing firms today claim to be solution providers. A solution provider addresses complex business problems of customers in a holistic way by providing highly customized and integrated, product-service offerings. However, the extent to which manufacturers derive financial returns from investments made into this advanced form of service provision remains debatable.
Prior research shows that the further the manufacturer moves from the established basis in selling equipment and related, product-oriented services, the more difficult it is to generate profits. While failure stories in the scientific literature are scarce, practitioners report figures on unsuccessful transformation projects: Krishnamurthy (2003) estimate that 75 % of the companies that want to offer solutions fail to return the associated costs. According to Roegner and Gobbi (2001), only about 20% of all solution sellers finally recapture their capital costs, and even fewer achieve the 20 to 25% increase in profitability that McKinsey expects from successfully implementing business solutions. Despite these challenges, there is no evidence for large-scale transition away from solution business. This leads to the assumption that managers persist with solution business at least partly for strategic reasons. However, beyond broadly based arguments stressing managerial beliefs of the differentiating role of customer solutions, it is unknown what the specific and measurable market effects are that help to explain why engaging in solution business is strategically important for the manufacturer.
To answer this question, we examine the function of a solution business as a signal to the market. We assume that irrespective of the direct revenues generated by solutions, manufacturers benefit strategically from the positive spillover effects of solution business on the firm’s underlying product business through a signaling mechanism: Credibly signaling the capabilities associated with solution selling, such as understanding of the customer’s business, designing and implementing solutions that generate superior value-in-use, and commitment to supporting the customer during the full life cycle of the provided solution lower the customer’s risk perception.
We test the role of a solution business as a signal to the market in a cross-industries online experiment with 333 managers. Participants were shown eight short vignettes describing a fictional B2B purchase situation for a product-based component. The scenarios systematically vary along three dimensions:
- Solution vs. component sellers (to address the main question wether customers prefer buying from solution providers even if they need just a stand-alone component),
- Sellers with and without prior reference projects, and
- High vs. low price of the focal component.
Participants were recruited through an online access panel provider in the US and the UK. Respondents needed to be managers in the manufacturing industry and they had to be involved in purchasing decisions that exceed 10,000 USD at least once a year.
The results show that a market positioning as a solution seller has a highly significant and positive effect on the customer’s purchase intention in cases where the customer is only considering the purchase of a single, product-based component. Further, the results show that positioning as a solution seller has a positive effect on the customer’s purchase intention in cases where the emitted signal is unsubstantiated through showcasing of prior reference projects. However, the signaling effect of solution business is even stronger if the seller can boost the credibility of the signal through evoking upon prior reference projects.
For practitioners, the research suggests that a market positioning as a solution provider is strategically important for manufacturers. Such a positioning increases the customer’s purchase intention of products. Thus, manufacturers should consider persisting with solution business even in of negative direct returns. The results also suggest that manufacturers lacking real capabilities in solution provision can be induced to exploit the signaling effects of the solution business. This would result in a free rider problem. Thus, customer reference marketing is crucial for manufacturers that have demonstrated capabilities in solution provision. Such a marketing focus ensures that they fully benefit from investments made into development of the related capabilities.
Based on the following paper:
Zimmer, M., Salonen, A. and Wangenheim, F. (2017, July), „Business Solutions as Signals“, Conference Paper presented at the 8th BMM-EMAC International Conference on Business Market Management, Graz, Austria.
References and further readings:
- Krishnamurthy, C., Johansson, J. and Schlissberg, H. (2003), “Solutions Selling: Is the Pain Worth the Gain”. McKinsey Marketing & Sales Practice.
- Macdonald, E.K., Kleinaltenkamp, M. and Wilson, H.N. (2016), “How Business Customers Judge Solutions: Solution Quality and Value-in-Use,” Journal of Marketing, 80(3), 96-120.
- Roegner, E. and Gobbi, J. (2001), “Effective Solutions Pricing-How to Get the Best Premium from Strategic Collaborations”. McKinsey Marketing & Sales Practice.
- Tuli, K.R., Kohli, A.K. and Bharadwaj, S.G. (2007), “Rethinking Customer Solutions: From Product Bundles to Relational Processes,” Journal of Marketing, 71(3), 1-17.
- Ulaga, W. and Reinartz, W.J. (2011), “Hybrid Offerings: How Manufacturing Firms Combine Goods and Services Sucessfully,” Journal of Marketing, 75(6), 5-23.