Services dominate the global economy, with business-to-business (B2B) markets accounting for the lion’s share. The contribution of services to U.S. gross domestic product (GDP) is sizable and growing—increasing from 73% in 2000 to 77% in 2016. In particular, services are becoming more important in B2B markets. A growing number of B2B firms (e.g., IBM, Xerox) are becoming service-dominant because services enable them to build lasting relationships with their direct customers and their customers’ customers. As a result, B2B firms rely on new B2B services or service innovations (B2B-SIs) for growth. An example of a B2B-SI is Dell’s service launched in 2002 for small and medium-sized businesses that included network design, network installation, and staff training. An example of a B2C-SI is Starbucks’s “music bar” service introduced in 2004, which allowed consumers to hear digital recordings and burn their own CDs.
Relative to B2C-SIs, what value and risk do B2B-SIs create for investors? Do value and risk depend on other types of innovations from the firm or the characteristics of the service innovations they introduce? A new study in the Journal of Marketing answers these questions and helps managers gain a better understanding of the returns and risks from B2B-SIs compared to B2C-SIs to make more informed decisions. The study predicts the effects of B2B-SIs and B2C-SIs on firm value and firm risk. We empirically test these predictions by developing and estimating an econometric model on a unique panel data set of 2,263 service innovations across 15 industries over eight years. We assembled our data from multiple data sources, controlling for firm- and market-specific factors, heterogeneity, and endogeneity. We analyze innovation announcements using natural language processing (NLP) to gather data on quality of innovations.
From a theoretical perspective, our research offers a detailed explanation of how and why B2B-SIs affect firm value and firm risk and why these effects differ from those of B2C-SIs. From a managerial perspective, this study offers managers insights into the returns and risks of B2B-SIs relative to B2C-SIs.
The study results suggest that firms should consider introducing B2B-SIs whenever possible because on average they increase shareholder value without increasing firm risk. B2B-SIs may take a long time to develop and co-produce with customers, but once designed and marketed, they can become valuable assets and mitigate the risks associated with growth. Although B2C-SIs also improve shareholder value, unlike B2B-SIs, B2C-SIs can be riskier, so firms should be vigilant in launching B2C-SIs. If resource requirements are similar, firms should consider launching a B2B-SI over a B2C-SI. If managers have to make a choice, a B2B-SI is a safer option than B2C-SI from a risk reduction standpoint.
But firms need to be careful about what they say when they announce B2B-SIs. They should avoid overemphasizing customers in their B2B-SI announcements because customers and investors take customer orientation in a B2B-SI as a given and might doubt its potential success if customer focus is touted heavily. B2B firms should coordinate service and product innovations at a strategic level to boost shareholder value. Firms introducing B2B-SIs should also introduce new products where possible, sometimes bundling and selling them together as hybrid innovations.
This study is particularly helpful for managers of firms that offer both B2B-SIs and B2C-SIs. Based on the findings, companies such as Dell and FedEx that introduce service innovations in both business and consumer markets can better manage their portfolio of B2B-SIs and B2C-SIs.
Read the authors’ slides for sharing this material in your classroom.
From: Thomas Dotzel and Venkatesh Shankar, “The Relative Effects of B2B (vs. B2C) Service Innovations on Firm Value,” Journal of Marketing, 83 (September).
Thomas Dotzel is Assistant Professor of Marketing, University of Nebraska–Lincoln.
Venkatesh Shankar is Professor of Marketing and Coleman Chair in Marketing, Mays Business School, Department of Marketing, Texas A&M University.