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.
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From: Thomas Dotzel and Venkatesh Shankar, “The Relative Effects of B2B (vs. B2C) Service Innovations on Firm Value,” Journal of Marketing, 83 (September).