Key Takeaways
- Price does more in a B2B purchase than determine how much a customer has to pay. It can also influence how customers perceive the risk of an offering.
- When buyers have limited information about how well a product or service will perform, they may use price as a cue when judging its likely performance.
- A lower price can sometimes increase perceptions of functional risk, particularly when the buyer is comparing competing alternatives.
- The importance of the purchase can change how buyers respond to price. When the consequences of making the wrong choice are greater, buyers may become less willing to choose the lower-priced alternative.
- This has important implications for discounting. In some B2B situations, cutting the price may do more than reduce margins; it may also alter how the buyer perceives the offer.
- Price is unlikely to be the only signal buyers use. Brand, technical specifications, references, expertise and other information can all influence perceptions of risk and quality.
- Understanding the behavioral role of price can help B2B businesses think more carefully about when to compete on price and when to strengthen the signals that make an offering feel like the safer choice.
Wouldn’t it be useful if you could understand a little more about the psychology at play when a B2B buyer looks at your price?
A procurement manager comparing two industrial automation systems may see one supplier quoting $400K and another $320k. A CIO evaluating enterprise software may notice that one implementation partner is considerably cheaper than the others. A manufacturing company choosing a maintenance provider may receive proposals with surprisingly different prices for what appear to be similar services.
The natural response is to compare the numbers.
But there may be another question operating in the background: what does the price tell me about the offering?
This behavioral insight becomes particularly relevant when buyers cannot completely assess the performance of a product or service before they purchase it. They may be able to compare specifications, certifications, references and features, but there can still be uncertainty about what will happen once the supplier has been selected.
Will the equipment perform reliably? Will the software implementation go as promised? Will the service provider respond when something goes wrong? Will the solution deliver the performance that was promised during the sales process?
In such situations, price can become more than an economic variable. It can become a signal.
When Price Becomes a Signal of Risk
In many B2B markets, buyers have to make decisions with incomplete information.
Consider a company choosing between two industrial equipment suppliers. Both meet the technical specifications. Both have the required certifications. Both have credible customer references, but one is 15% cheaper.
A procurement team may naturally see this as an opportunity to reduce costs. But if the difference is large enough, another thought may enter the evaluation: Is there something we are missing?
Perhaps the cheaper supplier uses lower-cost components. Perhaps its service network is weaker. Perhaps its equipment will not be as reliable over time. The buyer may have no direct evidence for any of these concerns. Yet the price difference can provide a cue from which those concerns are inferred.
Behavioral science recognizes this as an example of the price-quality effect (PQE), in which buyers use price as an indication of the underlying qualities of an offering. In a B2B context, that can have an important consequence: price may influence not only perceptions of value, but also perceptions of functional risk, or the possibility that the product or service will not perform as expected.
The idea is particularly relevant when the buyer cannot easily establish the quality of an offering before making the purchase.
Think About the B2B Purchases Where Performance Is Hard to Judge
Some B2B purchases provide buyers with plenty of information that can be checked before the purchase. Energy consumption, production capacity, equipment dimensions, processing speed or software functionality can often be compared relatively directly. Other purchases are harder to evaluate.
How do you assess the quality of a cybersecurity provider before you experience an actual security incident? How do you compare the likely effectiveness of two management consulting firms? How can a manufacturing company be certain that a new engineering partner will solve a complex production problem? How can a company know in advance whether an IT implementation partner will handle the inevitable problems that arise during a major transformation?
These decisions contain a greater element of uncertainty because important aspects of performance are difficult to verify in advance. Buyers therefore have to make judgments using the information available to them. That information may include technical specifications and customer references. It may include the supplier’s reputation, certifications, expertise and track record. And sometimes, it includes the price.
The Importance of the Decision Changes the Price Equation
There is another factor that makes this behavioral insight particularly useful for B2B marketers: not every purchase carries the same consequences. Imagine two purchasing decisions. The first is the selection of furniture for a company’s administrative office. A poor choice may be inconvenient, but the consequences are unlikely to be significant. The second is the selection of a technology platform that will determine how a company’s entire operation works for years.
The buyer’s approach to price may be very different in the two situations.
When the consequences are limited, choosing the cheaper option can seem like a sensible way to avoid unnecessary expenditure. If the product turns out to be less satisfactory, the cost of being wrong may still be manageable. When the consequences are substantial, the calculation changes.
A cheaper supplier may offer an attractive saving, but the buyer may also think about what could happen if the product fails, the implementation goes wrong or the supplier does not provide adequate support.
What Happens When the Stakes Are Higher?
Research by Saab, A. B., & Botelho, D. (2020). Are organizational buyers rational? Using price heuristics in functional risk judgment. Industrial Marketing Management, 85, 141–151 provides particularly interesting evidence on this question.
The researchers conducted an experiment with 147 managers in which price, the importance of the purchase decision and the type of offering were varied. The study examined whether managers used price as a cue when assessing the functional risk of competing B2B offerings.
The results showed that price did influence perceptions of functional risk in several situations. For the printer used in the experiment, participants perceived the higher-priced alternative as having lower functional risk than the lower-priced alternative. The researchers also found that the importance of the purchase affected how strongly buyers responded to price.
The difference became particularly striking when participants had to choose between the alternatives. When the printer was 50% cheaper than the comparison product, 83% chose it when the decision was considered relatively unimportant. When the same decision was framed as highly important, the proportion choosing the cheaper printer fell to 65%.
When the printer was 50% more expensive, only 24% chose it in the low-importance situation. But when the decision was highly important, 61% chose the more expensive alternative.
The same broad pattern appeared for the printing service: buyers were more willing to choose the cheaper alternative when the decision was less important, while the higher-priced alternative became considerably more acceptable when the decision carried greater consequences.
The research therefore provides an important insight for B2B pricing: price sensitivity can depend on the perceived importance of the decision. A buyer who is highly price sensitive in one situation may not behave the same way when the consequences of choosing the wrong supplier become more significant.
This Has a Strong Implication for Discounting
This is where the finding becomes particularly relevant for B2B sales and pricing teams.
Discounting is often used when a supplier believes that price is standing between the business and the customer. But suppose the customer’s hesitation is not simply about paying more. Suppose the buyer is also trying to assess whether the supplier represents a safe choice. A discount may solve one problem while creating another.
Consider an enterprise software provider competing for a major transformation project. Its proposal is priced at $3 million, while another supplier has quoted $2.4 million. The sales team is under pressure to close the deal and offers a further 10% discount.
The buyer may welcome the saving. But the original price difference may already have raised questions about capability, implementation risk or the level of support that will be available. Reducing the price further does not necessarily answer those questions.
In a high-consequence purchase, the supplier may be better served by strengthening the evidence that reduces perceived risk. A technology provider could demonstrate successful implementations in comparable organizations. An industrial equipment manufacturer could provide reliability data, references and service commitments. A consulting firm could show the experience of the specific team that will work on the engagement rather than relying only on the reputation of the firm. A cybersecurity provider could demonstrate its incident-response capabilities and service-level commitments.
In each case, the objective is to give the buyer more information with which to assess the risk of the decision, rather than relying on price to do some of that work.
But Price Does Not Work the Same Way in Every Category
The research did not find that price influenced perceptions of risk in exactly the same way for every type of offering. The researchers compared a printer, which had attributes that could be assessed relatively directly, with a printing service, where more of the relevant quality was difficult to evaluate before purchase. Interestingly, the price effect was stronger for the printer than for the printing service, and this was contrary to the researchers’ original expectation.
This is a useful reminder that behavioral principles should not be converted into simplistic rules. It would be tempting to conclude that a higher price will always make a B2B offering appear safer, but the evidence does not support that.
Instead, the more useful conclusion is that price can become one of the cues buyers use to make judgments about risk, and the strength of that cue depends on the decision context and the characteristics of the offering.
A higher price cannot compensate for a weak value proposition. Nor will lowering a price necessarily damage an offering. Buyers have many other sources of information available to them, and the importance of those sources will vary from one purchase to another.
What Signal Is Your Price Sending?
B2B pricing is usually approached as a question of value, willingness to pay, competitive positioning and profitability. Behavioral research adds another dimension. The price you put in front of a buyer can influence how that buyer interprets the offering itself.
A lower price can make an offer more attractive when cost is the primary concern. In some situations, however, it can also provide a cue that increases uncertainty about performance.
And when the consequences of the decision become more significant, buyers may become less willing to take that risk. For B2B businesses, this creates an interesting opportunity. Instead of asking only whether your price is competitive, it may be worth asking:
What is my price communicating about the risk of choosing my offering?
The answer could influence not only how you price the offer, but also how you communicate its value, demonstrate its reliability and decide when a discount is, or is not, necessary.
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