Despite Perceptions, Study Shows Economic Benefits
A design award signals quality and boosts business-to-consumer sales. The payoffs are less obvious in business-to-business markets. But research from the University of Maryland’s Robert H. Smith School of Business shows the economic value of earning industry prizes for B2B excellence, despite doubts among managers who often bypass the application process.
“A recent survey shows that B2B managers perceive few economic benefits for third-party recognition, so they hesitate to make the necessary investments to impress judges,” says Smith School professor P.K. Kannan, co-author of a new Journal of Marketing study. “But our analysis shows clear evidence of financial payoffs in B2B markets.”
Prior research has shown the impact may be higher in B2C markets. Third-party recognition signals quality, which helps retailers retain existing customers while attracting new ones. The same signals benefit B2B companies, but the effects are muted due to switching costs that make it difficult for corporate buyers to replace one supplier with another.
“Research has suggested that quality perceptions are not necessarily a critical factor affecting purchasing behavior in B2B markets,” Kannan says.
He and his co-author, D. Eric Boyd at James Madison University, consider three types of switching costs that may outweigh or mitigate quality considerations in B2B markets.
The first type is relational. Companies spend significant time and resources developing relationships of trust with suppliers and other partners, and starting over can be expensive. “B2B exchange relationships tend to be long term, and this creates the opportunity for employees from each firm to develop personal relationships,” the authors write.
The second type is procedural, which refers to the search costs associated with finding a high-quality supplier. Third-party recognition for design excellence can lower procedural switching costs because awards create a public ranking system of sorts.
The third type is financial, which refers to contract termination costs. A company locked into a five-year contract with a vendor, for example, cannot easily switch just because another firm wins a prestigious design award.
Contracts are often confidential, which makes it difficult to anticipate the financial switching costs of potential buyers. “The lack of knowledge creates uncertainty regarding how buyers will react to a firm receiving a third-party recognition for design excellence,” the authors write.
Despite the various switching costs, the study finds overall gains in financial performance for B2B firms following third-party recognition. Instead of looking at the impact of design awards in terms of their ability to signal product quality, Kannan and Boyd analyze third-party recognition as a type of demand shock — something familiar in B2B markets that can trigger positive or negative effects.
Examples include regulatory or economic changes, natural disasters or company recalls farther up the supply chain. “Publicity associated with third-party recognition can also create a demand shock,” the authors write.
To test the effects, the authors identified B2B award recipients announced between 1997 and 2014. They developed a control group by identifying matching firms from the same industries with similar market values and research investments — minus the design award.
They also filtered out award announcements that came too close to other events that could affect firm performance, such as the release of a quarterly report or the announcement of new CEO or alliance.
“The effect varies, however, depending on certain types of chief executive officer functional experience (market and finance) and the criteria used by third parties in judging design superiority,” the authors conclude.
Read more: (When) Does Third-Party Recognition for Design Excellence Affect Financial Performance in Business-to-Business Markets? is featured in the Journal of Marketing.