A Structural Model of Organizational Buying for Business-to-Business Markets: Innovation Adoption with Share-of-Wallet Contracts

Abstract

This article develops the first structural model of organizational buying to study innovation diffusion in business-to-business markets. The model is particularly applicable for routinized exchange relationships, whereby centralized buyers periodically evaluate and choose contracts and then downstream users order items on contracted terms. The model captures different utility trade-offs for users and buyers while accounting for how buyer and user choices interact to influence user adoption/usage and buyer contracting. Further, the authors consider the dynamics induced by share-of-wallet (SOW) pricing contracts, commonly used in business-to-business markets to reward customer loyalty with discounts for buying more than a threshold share from a supplier. The authors assemble novel panel data on surgeons’ product usage, SOW contracts, contract switching, and hospital characteristics. They find two segments of hospitals in terms of the relative power of surgeons and buyers: a buyer-centric segment and a surgeon-centric segment. Further, they find that innovations diffuse faster in teaching hospitals and when surgical procedures are concentrated among a few surgeons. Finally, the authors answer questions such as these: Should the marketer focus on push (buyer-focused) or pull (user-focused) strategies? Do SOW contracts hurt the innovations of smaller firms? Surprisingly, the authors find that SOW contracts can help speed the diffusion of major innovations from smaller players.