Gain-sharing in performance-based contracting: How risk and fairness drive business customers' willingness-to-switch to a gain-sharing arrangement

Abstract

Gain-sharing arrangements, which involve the seller promising to realize a measurable economic performance gain that is shared between the seller and customer, are used in the context of performance-based contracting. Prior academic research explicating the implementation of this managerially relevant practice has mainly utilized anecdotal evidence and has primarily focused on the seller's perspective. Thus, we lack rigorous explanations as to what drives customers' willingness-to-switch to a gain-sharing arrangement. To overcome this limitation, we build on agency theory and equity theory to develop two competing and theoretically grounded explanations (risk-based vs. fairness-based) to explain customers' willingness-to-switch. We conducted a qualitative pre-study and collaborated closely with an industry partner to develop a realistic experimental scenario and tested the proposed explanations with data from 437 professional purchasers. The results show that decision-makers in customer firms respond differently to economically equivalent gain-sharing arrangements that feature different pricing schemes. More specifically, the fairness perception, but not risk perception, drives the customer's willingness-to-switch. The findings of this study advance B2B pricing research by showing that buying decisions in firms are not necessarily guided by economic rationality-based arguments. Instead, in the context of gain-sharing arrangements, the choice is guided by what is perceived as fair.