Outcome-Based Contracts’ Design-Related Criteria Impacts on the Manufacturer’s Nexus of Bilateral Contingencies Using the Theory of the Marketing Firm

Outcome-based business models have been defined, categorized, and described in the literature; however, the reformation of bilateral contingencies after implementing such business models in a business-to-business context has remained unanalysed. Accordingly, the theory of the marketing firm (TMF) and its three-term bilateral contingency and nexus of bilateral contingencies are applied to analyse this reformation of bilateral contingencies in an industrial setting where an equipment manufacturer has implemented an outcome-based business model for contracting its customers. In this new form of contracting, the customers can have non-ownership-based access to the equipment and use it in their operations, instead of the traditional way of buying and owning the equipment to be able to use it. The design of such outcome-based contracts is one of the sub-steps of implementing outcome-based business models, and the focus of this chapter is on the design-related criteria of such contracts and their impacts on the equipment manufacturer’s nexus of bilateral contingencies and value capture. Bilateral contingency is the relationship between two parties in which one party’s behaviour supplies consequences for the other party’s behaviour and vice versa. TMF defines the firm as a nexus of internal and external bilateral contingencies between its members, customers, and suppliers; however, in the nexus of bilateral contingencies, this chapter only focuses on the firm (equipment manufacturer) members and its customers. This chapter elaborates on the concept of outcome-based business models in the industrial settings, explains the applications of TMF in outcome-based business models, describes a case study implementation of outcome-based business models, and discusses the impacts of ownership, responsibility, and payment model as the criteria of designing outcome-based contracts on the case study’s nexus of bilateral contingencies. Finally, it specifies the importance of the criteria mentioned above and the equipment manufacturer’s capabilities, as part of value co-creation, in impacting the manufacturer’s nexus of bilateral contingencies and value capture, where the customer’s desire for non-ownership-based access to the equipment plays an imperative role. These findings provide helpful insights for manufacturers to successfully implement their outcome-based business models in an industrial setting.