Performance as a Basis for Price-setting in the Capital Goods Industry:: Concepts and Empirical Evidence

This paper discusses a new pricing strategy, which leads to a certain variability of prices as the supplier offers to fix prices to performance parameters of long-lasting industrial goods. The underlying idea is to give a signal of the supplier’s competence and/or to conclude a contract, which contains additional value for both parties to the market. Some theoretical findings are applied to this concept and lead to 13 hypotheses, especially dealing with the perceptions of the buyer. Empirical research covered 131 German mechanical engineering companies. The data were used to evaluate the use of performance-based pricing and test the hypotheses. The results show a mixed picture. Uncertainty-reducing effects are well perceived while other assumptions could not be confirmed. Based on the results recommendations are developed on how and when to apply performance-based pricing.