On the Optimality of Delegating Pricing Authority to the Sales Force

This is the publisher's version. Copyright 2001 American Marketing Association.An important decision facing sales managers today is precisely how much pricing authority should be delegated to the sales force. Received theory suggests that the salesperson’s superior information about customers’ valuations will invariably make price delegation profitable for the firm. The empirical evidence, however, reveals that firms that grant full pricing authority generate lower profits than firms that limit pricing authority. Given this state of affairs, the author develops and analyzes a formal model that examines the optimality of delegating pricing authority to the sales force. The model preserves the notion of superior information assumed in the literature but considers as well a negative feature of much concern to practitioners, namely, the suboptimal substitution of selling effort by price discounting. The model reveals that providing the salesperson with full pricing authority is not always optimal. Specifically, in some environments, it is appropriate to limit pricing authority because this decision forces the salesperson to target high-valuation customers. In addition, the model predicts that the commission rate offered to the salesperson should be higher when pricing authority is limited. The author concludes by summarizing the context, calculus, and implications of the model with a view to assisting managers charged with the price-delegation decision

Clipping Coupons: Redemption of Offers with Forward-Looking Consumers

Consumer redemption behavior pertaining to coupons, gift certificates, product sampling, rebates, and the like, has been the focus of much scholarly inquiry and the extant literature has documented two noteworthy empirical regularities - a bump in redemptions close to offer expiry and greater redemption with shorter redemption windows. In the extant work, these phenomena have been explained by invoking myopic consumers. Against this backdrop, we ask a simple question: can these phenomena survive if we assume rational, forward-looking consumers? Accordingly, we develop a model consisting exclusively of forward-looking consumers and incorporate two constructs highlighted in the literature - forgetting and stochastic redemption costs. We derive consumers' period-by-period redemption rule and subsequently illustrate the emergence of the two aforementioned empirical regularities

Free cash flow, agency costs, and the affordability method of advertising budgeting

This is the published version. Copyright 2002 by the American Marketing Association.The allocation of excess cash has long been recognized in the finance literature as an important aspect of the basic agency conflict between managers and owners. In the advertising budgeting context, marketing scholars report that firms possessing high levels of cash tend to spend more on advertising than what seems necessary or desirable. Indeed, this positive link between excess cash and advertising expenditures constitutes a part of what is commonly referred to as the affordability method of advertising budgeting. Surprisingly, there has been little research that attempts to view this association as a manifestation of agency costs. Therefore, this article examines whether agency costs, as measured by managerial ownership, moderate the relationship between excess cash and advertising expenditures. On the basis of received theory, the authors conceptualize that agency costs will first decrease, then increase, and then decrease again with the level of managerial ownership

Author Order and Research Quality

Southern Economic Journal © 2005 Southern Economic AssociationWe observe a great deal of heterogeneity in the manner in which author orderings are assigned both across and within academic markets. To better understand this phenomenon, we develop and analyze a stochastic model of author orderings. In our model, authors work equally hard to obtain priority in listings but final contributions are stochastic. Further, research outlets differ in their quality hurdles. In this setting, our simulation results are consistent with two empirical regularities. First, we find that the rate of alphabetization increases with the stringency with which papers are accepted for publication. Second, conditional on clearing the publication hurdle, quality increases with alphabetization. These findings arise because increases in the publication hurdle make it more likely that authors will exceed this threshold only when both contribute a high amount. This, in turn, leads to roughly equal contributions (alphabetization) and also generates a positive correlation between alphabetization and quality

Why Do Service Providers Employ Their Face-Shots in Marketing Communications?

From billboards to newspapers, from TV to Yellow Pages, business owners of retail establishments and services frequently include their face-shots in their advertising to the public. Clearly, their face-shot takes up space which, in turn, costs money. Thus, an important question to ask is: are advertisers who include their face-shots receiving a benefit that justifies their cost? Accordingly, in this research, we develop the notion that the utilization of the service providers face is able to credibly signal product quality via a bonding mechanism. In particular, we examine if the signaling ability of the face-shot is higher for credence goods, services that typically exhibit higher demand for quality signals. In addition, we also investigate the ability of the face-shot to serve as a logo for the service. Analyzing a dataset containing 3299 yellow pages advertisements culled from seven city-pairs, we find support for the bonding hypothesis but not for the logo hypotheses. Implications for the design of marketing communications are also discussed

Essays on the management and compensation of the salesforce

This dissertation focuses on topics within the salesforce area and is written in the form of three essays. Essay one examines the optimal allocation of resources in the firm-salesperson system and considers two applications. In the first, we address the problem of determining the optimal level of resource allocation when its productivity is private information. We demonstrate that it is feasible to design a menu of contracts such that the salesperson will utilize his superior information to self-select into the contract desired by the firm. In the second application, the focus of our research is to provide insights and prescriptions regarding the amount of advertising resources and sales incentives that should be employed over the different stages of the product life cycle of an industrial product. The second essay empirically examines the factors which affect salesforce retention. We examine if the existence of a bonus component in the sales compensation structure can enhance salesforce retention. We also study the impact of total sales compensation on salesforce turnover. We find that bonus payments do enhance salesforce retention among firms whose total compensation is above industry average but not among firms whose total compensation is below industry average. Further, we examine the role of training, non-financial motivational tools, age, education, and length of the selling cycle on salesforce turnover. In the third essay, we report findings from tests of hypotheses pertaining to the selection and structure of salesforce control systems. We find that uncertainty in the selling process, length of the selling cycle, the need for prospecting activities, the amount of sales support expenses, and knowledge of the effort-sales relationship all positively influence a firm towards the use of behavior-based control systems. We conclude this essay with a few managerial implications and directions for future research

Monitoring and Incentives in Sales Organizations: An Agency-Theoretic Perspective

Our primary objective in this paper is to analyze a framework that simultaneously examines the role of monitoring and incentives in the design of sales force control systems. Previous research has focused exclusively on the role of incentives in directing salesforce effort. We build on the structure provided by the past work and analyze an agency-thoeretic model in which a salesperson generates wealth for the firm by expending effort across two dimensions, namely, internal and external. We assume that effort in the internal dimension can be monitored relatively cheaply whereas effort in the external dimension can be monitored only at infinite cost. We then analyze the following two scenarios: (i) a pure incentives world wherein both effort dimensions are governed through the use of incentive pay, and (ii) a monitoring and incentives world wherein the internal dimension is monitored and the external dimension is governed through the use of incentive pay. In addition to modeling the notion of partial monitoring in this manner, we also explicitly allow the firm to choose the level of risk aversion desired in its salesperson. Of course, salespeople who are relatively risk-tolerant command higher reservation wages; consequently, such salespeople are likely to be valuable only to those firms that emphasize incentive pay in their control systems. Our analysis across the two scenarios helps us to demonstrate the implications and value of introducing monitoring into the control structure. Specifically, we find that monitoring allows the firm to decrease the weight placed on incentives and hire a relatively risk-averse salesperson from the salesforce labor market. These actions, in turn, permit the firm to reduce the risk premium and the reservation wage offered to the salesperson. In direct contrast to these monetary savings, however, we find that an adverse side effect of monitoring is that it induces salespeople to overemphasize the effort devoted to the monitored dimension while underemphasizing the effort devoted to the nonmonitored dimension. This adverse effect of monitoring notwithstanding, we find that the overall benefit of increased monitoring is that it allows the firm to the amount of total compensation paid to the salesperson. These analytical findings are consistent with the prescriptions found in the popular business press where it is often stated that compensation plans that emphasize incentive pay are characterized by independence in managing activities (lack of monitoring) as well as high income potential. These findings are also consistent with the popular wisdom that incentive-laden compensation plans are generally more appropriate for individuals who are risk takers and entrepreneurial in nature. We also delineate the conditions where monitoring can improve on the profits obtained in a pure incentives world. Specifically, we find that monitoring can prove to be most valuable when the importance of internal activities is high and the level of incentives is low. Finally, we conclude by conducting a sensitivity analysis to examine the robustness of our results to the specifications we utilize in our modeling efforts. Overall, we view the main contribution of our research efforts as one of explicitly delineating the tradeoffs associated with the use of monitoring and incentives in the design of salesforce control systems. As such, our paper should be of interest to academics and practitioners interested in the design of salesforce control systems.Monitoring, Salesforce compensation, Salesforce control, Agency-theory

Predicting Amazon’s Choice of HQ2 From Social Media: Evidence From the Tweets of Informed Sources

Social media chatter, and in particular, Twitter, is increasingly gaining popularity to generate forecasts in a wide variety of domains. We build on this body of work and set out to predict Amazon’s HQ2 choice by analyzing the tweets of officials at the 20 finalist cities. Consistent with the affect infusion model (AIM) from the psychology literature, we conceptualize that the positive affect generated in successful ongoing negotiations will lead to a congruent positive spill over even in unrelated tweets. Analyzing tweet series that include a corpus of 50,238 tweets and incorporating dynamic time warping measures, our forecasting method correctly predicts Northern Virginia, favors it over two proximal cities, Washington D.C. and Baltimore, and ranks New York City 11 th out of 20 cities. These forecasts match those of the betting markets. Our research thus offers an alternate and novel approach to extracting the signal from the noise in social media

Price Delegation in Sales Organizations: An Empirical Investigation

The allocation of decision rights is an integral component of designing organizational architecture. Economists have long understood the importance of co-locating decision rights with the knowledge that is valuable to those decisions. Following this prescription, marketing scholars have developed strong theoretical arguments in favor of delegating pricing authority to the sales force. Empirical work, however, reveals a significant number of sales organizations yielding only minimal authority to their salespeople. Given this divergence between theory and practice, we develop and empirically test two mitigating factors that could potentially explain why firms restrict pricing authority. We test our hypotheses on a sample of 222 German sales organizations and find that the data are generally consistent with our conceptualization

A joint optimal model of pricing, rebate value, and redemption hassle

Although rebates are widely employed, redemption is not effort free, and the hassle of redemption is an important decision variable for buyers. The current research examines the impact of hassle cost on optimal rebate strategy. An analytical model is developed that simultaneously determines the supply chain's optimal price, level of rebate value, and rebate-redemption hassle, while allowing for slippage (as consumers may forget to redeem a rebate), in both a centralized and decentralized supply chain. Results show that the level of rebate-redemption hassle plays a key role in segmenting the market into rebate and nonrebate purchasers. Although in a centralized supply chain redemption hassle should increase in a convex manner with valuations, no such restrictions exist in a decentralized supply chain. This difference is due to double marginalization, which results in higher retail prices in the decentralized supply chain. Rebates can be used to reduce this double marginalization. Furthermore, a manufacturer in a decentralized supply should offer a more attractive rebate than in a centralized supply chain. We also find that changes in the supply chain's optimal price and rebate strategy are nonlinear and nonmonotonic in both production cost and elasticity for consumers’ disutility for hassle. Finally, findings are all supported by results from numerical analyses. Overall, our work contributes theoretically and managerially to the study of rebates by jointly considering price, rebate value, and redemption hassle