First, in the survey on salespeople we asked the question “Do you feel the product return rate is higher in some product categories/departments than in others?” 35 (88%) of 40 respondents answered “yes” to this question and then evaluated the return rate across product categories on a 5-point Likert scale (1: very low, 5: very high). We also collected two additional measurements of sales advising effectiveness.
Indeed, abundant evidence has demonstrated the positive relationship between consumer satisfaction and outcome measures of interest to the firm, such as repurchase intentions, loyalty, and profitability (Anderson and Sullivan 1993 Boulding et al. Conceptually, this approach to modeling the reputation effect as directly affecting a firm’s profit function views the reputation effect as related to the retailer’s future profit, and views a reputation loss as caused by dissatisfied customers who attribute the purchase of a misfit product to the lack of sales advising and spend less at the retailer in future shopping occasions. Under this specification, a reduced salesperson effort (a smaller y) leads to a loss in firm profit, which is similar to the impact of reputation effect in our model (i.e., a reputation loss of r(1 − α) in firm profit when the salesperson does not advise customers). ( 2003), the firm’s profit function is specified as π = ( p − c) x − s( x, y) + 𝜃 y, where p is price, c is production cost, x is demand, s is compensation paid to the salesperson, and 𝜃 y is future profit related to the stock of consumer satisfaction, which increases with the salesperson’s effort. Our parsimonious approach to modeling reputation effect follows existing literature (e.g., Hauser and Wernerfect 1994 Kalra et al. ( 2014) examines how different components of a sales compensation plan, including salary, commissions, and bonuses on achieving annual quotas, affect the sales outcome of the direct sales force with a Fortune 500 firm that sells office durable goods. Misra and Nair ( 2011) examines dynamic effects of quota-compensation contracts on salesforce output with a Fortran 500 contact lens manufacturer. Recently, the principal-agent model has been adopted in structural empirical analysis of sales force compensation. Lal and Staelin ( 1986) examines the optimal commission schedule when the sales outcome is a function of the sales agent’s effort and selling capability, but the principal only observes the sales outcome, not the sales effort or sales agent’s selling capability. ( 1985) examines the optimal commission schedule when the sales outcome is a function of the sales agent’s effort and market uncertainty but the principal only observes the sales outcome, not the sales effort or market uncertainties. Our study reveals the interesting theoretical insight that the incentives of a big retailer and upstream manufacturers to motivate sales advising reside in their incentives to battle for a more favorable channel status.Ī majority of the salesforce literature models the principal-agent relationship between a monopolistic seller and its sales representative with more information about aggregate market demand and examines how sales commissions should be devised to eliminate the moral hazard problem in such a relationship (see Coughlan and Sen 1989 Prendergast 1999 for reviews). Otherwise, salesperson advising hurts retailer profit and the big retailer benefits from blocking manufacturer SPIFF programs.
Our analysis shows that motivating the salesperson to advise customers is profitable for the retailer only if the such advising has moderate effectiveness in matching consumers and suitable products, and only in this case would the retailer collaborate on manufacturer SPIFF programs. We scrutinize a big retailer’s decision to maximize its profit through managing its channel interactions with upstream manufacturers offering horizontally differentiated products, customers uncertain about true fits with competing products, and its salesperson who can match customers with suitable products through offering purchase advice. In this study, we investigate a big retailer’s incentive to block manufacturer SPIFF programs, which has the consequence of demotivating salespeople from advising customers, from the perspective of vertical channel interactions. Interestingly, big retailers vary in their policies regarding whether to allow their salespeople to receive manufacturer SPIFF (Sales Person Incentive Funding Formula) payments, which motivate salespeople advising at no cost of the retailer. Big retailers that carry a large assortment of products rely on knowledgeable salespeople to provide purchase advice to customers and match customers with suitable products.
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