Open Negotiation: The Back-End Benefits of Salespeople’s Transparency in the Front End

Link: https://doi.org/10.1177/0022243720951153

Over 94% of business buyers research extensively on the internet for competitive product and pricing comparisons prior to contacting a potential vendor, according to an Accenture study in 2014. For example, automobile buyers find average prices paid by other consumers and can even access the dealership cost for any specific model from websites such as Edmunds.com and leverage these data to get a good deal.

Negotiations today are less likely to be characterized by information asymmetry—the notion that buyers are less informed than sellers—due to the amount of information available to buyers. However, the distribution of information remains largely skewed toward the sellers when it comes to the “back end” of the deals, or the so-called “aftermarket”. For instance, once an automobile buyer agrees on a
price and enters the finance and insurance phase of the purchase, they have little information about the quality and pricing of various options presented to them, such as addon products, different service or insurance options, or the most affordable loan they are eligible for.

U.S. firms and consumers spend about a trillion dollars annually on aftermarkets, which constitute the bulk of sellers’ profits in many industries. Facing eroding margins on the “front end” of the deals due to well-informed customers, many firms now see the aftermarket as the main driver of their profits.

In this paper, authors examine the effect of a particular negotiation strategy practiced in the front end on customer profitability in the back end of the deal. The authors argue that increasing information symmetry in the front end has created a unique opportunity for marketers to gain customers’ trust. Drawing on prior research, the study theorizes that disclosing seller’s cost at the beginning of the negotiation builds trust, particularly because the well-prepared customer can verify the truthfulness of the disclosed information. Subsequently, the earned trust will pay handsomely in the back end of the deal, where it is much needed due to information asymmetry.

A field study showed that customers to whom the cost of a car was revealed at the beginning of the negotiation did not significantly pay less in the front end but on average contributed about$1,400 more to back-end profits than those to whom the cost was either not disclosed or disclosed later on. The authors supplemented the observational study with experiments that allowed them to test the role of trust, prior customer information, and verifiability while ruling out alternative explanations.

The findings provide the following key insights for Chief Sales Officers:

• Most firms incentivize their salespeople on short-term negotiation outcomes such as sales margin or number of units sold. According to the findings, companies might need to consider the entirety of the front end and backend when evaluating their salespeople’s performance.
• Empirical evidence reveals that many firms conceive their product sales and aftermarket sales as two detached businesses. This study calls for a better evaluation of the interdependencies between the front end and the back end and fostering cooperation between various customer touchpoints.
• The results suggest a different look at traditional bargaining strategies. Facing knowledgeable customers, firms can modify current sales force training strategies to include trust-building behaviors such as cost disclosure.