Abstract
AbstractThe 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.
Highlights
The allocation of decision rights is an integral component of designing organizational architecture (Brickley, Smith, and Zimmerman 2001)
Despite these powerful theoretical arguments in favor of delegating pricing authority to the sales force, empirical work reveals a majority of sales organizations yielding little or no pricing authority to their salespeople
Managerial monitoring can ensure that the salesperson does not misuse pricing authority. This discussion involving the control system leads to our second set of hypotheses: H2a: The utilization of incentives based on gross margins in the control system will increase the likelihood of delegating pricing authority to the sales force
Summary
The allocation of decision rights is an integral component of designing organizational architecture (Brickley, Smith, and Zimmerman 2001). Weinberg (1975) shows that salespeople, who are paid a commission based on realized gross margin and who are given control over price, will set prices so as to maximize simultaneously their own income and the company’s profits Despite these powerful theoretical arguments in favor of delegating pricing authority to the sales force, empirical work reveals a majority of sales organizations yielding little or no pricing authority to their salespeople. The work by Joseph (2001) is germane in this connection His model reveals that salespeople have a tendency to make trade-offs between effort and price discounting that are inconsistent with the profit objective of the firm. Only a relatively lower percentage of firms, namely 11%, follow the theoretical prescription of providing their salespeople with full pricing authority In these cases, salespeople are given the freedom to set any price above marginal cost. We summarize our contributions and conclude by outlining directions for future research
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