Steering sales reps through cost information: An investigation into the black box of cognitive references and negotiation behavior

Abstract

As previous research demonstrates, few firms provide full pricing authority to their sales representatives (in the following: sales reps), and those sales representatives who do have full pricing authority may offer too many price concessions in their effort to close the sale. Thus, many sales managers lose the opportunity to use salespeople's superior customer knowledge to exploit their customers' willingness to pay. This study investigates how a company might steer sales reps during price negotiations while still giving them full pricing authority. The proposed instrument is simple to understand, easy to implement, fairly inexpensive, and effective; it posits that the kind of cost information that sales reps receive affects both their cognitive references and their negotiation behavior, which in turn affect negotiated prices. Electronically mediated negotiations in an experimental setting with 119 student dyads ( Study 1), as well as replications of the findings using 41 dyads of key account managers ( Study 2), indicate that undifferentiated cost information (full costs without information on direct costs) leads to higher reference prices (reservation price, target price, and first offer), as well as stronger attacking behavior and weaker coordinating behavior. These effects yield higher sales prices, and therefore more profit for the company. These results offer sales managers valuable insights into the “black box” of negotiations, which may be particularly helpful for steering sales reps in a situation in which they have full pricing authority.