High-value Customers Research Articles

On the Optimality of Delegating Pricing Authority to the Sales Force

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.

A customer‐service worker relationship model

True loyalty, defined by a high relative attitude in addition to high repeat purchase, is an extremely valuable asset to the service firm – as the customer’s search motivation for competitive alternatives is reduced, he/she shows an immunity to the pull of competition and provides favourable word of mouth. A conceptual model presents the likely influence of customer relationships with service workers on the development of true customer loyalty to the service firm. It is suggested that strong customer relationships with a firm’s service personnel lead to true customer loyalty to the service firm, as positive attitudes towards service staff are transferred directly to the firm. In situations where a strong relationship develops between the customer and only one particular service worker, true loyalty to the service firm will be an outcome of high personal loyalty and therefore be dependent on the continued availability of the service worker. To assist managers in encouraging relationship development between high value customers and their service personnel, potential antecedents of relationship strength have been identified. These include: the amount of perceived benefits/rewards the customer receives from the service worker, the age of their relationship, the service contact intensity, the customer’s perceived risk in acquiring the service, the customer’s interpersonal orientation and the service worker’s customer orientation as perceived by the customer.

Intertemporal Mixed Bundling and Buying Frenzies

By initially selling goods only in bundles and subsequently selling unsold units individually, a multiproduct seller can create a buying frenzy in which his profit is higher than it would be if he sold all units individually at their market clearing prices. In this frenzy, high-valuation customers buy a bundle because they expect quantity rationing when units are sold individually. Their purchases reduce the quantity to be sold individually, causing the shortages that result in rationing. The bundle's price exceeds the sum of the individual prices, a fact observed in markets for rock concert tickets.

Durable Goods Monopoly with Limited Choice of Commitment Strategy: When Should the Monopolist Precommit?

Consider a firm (a monopolist) offering a unique product to a fixed number of potential customers. Suppose that no consumer desires more than one unit of the good, within a given period or across periods; that is, there is no value to repeat purchases. In addition, suppose that customers vary with respect to their initial reservation prices, which decline over time. A natural interpretation is that the monopolist is selling a good that is durable. Alternatively, the firm is providing an entertainment or fashion good. Consumers may place a premium on obtaining the product quickly, before it becomes less useful, less stylish, or less novel. Coase [7] conjectured that this firm's ability to extract surplus is limited because the firm has to compete with itself across time periods. High-valuation customers would be unwilling to pay a high initial price because they would anticipate that over time, the firm will be reducing the price in order to sell to lower-valuation customers. Subsequent literature formalizes this as a time inconsistency problem faced by a monopolist unable to make intertemporal commitments.' A separate strand of the literature proceeds from the polar assumption that the monopolist can precommit to any multiperiod pricing strategy. Comparison to Coase's monopolist is simple: higher profits are obtainable under precommitment because more surplus is extracted from high valuation customers. An important proposition due to Stokey [22] is that it will be optimal for the monopolist to precommit to a declining intertemporal price schedule if consumers with higher initial valuations have a higher rate of time preference.2 Otherwise, the optimal strategy is to hold price constant at the static monopoly level and to sell no more than the static monopoly quantity.3