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

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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.

Introduction

Industrial goods, especially if they are tailor-made, regularly require sales negotiation processes, in which prices are not set, but rather negotiated individually (e.g., Angelmar and Stern, 1978, Bonoma and Johnston, 1978, Boyle, 1996). To increase effectiveness and efficiency, industrial companies often delegate pricing authority to salespeople, who have better knowledge of customers and can better assess customers' willingness to pay (Bhardwaj, 2001, Lal, 1986, Le Bona and Merunka, 2006). However, empirical findings reveal that salespeople with pricing authority might offer too many price concessions to close a sale because they tend to “always play it safe to get the order” (Dolan & Simon, 1996, p. 313; see also Joseph, 2001, Langerak, 2001, Stephenson et al., 1979).

Plinke (1985) considers whether negotiated prices might depend on the cost information that sales reps receive. In a laboratory experiment, he finds that highly aggregated cost information (i.e., no distinction of direct costs and overhead expenses) leads to higher selling prices than does disaggregated cost information. This result contradicts normative pricing theory, which states that in a situation of idle capacity, direct costs constitute the lower price limit. As a result, a sales rep needs to know the exact amount of direct costs to fix the lower price limit. However, from the sales manager's perspective, disclosing direct costs might be unfavorable, as it could evoke a strong gross margin orientation among salespeople and minimize their efforts to cover overhead expenses (Stephenson et al., 1979). For suppliers in industrial markets, systemic problems would result from disclosing direct costs, as many of these markets contain complex products and processes that induce considerable overhead expenses (e.g., Kaplan & Cooper, 1998). Sales managers therefore might provide salespeople with rough cost information that lacks an explicit breakdown into direct costs and overhead expenses.

However, to the best of our knowledge, Plinke's (1985) idea has not been discussed further; he only analyzes the relationship between a stimulus (S) (cost information) and a response (R) (sales price) without considering the organism (O) variables that might mediate this relationship. As Luft, Haka, and Ballou (1998, p. 111) assert, the “impact of accounting information characteristics on bargaining behavior has received little research attention.”

The organism component entails the “complex, multifaceted aspects of human behavior” (Bagozzi, 1986, p. 46); excluding them from the analysis eliminates information about how a stimulus produces responses and thus provides an incomplete picture of underlying relationships. Neale and Northcraft (1991) consider it insufficient to study static context variables (e.g., cost information) and their influence on negotiation outcomes; instead, they demand investigations into the “black box” between these variables. White, Valley, Bazerman, Neale, and Peck (1994, p. 441) similarly appeal for more comprehensive models, asserting that “there is still more behavioral research to be done on what factors simultaneously influence price in negotiations.”

We attempt to fill this research gap by developing a more comprehensive S–O–R model in which we analyze how the S–R effect evolves through two distinct routes. First, in our model of decentralized price negotiations, we integrate some important cognitive references that negotiators may consider, including the reservation price, the target price, and the first bid. Previous studies support the general relevance of these cognitive references in negotiations (e.g., White et al., 1994). Second, we analyze negotiators' actual behaviors during negotiations and their dependence on the extent of cost information that the negotiators possess. To measure negotiation behavior, we transform qualitative data (negotiation protocols) into quantitative data using a content analytic approach. We thus follow Weingart and Olekalns (2004, p. 154), who assert: “Much of this [previous] research focuses on the strategy–outcome link, and very little addresses the role of context in this relationship. Additional research in each domain is needed to continue to pry open the black box of the negotiation process.”

In addition to this analysis of the black box, we consider electronically mediated negotiations, whereas Plinke (1985) employs a face-to-face negotiation setting. Electronically mediated negotiations systematically have been gaining in importance in the past two decades as technical innovations continue to facilitate complex transactions that require negotiation (Rangaswamy & Shell, 1997). In this context, newly developed electronic negotiation systems can enable more economically productive negotiation processes (Kersten and Noronha, 1999, Rangaswamy and Shell, 1997). However, electronic negotiations also may change the way people interact, as electronic media generally cannot effectively transmit personal cues (e.g., Tan, Wei, Watson, & Walczuch, 1998). We thus investigate whether Plinke's (1985) findings, derived in a face-to-face setting, persist in electronic negotiations.

Our study shows that the level of cost information shared with salespeople affects cognitive references, negotiation behavior, and negotiation outcomes (i.e., sales price) of the salespeople. Specifically, the provision of only approximate cost information instead of detailed information regarding the breakdown into direct costs and overhead expenses leads to a higher reservation price, which aligns with a higher target price and, ultimately, a higher first bid. We find a natural hierarchy in these cognitive references, which ensures a “transmission” of effects from the negotiation context to the negotiation outcome. Furthermore, the results show that rough cost information changes the salesperson's negotiation behavior, such as the greater use of attacking and the lesser use of coordinating negotiation strategies. Both groups of variables—higher reference prices and increased attacking (lesser coordinating) behavior—eventually result in higher sales prices and thus higher profits for the seller. These results offer sales managers some valuable insights into the black box of negotiations, which should be particularly helpful for guiding sales reps in situations where they have full pricing authority.

The remainder of this paper is structured as follows. First, we describe the conceptual framework that serves as the basis for our analysis. Second, we present the hypotheses. Third, we describe the data collection and methods. Fourth, our model is tested empirically. Fifth, we close with a discussion and suggestions for further research.

Section snippets

Theoretical model of negotiation

To integrate findings from behavioral research on two-party bargaining, Neale and Northcraft (1991) propose a behavioral negotiation concept that distinguishes (static) context variables, (dynamic) interaction variables, and outcome variables. Whereas context variables determine the negotiation setting, dynamic variables (the “black box”) refer to negotiators' cognitive (e.g., planning, information processing) and interaction processes (communication and influence tactics). According to this

Hypotheses development

We organize our hypotheses into blocks related to different facets of Neale and Northcraft's (1991) conceptual model. We differentiate among these hypotheses with regard to the links (1) between context variables and dynamic variables, (2) within dynamic variables, (3) between dynamic variables and negotiation outcomes, and (4) between outcome measures. We illustrate the research model, including the hypothesized links we later develop, in Fig. 1. The model reflects the seller's perspective, as

Sample

In the first step (Study 1), we recruited 254 participants consisting of graduate students in business administration, most in their final year of education. Student samples provide relatively high homogeneity (Petty & Cacioppo, 1996), which helps to isolate the effect(s) of interest. Furthermore, in bargaining games, students regularly do not perform differently than do practitioners or professionals (e.g., Camerer, 2003, Neale and Northcraft, 1986, Northcraft and Neale, 1987, Roth, 1995).

Study 1—student sample

The final survey data consist of 119 dyads after having excluded 8 dyads from the analysis: 4 that suffered from missing data from at least one party and 4 that ended in an impasse (2 from each cost information condition). Because the impasse rate is very low and affects both cost information conditions equally, we believe these exclusions are acceptable. In Table 4, we display the means and standard deviations of the sellers' cognitive references, negotiation strategies, and outcome measures, as

Discussion

Keeping information from salespeople seems to contradict normative theory; more information should empower salespeople to make better decisions. However, with more information salespeople may give in to their myopic tendency to choose the path of least resistance and grant higher discounts rather than expending effort in the negotiation. In doing so, they also can increase their confidence in closing the deal.

With our model of decentralized price negotiations, we theoretically contribute to

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