Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96588
Authors: 
Banerjee, Sumitro
Thevaranjan, Alex P.
Year of Publication: 
2013
Series/Report no.: 
ESMT Working Paper 13-05
Abstract: 
We show that prices and incentives recommended by the salesforce literature when targeting a profitable segment can attract unprofitable customers, particularly when salespeople have high productivity and low risk (i.e., risk aversion times uncertainty). Therefore, when customers are unidentifiable, unprofitable customers may also enter the market creating an adverse selection problem for the salespeople. By solving the moral hazard and adverse selection problems simultaneously, we show that firms can prevent the entry of unprofitable customers by “screening”. Although, screening generally requires a higher price to dissuade unprofitable customers, when firms hire salespeople, however, it requires lowering of both selling effort and the price. It also leads to a “sales trap” restricting the sales to the profitable segment to a fixed level. Screening, therefore, lowers firm profits obtained from the profitable customers. When salespeople are highly productive and risk tolerant, this drop in profit can be so high that “accommodating” unprofitable customers becomes the preferred strategy. Furthermore, the adverse selection problem intensifies and accommodation becomes more preferable when there is no moral hazard between firm and the salesperson. Behavior of unprofitable customers, therefore, must be an important consideration when targeting high-value customers and designing salesforce compensation.
Subjects: 
Salesforce compensation
target markets
adverse selection
screening
pooling
principal-agent models
agency theory
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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