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Buyers more informed than ever before, thanks to the information technology available today. They can research prices and compare products before ever interacting with a salesperson. As such, buyers and sellers now have a greater level of symmetry in what the authors describe as the “front end” (i.e., initial product purchase) of negotiations. However, on the “back end” (i.e., aftermarket product purchase), information asymmetry remains, and the seller still maintains the advantage. While the back-end marketplace has become an important driver of sales revenue for firms, a surprisingly scant amount of literature addresses this topic.
Yashar Atefi, Michael Ahearne, Sebastian Hohenberg, Zachary Hall, and Florian Zettelmeyer explore the negotiation process at these different stages in their recently published article in the Journal of Marketing Research. Using an observational study and four supplemental experiments, they highlight how different negotiation strategies, such as price disclosure, early in negotiations can lead to higher profits on the back end. Trust between the buyer and seller is the key mediator in this relationship; early disclosure can signal the salesperson’s sincerity, leading to additional sales on the back end, whereas a late disclosure may be seen as a last-minute attempt to save the sale. This proactive information disclosure effect only holds when the customer can easily verify the information from the salesperson.
Most sales managers incentivize and evaluate their sales teams on front-end sales performance, and they consider the back end a different environment altogether. However, Atefi et al.’s findings show that managers should examine the entirety of the negotiation process, including both front- and back-end sales, to optimize the evaluation of their sales teams and allow for different opportunities for incentivization. These findings suggest that cooperation and communication between sales personnel who operate in both front- and back-end markets would help create more cohesive negotiation strategies.
While being transparent in the early stages of negotiation may attenuate profits derived from front-end transactions, the trust established by the salesperson resulting from this transparency will compensate for this differential in the sales of the higher-margin back-end products. Sales managers may modify their training programs to highlight the importance of building trust early on and how different cost disclosure strategies can accomplish that goal.
The authors answered a few questions about the impact of their research.
Q: Previous studies have studied front-end and back-end contexts separately. What inspired you to study both together and to examine the impact of front-end activities on the back end?
A: The way customers prepare before negotiations is revolutionized by the amount of information available online and across several resources and third-party websites. This has created a dramatic shift of power to customers when it comes to front-end negotiations. We realized that while the bulk of the literature is focused on front-end negotiations, this revolution in customer information is driving the front-end margins down. We also realized that in a lot of industries, the back-end (aftermarket) profits are the real driver of the overall firm profits. We learned that unlike the front end, information on these profitable back-end items are less accessible to the customer prior to the negotiation and customers are primarily focused on researching the main product (the front-end item). These factors together underlined the need for studying front-end negotiations in conjunction with the back-end outcomes.
Q: In addition to the automotive industry, in what other industries might this study be relevant?
A: We identified a lot of industries for which our findings have significant implications. These industries share two main characteristics: (a) the main product is purchased through negotiation with the seller, and (b) a significant portion of the overall profit comes from a sizable aftermarket. Several such industries include industrial machinery, original equipment, computer hardware, prepackaged software, household equipment, home improvement, and the auto industry.
Q: In terms of “early disclosure,” is the word “early” subjective? Could you specify how to view it in terms of a specific time frame (e.g., first 5/10/15 minutes) of negotiations?
A: In our studies, we coded the disclosure of the invoice price as “early” if the disclosure came with the opening offer. If the customer and the sales rep had to negotiate the opening offer for some time, and in some cases exchange multiple offers, before the invoice price was disclosed, we coded it as a “late disclosure.” When the salesperson discloses the cost later, after negotiating back and forth with the customer for some time, the disclosure would not have the strong effect that it has at the beginning, since the customer has already formed beliefs about the salesperson’s intentions. On the other hand, when the salesperson discloses the cost upfront at the beginning of the negotiation, the customer is more likely to perceive the salesperson’s disclosure as a genuine attempt to help the customer get a good deal.
Q: If this study is done in B2B settings, do you think there will be changes to your findings or implications? If yes, please elaborate.
A: Our findings are likely to generalize to B2B settings that share the two main characteristics we mentioned earlier: (a) the main product is purchased through negotiation with the seller, and (b) a significant portion of the overall profits comes from a sizable aftermarket. In fact, transparency in front-end negotiations is gaining a lot of attention also in B2B markets these days and anecdotal evidence confirm these expectations (e.g., see Sales Leadership Podcast: Episode 110: “Todd Caponi of Sales Melon—Becoming ‘Flawsome’ with Transparency in Sales”).
Q: Do you see any potential benefits or ramifications of transparency early in negotiations for markets that do not have large aftermarkets?
A: Yes, there are a few (but substantially smaller) benefits of open negotiation in these markets. For instance, findings of our Study 2 suggest that early cost disclosure enhances the likelihood of closing the initial deal at the front-end. Thus, even in markets with less significant aftermarkets, we would expect to see higher sales. In addition, early invoice price disclosure would still manifest in buyer trust (if the information was verifiable) in markets without large aftermarkets. However, the question is whether this boost in trust would lead to additional revenues (as future purchases would be less connected/structured in such markets).
Q: What are the key takeaways of this research study for marketing/sales managers and for those in academia)?
A: This investigation is the first that examines cost information disclosure under information symmetry in the front end and information asymmetry in the back end. In contrast, the existing bargaining literature widely concludes that negotiators rarely disclose information that would reveal their reservation price. We showed that such revelation, if made proactively at the beginning of the negotiation, can build trust, and pay off in the back end. For academics, the key implication of this research is to question and reexamine established negotiation paradigms in light of the changing customer behavior (e.g., information symmetry in the front-end).
Q: What are the key takeaways of this research for sellers, seller organizations, and buyers?
A: For sellers in today’s negotiation situations, customers come prepared to the sales negotiation and have the same knowledge as the sellers, including the seller’s costs and the true value of the product. This may sound frightening for sellers but is in fact a big chance: sellers can build trust through transparency (because the buyer can verify the information that you disclose).If sellers would like to implement open negotiation, they need to do it proactively, make sure that the buyer is in fact informed or can verify the accuracy of the disclosed information, and do it face-to-face either in (in-person or at least via a video call.
For seller organizations, updating incentive systems and integrating product and aftermarket sales can be beneficial. Most firms incentivize their salespeople on short-term negotiation outcomes such as sales margin. According to our findings, companies might need to consider both the front- and back end when evaluating their salespeople’s performance. Evidence reveals that many firms conceive their product sales and aftermarket sales as two detached businesses. Our findings call for a better evaluation of the interdependencies and fostering cooperation between various customer touch points.
For buyers, it is important for them to do their research before the negotiation. Our results show that informed buyers on average pay substantially lower prices on the front end of the deal and get into much more efficient and trustful relationships with their sellers. It is imperative for buyers to signal to sellers that they are informed (e.g., mention that they know about such websites). This could signal to the seller that information symmetry actually exists (and that transparency could pay off), facilitating mutually beneficial negotiation strategies, such as open negotiation.
Read the full article:
Yashar Atefi, Michael Ahearne, Sebastian Hohenberg, Zachary Hall, and Florian Zettelmeyer (2020), “Open Negotiation: The Back-End Benefits of Salespeople’s Transparency in the Front End,” Journal of Marketing Research, 57 (6), 1076–94.