Effectiveness of Price Delegation: Evidence from a Field Experiment

Delegating pricing decisions to the sales force, i.e., granting sales people the authority to decide the final price within certain bounds, is a critical managerial decision that can have significant effects on firm performance, sales force motivation, and customer engagement. While there exists theoretical and survey-based research on price delegation, there has been little empirical work on the real-world consequences of price delegation on the short-term and long-term outcomes of the firm. Leveraging a field experiment across two automobile dealerships in India conducted over five years involving 15,746 vehicle sales transactions and 68,692 vehicle service transactions, this study finds that price delegation has significantly positive effects onboth short-term (sales volume, gross profits) and long-term (market share, service volume and revenues) firm performance. Moreover, sales people respond positivelytothis change and improve their earnings, leading to a win-win situation for the firm and the sales people. Price delegation1 represents one of the major strategic decisions sales managers facetoday. Existing literature has mostly explored price delegation through analytical models (e.g., Mishra and Prasad 2005) and surveys (e.g., Frenzen et al. 2010). However, there is no consensus in academic research on the effectiveness of price delegation. Some theoretical works propose that granting salespeople the authoritytoset prices could prove advantageous in sales environments involving negotiations or bidding (Weinberg 1975) or in situations where sales people may possess private information unavailable to the firm (Lal 1986). In contrast, other works propose that price delegation may lead sales people to stop seeking high-value customers (e.g., Joseph 2001) or that the firm can design contracts to extract salespeople’s private information so that price delegation loses its advantages (Mishra and Prasad 2004). Similarly, despite the absence of field studies, the limited empirical work on price
delegation through surveys also paints a murky picture of the effectiveness of price delegation. While some researchers show that delegation positively impacts firm performance (Frenzen et al. 2010) or increases customer loyalty to the salesperson(Bonyuet 2019), other works find that it negatively affects sales and profit performance (Stephenson et al. 1979). Therefore, it is surprising that despite increasing deployment of price delegation byfirms in practice, empirical work on its effectiveness in the field is scarce in academicresearch. The current study addresses this dearth of research through an empirical investigation of the consequences of price delegation in the field. This research leverages data on 15,746 vehicle sales transactions and 68,692 vehicle service transactions from a field experiment conducted across two automobile dealerships inIndia over five years. While one of the dealerships continued centrally determined1 In price delegation, sales managers assign their salespeople the authority to price specific products or services within pre-defined price ranges. The price range over which pricing authority is delegated is chosen based on the estimated price elasticities of products or services, desired margins, and overall firm strategy. 2 Here, private information refers to any information relevant to the customer or the sale that the salesperson can access but not the firm. Usually, this is in the form of local information not known to individuals in the firm far removed from customer-level dynamics. pricing throughout the duration of the study, the other dealership started delegatingpricing authority to its salespeople from the 3
rd year onwards. Moreover, the price delegation scheme was integrated with the incentive scheme for salespeople3. Leveraging the field experiment, this study aims to address the following questions:
1. How does price delegation impact the firm’s sales volume?
2. How does price delegation affect the firm’s gross profits?
3. What impact does price delegation have on salespeople’s incentive earnings?4. What are the long-term effects of price delegation on the firm’s performance?By answering these questions, this study makes the following contributions to the
literature. First, while prior literature has explored price delegation through the lens of analytical models or surveys, this is the first study to empirically examine the effectiveness of price delegation in a field setting. Results indicate that introducing price delegation can have a significant positive impact on a firm’s sales performance(e.g., sales volume). Moreover, the results of this study indicate that strategic deployment of price delegation schemes can be effective in enhancing firm profits in low-margin industries (e.g., the Indian automobile industry). Second, this is the first work on the long-term consequences of delegating pricing authority to the sales force. Findings suggest that price delegation can increase the market share of the firmandboost customer re-engagement behavior (e.g., service volume and revenues) after theinitial purchase. Third, the study demonstrates that incentive-integrated price
delegation can be an effective tool to induce motivation in the sales force, which may positively impact their sales performance and incentive earnings. In fact, there is someevidence that salespeople’s customer follow-up efforts may have increased due to the introduction of price delegation.
Keywords: price delegation, sales force incentives, field experiment, difference-in- differences