The Hidden Costs of Different Sales Channels
25 Pages Posted: 18 Aug 2012
Date Written: August 17, 2012
In this study I examine how sales channel selection influences the type of customers attracted to a service and how the different types of customers are associated with indirect costs that are not captured by traditional accounting systems. The choice of a sales channel to target customers is a crucial choice for firms. Online selling is considered to be less costly compared to a traditional distribution via intermediaries. Based on the customer database of a large car insurance company I investigate the differences in customers between those targeted online as direct insurance and those targeted traditionally via an intermediary. I further analyze how customer differences are associated with differences in damage claims. Results show that customers of the same product vary significantly between sales channels. Similar to other products or services, the premium of an insurance is lower if bought online than an identical insurance that is bought via an intermediary. However, despite this lower price for an online insurance, online insurance customers are significantly more associated with higher damage claims and are the more riskier customers. Hence, even though direct costs of a sales and distribution network are saved by an online sales channel, the approached customers are more costly in the long run. This is not reflected in the price for the product (premium) and might lead to suboptimal decisions. Additional analysis provides some evidence of adverse selection between the different sales channels. That is, riskier customers are more likely to choose an online insurance compared to less riskier customers. This study contributes to the costing literature and underlines the importance of a sophisticated accounting system that incorporates long-term effects of decisions, such as the long-term costs and benefits of sales channels. The study also bridges the gap between accounting and marketing by analyzing cost effects of strategic marketing decisions.
Keywords: sales channel, hidden costs, customer profitability
JEL Classification: M41, M31
Suggested Citation: Suggested Citation