How to Deal with Unprofitable Customers? A Salesforce Compensation Perspective

40 Pages Posted: 12 Jun 2013

See all articles by Sumitro Banerjee

Sumitro Banerjee

Grenoble Ecole de Management

Alex Thevaranjan

Syracuse University - School of Management

Date Written: June 7, 2013

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.

Keywords: salesforce compensation, target markets, adverse selection, screening, pooling, principal-agent models, agency theory

Suggested Citation

Banerjee, Sumitro and Thevaranjan, Alex, How to Deal with Unprofitable Customers? A Salesforce Compensation Perspective (June 7, 2013). ESMT Working Paper No. 13-05. Available at SSRN: https://ssrn.com/abstract=2277497 or http://dx.doi.org/10.2139/ssrn.2277497

Sumitro Banerjee (Contact Author)

Grenoble Ecole de Management ( email )

12 Rue Pierre Semard
Grenoble, Cedex 01 38000
France

Alex Thevaranjan

Syracuse University - School of Management ( email )

Department of Accounting
900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States
315-443-3355 (Phone)
315-443-5457 (Fax)

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