The Profitability of Revenue-Based Quotas under Price Negotiation

Management Science

68 Pages Posted: 19 Jul 2017 Last revised: 2 Mar 2021

See all articles by Pranav Jindal

Pranav Jindal

UNC Kenan-Flagler Business School

Peter Newberry

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Date Written: November 25, 2020

Abstract

We study how the presence of a monthly revenue-based quota impacts a retailer's profits when prices are negotiated by a salesperson. Utilizing transaction level data for refrigerators, we first provide reduced form evidence that prices are impacted by the quota: the negotiated discounts are approximately 3.8% higher if the salesperson is 10% closer to reaching the quota in the final week of the month. Guided by this result, we specify and estimate a demand model that identifies the impact of the quota through two forces - the effort salespeople expend in order to sell the product and their bargaining position. Results indicate that, as salespeople get closer to reaching their quota, their effort increases regardless of the week and their bargaining position weakens (i.e., they offer lower prices), but only in the final week of the month. We use these results to analyze the impact of the quota and find that holding salespeoples' total compensation fixed, eliminating quota results in 8% lower profit for the retailer. This decrease stems primarily from the reduction in effort which outweighs any benefit from strengthening the salespeoples' bargaining position. The change in profit is economically meaningful as eliminating both price negotiation (i.e., moving to fixed pricing) and the quota result in an up to 36% reduction in profit.

Keywords: salespeople, bargaining, compensation structure, quota, price delegation, pricing

JEL Classification: D4, C7, L1

Suggested Citation

Jindal, Pranav and Newberry, Peter, The Profitability of Revenue-Based Quotas under Price Negotiation (November 25, 2020). Management Science, Available at SSRN: https://ssrn.com/abstract=3001846 or http://dx.doi.org/10.2139/ssrn.3001846

Pranav Jindal (Contact Author)

UNC Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599
United States

Peter Newberry

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

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