Customer Acquisition in Business Markets: Managing Conflicts at the Marketing-Sales Interface

Abstract

In business markets, firms rely on sequential processes, or so called “funnels” to acquire new customers. During the initial stage, firms use marketing activities such as tradeshows, print advertising, digital advertising, social media, blogs, webinars to generate leads, and then resort to follow-up sales activities such as emails, phone calls, video meetings, in-person meetings to convert these leads into revenue generating customers. The former activity is typically handled by a group referred to as the “marketing group” and the latter handled by the “sales group,” and coordinating these two activities is critical to success. In many organizations, marketing people engaged in generating leads lament that sales disregards the leads they generate, while sales questions the revenue potential of these leads. To address such conflicts and their profit implications, we consider the following questions: How should firms coordinate lead generation and lead conversion efficiently? Should firms integrate marketing and sales into one group or should these be separate groups? Should marketers’ compensation depend on the leads they produce, the revenue the sales rep generate from these leads, or both? Should sales reps’ incentives depend on sales only, or should the volume of leads inform their compensation? We address these questions using principal-agent models where risk-averse agents could receive incentives based on leads, sales, or both. We establish that when there is no difference regarding leads’ revenue potentials, i.e., leads are homogeneous, optimal incentives prevent efficiency losses due to decentralization, i.e., the centralized and decentralized funnel structures yield the same equilibrium profits. However, when the revenue potentials of leads differ, i.e., leads are heterogeneous, we find that a centralized funnel structure could be suboptimal, despite the obvious a priori benefits of centralization. We show that the decentralized funnel structure dominates the centralized structure when uncertainty at the second (lead conversion) stage of the funnel is low, relatively to uncertainty at the first (lead generation) stage.

Keywords: Business Markets, Marketing-Sales Interface, Conflicts, Agency Theory, Sequential Agency Model.