The Value of Long-term Relationships when Selling to Informal Retailers - Evidence from India
32 Pages Posted: 26 Feb 2021 Last revised: 31 Mar 2021
Date Written: February 25, 2021
Attempts to distribute durable, life-improving goods to customers at the Base of the Pyramid (BoP) -- the more than three billion customers who live on less than US $2.50/day -- through traditional supply chains or e-commerce have largely failed to succeed at scale. Small informal retailers are the primary source of retail purchases for BoP customers, and are often embedded within communities, where local and long-term relationships are particularly important to business transactions. One hypothesis for why companies have struggled to scale rural last-mile distribution is that such relationships are not sufficiently recognized by traditional distributors. We analyze panel data from a distributor selling to 331 formal retailers and 493 informal retailers in India from April 2016-December 2019 to study the role of long-term relationships in selling durable goods to informal retailers. We leverage a staged natural experiment to study the effect of a sales agent reallocation on the subsequent orders placed by informal and formal retailers. We find that formal retailers experience an immediate performance decrease of 35.7-53.8% relative to expected order value and then recover within three sales cycles of a sales agent change, while informal retailers experience a corresponding performance decrease of 70.4-81.9%, and do not experience sustained recovery within five sales cycles. This indicates that business relationships, and disruptions to these relationships, are particularly important when selling to retailers in informal markets.
Keywords: Base of the Pyramid (BoP), causal inference, panel data, difference-in-differences
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