The Value of Long-term Relationships when Selling to Informal Retailers - Evidence from India

Abstract

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 struggled to succeed at scale.
One hypothesis for why distributors struggle to scale last-mile distribution is poor relationship management with small informal retailers, who are the primary source of retail purchases for BoP customers. These retailers are often embedded within communities where local and long-term relationships are essential to business transactions.
We provide empirical evidence for this hypothesis by analyzing panel data from a distributor selling to 319 formal retailers and 505 informal retailers in India from April 2016-December 2019. Specifically, we study the role of long-term relationships in selling durable goods to informal retailers, by leveraging a staged natural experiment that allows us to examine the effect of a sales executive reallocation on subsequent orders placed by informal and formal retailers. Using two different quasi-experimental methods, we find that informal retailers experience a decrease in order value of at least 72.4% relative to the control group and do not experience a sustained recovery within five sales cycles of a sales executive reallocation. In contrast, formal retailers experience a decrease of at least 46.4% relative to the control group and recover to previous levels within three sales cycles. This indicates that business relationships, and disruptions to these relationships, are disproportionately important when selling to informal retailers that serve BoP customers.

Keywords: Base of the Pyramid (BoP), causal inference, panel data, difference-in-difference