Reports

Information Disclosure in Negotiating with Informed Customers

Michael Ahearne, University of Houston, Yashar Atefi, Zachary Hall, Sebastian Hohenberg, and Florian Zettelmeyer, 2019, 19-129

Negotiation-based industries have lost the advantage of information asymmetry. Today, buyers can easily gather information about their intended purchase before negotiating with sellers. In response, sellers have shifted attention to aftermarkets where they still have an information advantage for add-ons such as insurance, financing, service, and maintenance.

Here, Michael Ahearne, Yashar Atefi, Zachary Hall, Sebastian Hohenberg, and Florian Zettelmeyer argue that the leveled playing field in the frontend is actually an opportunity to build trust with buyers, since the knowledgeable customer can verify the accuracy of information disclosed by the seller. They test their idea – which has not been considered in the literature to date – in this setting of information symmetry in the frontend (main purchase) and information asymmetry in the backend (aftermarket).

Across one observational study and two experiments, they show that disclosing sellers’ cost at the beginning of the negotiation, by revealing the manufacturer’s invoice of the product, builds trust in the frontend, which pays off in the backend. In an observational study in the automotive industry, customers to whom the salesperson revealed the invoice price at the beginning of the negotiation spent significantly more in the backend, and were more likely to come back for service a year after, compared to those to whom the invoice was either revealed later in the negotiation or not disclosed at all.

They replicated these findings in a simulated negotiation experiment and a scenario-based experiment, which allowed them to test moderators and the mediating role of trust.

Put into Practice

Most firms realize that succeeding in the market does not guarantee success in the aftermarket. A recent study by Bain & Company revealed that many firms utilize only 10% to 25% of their full aftermarket potential for their installed base. Applying this simple strategy in the frontend can help firms significantly improve their backend margins.

Moreover, because salespeople are often incentivized based on their immediate sales rather than the aftermarket outcomes, these findings imply that a more holistic look at the entire value chain might be better in designing salesforce compensation plans.

Michael Ahearne is C.T. Bauer Professor of Marketing, C.T. Bauer College of Business, University of Houston. Yashar Atefi is Assistant Professor of Marketing and the Director of the Sales Leadership Center, Daniels College of Business, University of Denver. Zachary Hall is Associate Professor of Marketing, Neeley School of Business, Texas Christian University. Sebastian Hohenberg is Assistant Professor of Marketing, McCombs School of Business, University of Texas at Austin. Florian Zettelmeyer is Nancy L. Ertle Professor of Marketing, Kellogg School of Management, Northwestern University.

 

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