Optimizing Pricing Delegation To External Sales Forces Via Commissions: An Empirical Investigation

Sales force activities, including personal selling and pricing, are often outsourced by providers to external firms. Given the importance of these marketing tasks, organizations must ensure that sales compensation is optimized to maximize profitability. In this article, we develop a model of external salesperson behavior in the context of indirect lenders that sell auto loans through external sales representatives at auto dealerships. Using this model, which accounts for the key decision makers in an indirect lending context (i.e., lender, external sales representative, and customer), and a large data set from a North American financial institution, we examine the behavior of external sales representatives, focusing on the demand allocation and pricing decisions made by external salespeople and the impact that commissions have on these decisions. The results indicate that external sales representatives’ decision to allocate customer demand is influenced by commissions provided by competing providers; however, the effect is smaller than suggested in the literature. Also, external sales representatives use a sequential decision-making process, first selecting a lender to allocate customer demand to and then choosing an option from the selected lender’s rate sheet (i.e., menu of prices), rather than a simultaneous process, whereby pricing options from all providers are compared at the same time. Finally, optimal commissions increase exponentially with price to ensure that external sales representatives select higher prices for customers with higher willingness to pay, thus maximizing lender profitability.

Keywords: sales force compensation; sales force pricing delegation; consumer lending