Retail sales advisory and compensation in a distribution channel
Consumers shopping at big retailers (such as specialty stores and department stores) often have difficulty finding among the large selection of differentiated products the ones that fit their peculiar needs. Sales associates in big retailers play important roles in advising consumers, or matching consumers with the right products, and retailers can motivate such retail sales advisory by offering sales commissions.
Interestingly, manufacturers are also observed to offer sales commissions to retailers’ sales associates through SPIFF (Sales Person Incentive Funding Formula) programs, which also leads to enhanced sales advisory. Owing to the inherent conflict of interest between a retailer and its upstream manufacturers in a vertical channel, conflict in their incentive to offer sales commissions naturally arises.
We study a big retailer’s strategic decisions to motivate retail sales advisory through its own commission programs or by signing up for manufacturer SPIFF programs. We find that better matching between consumers and products may hurt the retailer profit, in which case the retailer cuts its own sales commissions and blocks manufacturer SPIFF programs so as to suppress retail sales advisory.
The retailer has incentive to offer sales commissions to motivate its sales associates better advising consumers only when the fit probability of products is sufficiently low and the market contains a sufficiently large size of fit-uncertain consumers. And only in this situation, may the retailer allow manufacturers to offer sales commissions to its sales representative through SPIFF programs.
Our analysis suggests that the increasingly popular practice among manufacturers to bypass retailers in rewarding retailers’ sales representatives enhances consumer welfare; and this insight has important implications for public policy makers who generally hold a negative attitude towards manufacturer kickbacks.
Interestingly, our study reveals that how a big retailer manages its interactions with upstream manufacturers critically depends on the .t probability of products, or the matching probability between consumers and products in the market. While a low matching probability forces the retailer to seek coordination from the manufacturers in motivating retail sales advisory, a high matching probability incentivizes the retailer to fight with the manufacturers for a more favorable channel status.
Our theoretical insights provide explanations for many observed sales compensation practices at big retailers such as Sears, JC Penney, and Lowe’s.