In our information age, buyers have squeezed sellers’ profit margins by collecting readily available data about the value of goods and services. Car buyers can easily identify the dealership cost of their preferred vehicle online and use it to negotiate a great price, for example. And more than 94% of business buyers surveyed by Accenture said they conduct extensive Internet research on products and pricing before contacting potential vendors.
As the “information asymmetry” between buyers and sellers has narrowed, sellers in many realms, including industrial machinery, computer hardware, prepackaged software, and auto sales, increasingly have come to rely on selling aftermarket services—such as financing, technical support, upgrades, and repairs—to drive profits. Sellers continue to maintain an information advantage over buyers on the back end of the sales process, where profit margins are generally higher. For instance, car dealers who are getting less from buyers on the front end typically more than make up the difference during the finance-and-insurance phase of the purchase. Similarly, business-to-business software vendors can earn more from back-end service and maintenance fees than from front-end license sales.
Salespeople who disclosed their bottom line early in a negotiation achieved significantly higher back-end profits than those who did not.
Nonetheless, companies often struggle to maximize aftermarket profits, according to a Bain & Company report. In a new study, University of Denver professor Yashar Atefi and his colleagues identified a somewhat counterintuitive strategy for sellers seeking to maximize profit: Reveal your reservation price, or bottom line, to the buyer during front-end price negotiations. Doing so, they found, makes buyers more trusting and leads them to spend more on the back end.
In an observational study conducted at a U.S. car dealership chain, the researchers found that salespeople who disclosed their bottom line early in a negotiation achieved significantly higher back-end profits than those who did not. In subsequent lab experiments, sellers either did or did not inform participants in the role of buyer about how much a product had cost them. When sellers disclosed this verifiable information, buyers trusted them more and spent more on aftermarket products and services—and more overall—than did participants who did not learn about the sellers’ costs.
Contradicting the usual prohibition against revealing your bottom line, these results suggest that information can be “strategically sacrificed” in negotiation to build trust and increase overall profits, according to the authors. This advice underscores two negotiation truisms: First, sharing verifiable information builds trust. Second, trust puts us at risk of overpaying or buying more than we need. Buyers need to devote the same careful attention they give to front- end negotiations to learning about aftermarket services—including the fact that they tend to predominantly profit the seller.
Resource: “Open Negotiation: The Back-End Benefits of Salespeople’s Transparency in the Front End,” by Yashar Atefi, Michael Ahearne, Sebastian Hohenberg, Zachary Hall, and Florian Zettelmeyer. Journal of Marketing Research, 2020.