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Sellers Who Disclose True Value Can Maximize Profits

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Formal wearing young salesman offers brand new car key. Close up of the key In the foreground. Focus on the key.

AUSTIN, Texas – Car salespeople can be tight-lipped – they often resist revealing a vehicle’s true value. But new research from The University of Texas at Austin suggests that if they want to maximize total profits, salespeople would be wiser to reveal the invoice price early on in negotiations. Doing so builds trusts and causes customers to ultimately spend more on supplementary purchases such as service plans.

Early invoice price disclosure in these so-called front-end deals can be a winning tactic in today’s digital world, where buyers easily gather detailed pricing information online. Due to well-informed customers, many companies are now earning the majority of their profits in the aftermarket on supplementary purchases, which are trickier for consumers to research online.

According to the old theory of negotiation, as a seller you would never want to sacrifice the lowest price you’re willing to accept, says Sebastian Hohenberg, assistant professor of marketing at the university’s McCombs School of Business and co-author of the new research with Yashar Atefi of the University of Denver, Mike Ahearne of the University of Houston, Zachary Hall of Texas Christian University and Florian Zettelmeyer of Northwestern University.

“But now, you can use this new environment where people already know cost information to build trust, and then trust pays off nicely in the back end of the deal,” Hohenberg said.

The Journal of Marketing Research posted the study today, online in advance of publication.

In one experiment, researchers collected data at a major U.S. auto dealership chain, including information on salespeople-customer negotiations. Customers were mostly men – 76.5% – with an average age of 44. The researchers also gathered data on the dealership’s front-end and back-end gross profits, including service profits.

Of the 400 observed negotiations, 30 involved the salesperson disclosing the invoice price of the car early on, 44 disclosed it later, 25 did so only in response to prodding from the customer, and 301 never disclosed the price. The researchers found that sellers who revealed cost at the beginning of a negotiation had customers who spent significantly more in the back end – around $1,400, on average – compared with salespeople who revealed price later or not at all.

When Hohenberg and colleagues simulated similar sales negotiations in the lab, they found results hold true even when customers don’t know a seller’s cost beforehand, but they know cost information is widely available to them. “The mere knowledge that you could get this invoice price helps,” Hohenberg says.

The researchers said the results suggest that our increasingly digital world calls for a different approach to negotiating front-end deals such as buying a car. Information can be strategically sacrificed to build trust and increase profits.

“We’re seeing a change in consumer behavior,” Hohenberg said. “You can either fight it or embrace it. For firms and salespeople, the key takeaway is that you should embrace it.”

There are also takeaways for buyers. To foster more efficient, trustworthy relationships when making purchases, buyers should do their research before starting a negotiation, then let sellers know they’re informed. Aim for an in-person meeting or a video call, adds Hohenberg, because building trust is harder over text or chat.

The researchers said a more holistic view of how salespeople are incentivized also makes sense. Instead of earning a commission solely when they facilitate the purchase of a car, salespeople should also get credit for supplementary products the customer buys.

“Most salespeople are incentivized for immediate purchase,” Hohenberg said. “But the profits that accrue due to the immediate purchase later on are way more beneficial for the company. Training and coaching programs should also be revamped to reflect this new approach.”

For more information about this research, read the McCombs Big Ideas feature story.