Knowledge that Transforms

Observed contracts in the real world are often very simple, which partly reflects the constraints faced by contracting firms in making the contracts more complex. In this article, the authors focus on one such rigidity: the constraints faced by firms in fine-tuning contracts to the full distribution of heterogeneity of their employees. The authors explore the implication of these constraints for the provision of incentives within the firm. The study's application is to sales force compensation, wherein a firm maintains a sales force to market its products. Consistent with ubiquitous real-world business practice, the study assumes that a firm is restricted to fully or partially set uniform commissions across its agent pool. The authors show that this restriction implies an interaction between the composition of agent types in the contract and the compensation policy used to motivate them, leading to a “contractual externality” in the firm and generating gains to sorting. This article explains how this contractual externality arises; discusses a practical approach to endogenizing agents and incentives at a firm in its presence; and presents an empirical application to sales force compensation contracts at a U.S. Fortune 500 company that explores these considerations and assesses the gains from a sales force architecture that sorts agents into divisions to balance firmwide incentives. Empirically, the authors find that the restriction to homogeneous plans significantly reduces a firm's payoff, relative to a fully heterogeneous plan, when the firm is unable to optimize the composition of its agents. However, a firm's payoff under a homogeneous plan comes very close to that under a fully heterogeneous plan when the firm can optimize both composition and compensation. Thus, in the empirical setting of this study, the ability to choose agents mitigates the loss in incentives from the restriction to uniform contracts. The authors conjecture this result may hold more broadly.

During retailer-initiated price wars (PWs), hundreds of brands are involved simultaneously, affecting brands’ and retailers’ positioning and ultimately making the performance outcome for individual brands difficult to predict. Likewise, the impact on brand performance after the PW, when prices are restored, is unclear. The authors use a natural-experiment approach to track brand sales and shares before, during, and after a long-lasting supermarket PW in the Dutch grocery market. They find that PWs are not truly revenue, sales, or share generators for most brands unless prices remain reduced permanently by the retailer. Only after the PW, when rivals’ prices are restored and the focal brand's reduced retail price is maintained, can substantial sales, revenues, and share gains be realized. Moreover, restoring prices without additional price promotion support can severely damage brands’ performance. Overall, national brands can gain share, sales, and revenue, but at the cost of not restoring regular prices, while private labels can benefit even when prices are restored after the PW ends.

The authors identify customers, termed “Harbingers of failure,” who systematically purchase new products that flop. Their early adoption of a new product is a strong signal that a product will fail—the more they buy, the less likely the product will succeed. Firms can identify these customers through past purchases of either new products that failed or existing products that few other customers purchase. The authors discuss how these insights can be readily incorporated into the new product development process. The findings challenge the conventional wisdom that positive customer feedback is always a signal of future success.

Dynamic customer targeting is a common task for marketers actively managing customer relationships. Such efforts can be guided by insight into the return on investment from marketing interventions, which can be derived as the increase in the present value of a customer's expected future transactions. Using the popular latent attrition framework, one could estimate this value by manipulating the levels of a set of nonstationary covariates. The authors propose such a model that incorporates transaction-specific attributes and maintains standard assumptions of unobserved heterogeneity. They demonstrate how firms can approximate an upper bound on the appropriate amount to invest in retaining a customer and demonstrate that this amount depends on customers’ past purchase activity—namely, the recency and frequency of past customer purchases. Using data from a business-to-business service provider as their empirical application, the authors apply the model to estimate the revenue the service provider loses when it fails to deliver a customer's requested level of service. They also show that the lost revenue is larger than the corresponding expected gain that would result from exceeding a customer's requested level of service. The authors discuss the implications of their findings for marketers in terms of managing customer relationships.

Although yes/no response formats have been used to increase enrollment rates in several different types of programs, their effectiveness has generally been tested in forced-choice settings. The effects on postchoice engagement have not been measured. Across two field experiments in an e-mail context in which choice is not forced, the authors demonstrate a substantial advantage in click-through rates for a yes/no response format over traditional opt-in response formats. The increase in click-through rate does, under certain conditions, also persist through downstream program enrollment and participation. Finally, though noting that the yes/no format advantage is probably multidetermined, the authors discuss several potential psychological mechanisms, which are particularly relevant in non-forced-choice settings. The authors also discuss how the yes/no response format might operate in other settings, such as the implementation of mandated choice for organ donation.

Consumers readily indicate that they like options that appear dissimilar—for example, enjoying both rustic lake vacations and chic city vacations, or liking both scholarly documentary films and action-packed thrillers. However, when predicting other consumers’ tastes for the same items, people believe that a preference for one precludes enjoyment of the dissimilar other. Five studies show that people sensibly expect others to like similar products, but erroneously expect others to dislike dissimilar ones. While people readily select dissimilar items for themselves (particularly if the dissimilar item is of higher quality than a similar one), they fail to predict this choice for others—even when monetary rewards are at stake. The tendency to infer dislike from dissimilarity is driven by a belief that others have narrow and homogeneous ranges of preferences.

This article investigates the in-flight marketplace, using detailed data of in-flight purchases to understand social effects in purchase behavior and determine their potential for designing marketing promotions. On average, a passenger is approximately 30% more likely to buy an item after being exposed to a lateral purchase. Analyses on the underlying mechanisms reveal that the classical social influence theories do not suffice to explain all the patterns in the data. The author proposes omission neglect, product contagion, and goal balancing as complementary theories. Finally, consumers’ willingness to buy is shown to be positively correlated with responsiveness to social influence. This finding indicates that homophily and social feedback effects—classically viewed in the literature as nuisances—can provide targeting value for the firm. By taking these factors into account during behavior-based targeting, firms can double the social spillovers of marketing actions.

People who want to control their body weight often aim to regulate both energy intake (by reducing food consumption) and energy expenditure (by increasing physical activity), thus addressing both sides of the energy balance equation. Marketers have developed fitness-branded food that may lead restrained eaters (i.e., consumers who are chronically concerned about their body weight) to believe that they can achieve these two goals at the same time by consuming the food. The purpose of this research is to investigate the effects of fitness branding in food marketing (i.e., the integration of fitness into the branding of food) on consumption and physical activity in restrained (vs. unrestrained) eaters. The authors show that fitness branding increases consumption volumes for restrained eaters unless consumers view the food as dietary forbidden. Restrained eaters are also less physically active after consuming fitness-branded food, and food consumption volumes mediate this effect in restrained eaters. Fitness branding may therefore have undesirable effects on the weight-control behaviors of restrained eaters because it discourages physical activity despite an increase in consumption, which is contrary to the principle of energy balance.

This article applies a two-sided matching model to investigate the consequences of banning controversial sponsors. Using a data set containing the shirt sponsorships from 43 English football clubs between 1990 and 2010, the authors' estimates suggest assortative matching between a club's attendance and a sponsor's revenue. In addition, sponsorships become less valuable as the distance between the club and the sponsor's head office grows, particularly for low-performing clubs and smaller domestic sponsors. The authors use these estimates to simulate the consequences of banning alcohol and gambling sponsors. Their estimates of counterfactual outcomes suggest that such bans may not have the largest impact on the clubs (particularly the relatively successful clubs) that currently have alcohol and gambling sponsors. Instead, clubs with low attendance and clubs in low-income areas will be most affected by a ban. More generally, the results demonstrate that when marketing relationships are viewed as the result of a matching process, actions that affect only some marketers may have substantial indirect effects on a variety of players in the market.

Tasks such as the elimination of all debts when faced with the immediate option to spend can be unpleasant but not conceptually difficult. Dividing these tasks into smaller parts and completing the parts from smallest size to largest size can help people realize quick motivational gains that increase their likelihood of completing the task. The authors more broadly define this idea as “small victories” and discuss, model, and empirically examine two related behavioral theories that might explain it. A laboratory experiment tests this prediction and provides data for model calibration. Consistent with the idea of small victories, when a task is broken down into parts of unequal size, participants perform faster when the parts are arranged in ascending order (i.e., from smallest to largest) rather than descending order (i.e., from largest to smallest). The calibrated model is consistent with the directional predictions of each theory. However, when participants are given choice over orderings, they choose the ascending ordering least often. The authors conclude with a discussion of the efficacy of this method in stylized debt-repayment scenarios.