Targeting and salesforce compensation: When sales spill over to unprofitable customers

Targeting selling efforts towards profitable customers is widely known to increase sales and allow firms to charge higher prices. In this paper, we show that targeting of selling efforts may also inadvertently lead to sales spilling over to unprofitable customers when they are not identifiable. Such spillover sales are more likely when the ability of the salesperson and the profitability of target customers are above a threshold. We also show that firms can solve this problem by lowering the sales incentives as well as the price to make their offer unattractive to the unprofitable customers, a strategy commonly referred as screening. When the ability and profitability are both very high, however, the firm is better off allowing sales to unprofitable customers because the cost of preventing sales from spilling over is excessive. This is because the reduction in profits from the target customers that results under screening exceeds the loss from allowing sales to unprofitable customers. Such an accommodation strategy becomes more attractive as the fraction of unprofitable customers in the market decreases. Finally, we show that the spillover problem is even more acute when firms can monitor the selling efforts of a salesperson.