Turns out honesty really is the best policy.
Researchers at the University of Texas at Austin recently found that the more honest a salesperson is (as indicated by revealing the true invoice price of a car early on in negotiations), the more a customer will ultimately spend.
As the researchers found, “According to the old theory of negotiation, as a seller you would never want to sacrifice the lowest price you’re willing to accept,” writes Sebastian Hohenberg, assistant professor of marketing at the university’s McCombs School of Business who co-authored the 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 that’s changing: the old paradigm of “information asymmetry” whereby the salesperson knows far more than the customer, is breaking down. Most customers already know the invoice price before they walk into a dealership, presumably having done their internet research. So having it disclosed by the salesperson built trust—and then they were more likely to elect additional services and upgrades later in the sales process.
How did they find this out?
By observing negotiating at a major U.S. auto dealership chain, then looking at short-term and longer term sales. “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.”
Indeed, that points to a strategy that could be applicable elsewhere in the business world: Information can be “strategically sacrificed” to build trust and increase profits.
Hohenberg says this also calls for a rethinking of how salespeople are paid. “Most salespeople are incentivized for immediate purchase,” he said. “But the profits that accrue due to the immediate purchase later on are way more beneficial for the company.”
