I want you to think about your best friend—that person who you can tell anything to. He or she has your complete trust and respect. When did you first begin to develop that strong bond? Was it when you two went out to that huge party your first weekend of college? Probably not. How about the time you were having a rough week and you were able to open up to this person about your frenzied life, even if only for five minutes? That sounds more like it. Open and honest communication is what brought you two this far, this close, and for this long.
Well it turns out, openness and honesty not only take friendships far, but businesses too. In a recent study, HBS doctoral student, Bahvya Mohan, with the assistance of professors Ryan Buell and Leslie John, found that companies can benefit from revealing sensitive information about their variable costs to consumers. Cost transparency makes consumers feel like they have an ‘in’ with the company. As customers feel more connected, their willingness to pay increases, resulting in greater sales. Mohan also adds, “when firms communicate the effort that went into making a good, consumers tend to value the product more.”
Now, you’re probably thinking about that nice gap between costs and prices. Wouldn’t disclosing cost figures reveal markups and dissuade consumers from making purchases? The answer is no—not unless your product is outrageously priced. Buell says, “With a T-shirt that cost $6.50 to produce, it seemed reasonable to us that cost transparency would be helpful [in motivating buyers] if the price of the shirt was $10. But even at $35, we still saw an advantage to revealing the cost of production, which is interesting because the markup was five times the cost.”
While cost transparency may work for retailers, it is not for everyone. Companies with cost structures that provide competitive advantages should keep their secrets to themselves. Additionally, many retailers have limiting contracts with their suppliers that don’t permit disclosure of such information. Lastly, cost transparency may not be feasible in industries with high fixed costs such as pharmaceuticals. R&D costs can be in the millions, making it difficult to assign a dollar cost to each product produced from the research.
There are several ways to communicate information about your costs. One retailer that Mohan observed included an infographic on their website explaining the costs behind their $115 leather wallet for three of the five available colors. For the three colors that they attached the infographic to, the company saw a 44% increase in daily unit sales. Once you have the information on your website, utilizing social media is a sure way to spread the word fast. Companies that package their products such as beverage distributors can include a small blurb in their product packaging design about the production process, and proceed to explain the costs on their website or through social media as well.
Cost transparency can not only lead to higher immediate sales, but also greater customer loyalty. If we ignore the numbers for a minute, there may even be something bigger here. When companies reveal the work that goes into each of their products, they remind consumers that there are in fact actual people behind that bottle in their hands. The connection that they build with their customers moves more towards a people-to-people rather than an industry-to-people relationship. In a capitalistic society where humanity can get lost in the sea of business, perhaps a little honesty would pump some blood back into the marketplace.