Business Strategy

Honesty is the Best Policy

Honesty is the Best Policy
honesty about cost is the best policy

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Making consumers aware of the developing and distributing cost not only increases sales but also serves in developing long-term and fruitful relations with customers.

Traditionally, it was thought that making build-up cost accessible to all will lead to competition and recurring losses. Strikingly, current studies show that making these crafting, producing and distributing costs public; helps in trust development with customers as they become aware of build-ups and marginal profits. This trend of revealing costs not only help in increasing sales but also ensure that customers maintain rapport and frequency of buying with that specific company. An element of trust and a sense of faith gets induced which is unachievable with traditional practices.

Also Read: 3 Less-Painful Ways to Cut Costs

Earlier, opening builds-up costs to consumers was thought as a crazy idea and poor marketing strategy but its practical implications in today’s scenario have lead to better sales. It has potential of easily gaining markets from rivals, with simple disclosure of different supply-chain stages- that yield a final product. For example, when a company’s disclosures unknowingly reveal that it is making unjustified profits because of market turbulence; certainly consumers will turn off it.  Opposite to this scenario, if a company such as a hardware chain lowers the cost of snow shovels in scenario of fierce winter storm, then it is likely that more customers will turn up.

Cost transparency and accountability in modern times has rather become an important aspect of doing business, as buyers these days are lot more aware and have the very potential to work out for the detailed cost information; through Internet or the social media. Apparently, this process is much more different from revealing the background production or assembly line details of a particular commodity or item. Customers are still not made aware of the taxes, royalties and the revenues involved (also, they care relatively less). In this manner, confidentiality of mechanics behind production process is also ensured. Transparency, in today’s scenario is more relevant and desired as customers nowadays, crave for details about their purchases.

Initially, the authors conducted about six different experiments which dealt with more than 2,500 participants. In this experiment, a fictional T-shirt retailer’s website showcased a bit more transparency and the results were very obvious- this change had profound impact on customer’s willingness to spend. To be specific, transparency performed better than most of other marketing and advertising strategies. Cost transparency pushes towards more purchasing intentions in potential customers; the shift being significant in terms of traditional, complex and expensive branding techniques. Operational transparency was also out-performed by the cost transparency approach. Operational transparency made customers aware of the processes involved in production line- a thing, only few technically oriented people are interested in.

Positive effects of this transparency even endured when buyers encountered details about cost-makeups from those things they relatively don’t like paying for. To support this observation, it was noticed that buyers were less tolerant towards logistics and likely agreed to pay for raw materials. Moreover, the customers opted for those T-shirts which displayed cost information, in-spite of relatively high transportation cost. This transparency becomes hurdle for sales only in one case- when the marginal profits exceed industrial price and quantitative standards. The authors here try to make a note- consumers consider that profit-making is good and necessary but also want firm’s to adhere to price fairness and less fraudulent.

Furthermore, these experimental findings were evaluated against real-world scenarios. The validation comes from Christmas of the year 2013, when an online retailer posted an email promoting a leather wallet that came in 5 colour variants and with a cost of USD 115. Later-on to increase the post-holiday sales, the company added an info-graphic to its webpage which disclosed the breakdown of wallet with its leather, construction and transportation cost. Moreover, it emphasized the fact that they were charging 1.9x price markup instead of rival’s 6x price markups.

The authors finally concluded with a finding that displaying makeups of cost certainly yield to greater sales which in turns bring handsome profits. After holidays, it was observed that sales of wallets suffered decline in demand but the portal which showed info-graphics about cost build-up witnessed an increase of 44 percent in its sales.

Also Read: To Succeed in Business: Sell Lemons

One obvious fact, for companies being reluctant in disclosing their cost lies in strategically alliances, mutual contracts, contractual issues and strategic concerns. Also, few companies capable of streamlined production process and having access to cheap raw materials would likely keep their prices close to the vest. This fact in itself ensures crucial competitive edge over particular firm’s rivals. Furthermore, it is also possible that partners and suppliers don’t like to disclose their proprietary information.

Thus authors would like to conclude as cost transparency is an innovative and inexpensive way of advertising products, attracting potential buyers, increasing sales and most importantly building an ever-lasting brand image.

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