Microeconomic theory tells us that the price of a good or service is determined based on the law of supply and demand. However, that theory makes one big assumption -- that buyers and sellers have the exact same information about the product. The reality is that buyers are not always given all the information they need to make the best purchasing decision. If that leads them to overpay for a product, they will lose trust in the brand and go elsewhere.
We see this all the time. Buyers avoid small used car dealerships because they suspect these sellers know something important about the car that they are not sharing. Over the years, these used car lots come and go, because buyers perceive them as shady. In effect, these dealers gamble away their long-term success for short term profits.
Manufacturers run the same risks. Not enough information -- in the form of warranties, quality or pricing -- will have the same long-term effect. There is another way.
Manufacturers can build trust by giving buyers better information through better labeling, disclosure and transparency. Providing buyers with better information, in plain language, can improve their decision-making and yield benefits at a relatively low cost. Increasing transparency builds long-term trust and improves a manufacturer's image, enables them to develop a loyal customer base, reduces customer churn and saves money. In other words, building trust can be an important competitive advantage -- one that can increased market share and profits.
One way for manufacturers to build trust with buyers is to identify the hidden costs of using their products, and sharing that information at the time of purchase, not after the product is in use. The lack of information regarding ongoing costs leads many bargain chasers to buy cheaper and lower-quality brands and models, only to find they are paying much more down the road. This business model does not ultimately encourage repeat buyers. Let's look at two examples:
A study released by the American Consumer Institute found that, over a five-year period, the cost of printer ink could be nine times the cost of the printer. We found another printer that cost nearly 20 cents to print a page and 50 cents to print a photo. But, buyers were not aware of these high printing costs, when purchasing the printer. In effect, we found that buyers were being lured into purchasing discounted printers only to pay much more for ink. Three years ago, Kodak entered the inkjet printer market with a strategy of higher-quality, less expensive ink. They openly disclosed ink costs-per-page. In the last two years, Kodak is the only consumer printer manufacturer to increase its market share.
In another study released by the American Consumer Institute, we found that the five-year cost of vacuum cleaner accessories -- vacuum bags, filters, belts and repair -- could be seven times the price of the vacuum. In other words, purchasing an inexpensive vacuum may not be in the best interest of the buyer, but how would they know? Where do vacuum cleaner manufacturers disclose the average annual cost of operating a vacuum? They don't.
Approximately 10 years ago, Dyson entered the U.S. market using a transparent pricing strategy that diverged from the old razor-and-blades model -- namely, selling high-quality units with no variable costs. Their models are bagless, have washable filters and no belts, and include a five-year repair warranty.
Today, they are the leading vacuum manufacturer in the U.S. in terms of sales, and (as the chart below shows) they provide the lowest cost-of-ownership over a five-year period among popular models selling for $200 or more. The study also showed that buyers may be much better off paying a little more upfront to buy vacuums with low or no variable costs. In short, by exploiting the hidden costs of other vacuums, Dyson was able to build consumer trust and create brand loyalty.
Need for Transparency
For buyers, getting better information can be time consuming, and the difficultly they have in collecting information about hidden costs puts them at a disadvantage. The answer to the problem is simple -- companies should disclose hidden costs in order to give buyers better information to compare brands and models. This can be accomplished by one company setting the trend for others to follow; by setting industry standards or by providing better information on packages, fact sheets, at the point-of-purchase or on websites. This will allow buyers to make informed decisions that will better suit their needs and save them money. This will drive trust and brand loyalty.
Better informed buyers and increased competition is a recipe for maximizing benefits and savings. The firms with the most cost transparency will likely win in the end.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a 501c3 educational and research institute.