When I first stepped into the retail business, I was, as most consumers are, completely and utterly unaware about what goes into making a piece of clothing. Costs vary a lot. Produce in Europe, which we do, and you pay one price; produce in Bangladesh, and you pay another -- much lower -- one.
It's a subject retailers often try to avoid. Naturally, some share this information, but most would prefer not to discuss it (especially when markups are high).
But what if that's all wrong?
What if, as a business owner, you could use cost information to win more customers and make them happier -- even if you aren't a retailer?
Communication is a winning strategy
A recent Harvard Business School study shows that if you make customers aware of your costs of doing business, they just might want to buy from you even more than they would otherwise.
To test this idea, the researchers manipulated an online store environment to see how people reacted to different types of information. For example, some customers saw just the product (a t-shirt) and the price, while others saw the product, price, and some combination of information about the manufacturing process, the itemized costs of each, and the total production cost of the product.
It turns out, people really like it when you tell them what they're paying for.
For example, for the $15 t-shirt (the most notable example), showing the costs was even more powerful than providing transparency into the manufacturing of the product.
As part of the experiment, the researchers manipulated markup amounts to see whether there was a limit to "acceptable" markups. They found that customers always appreciated the price information -- meaning they were more willing to buy the t-shirt when it was provided. The extra willingness to buy declined as the markup went higher, but it never completely went away.
How to use cost transparency in any business
If you sell a product and you want to boost sales, consider sharing more information about the costs you face in your business. Especially in a situation where your markup is very fair -- and you make sure to point this out -- customers will respond positively and might just be happier to commit.
I would venture the reason this strategy is so powerful is twofold: It demonstrates the reason for the price, and it's a friendly disclosure that gives the impression of being fair.
That means this type of information can be used for much more than just physical goods, where costs are more easily defined.
For example, in service businesses, you're generally selling your brain or expertise, and you're sometimes doing it while sitting at your home office in pajamas. The "costs" involved are thus a little more opaque -- things like education, experience, and innovative thinking. We all know these are worth a lot, but how can you define them?
Instead of thinking about it in cost terms, try communicating the reasonableness and the fairness of your pricing by focusing on value.
For example, if you have training as a specialist or came up with an idea that saved a client millions, it's a pretty big deal. You should point out explicitly what those unique traits were worth to your other customers and how they can bring value to your new ones.
Try price comparisons
You could also emphasize your cost transparency strategy by using price comparisons -- even if your prices are higher than those of your competitors. After all, sometimes things are expensive because they're better, and service businesses are no different.
Focus on demonstrating why your prices are higher. Maybe your team has decades of experience, or your previous projects have been wildly successful. By explaining the reason, you're demonstrating that you're being fair.
The same goes for lower prices. Emphasize why you're cheaper. Perhaps you're taking a lower margin because you want to help smaller customers, or maybe you are experimenting with a new service, and you'd like more feedback in exchange for your lower fees.
In both cases, and indeed in any business, the lesson is this: Communicate with your customers. Treat them with respect and share information. As a result, you might not only have happier customers, but more of them.
