Businesses don’t typically disclose information to consumers on how much it costs to produce a product. However, the study “Lifting the Veil: The Benefits of Cost Transparency” we recently conducted — along with our colleague Leslie John of Harvard Business School — provides evidence that doing so can increase consumers’ purchase interest by more than 20 percent. We also found that cost transparency increases purchase interest even when prices are unexpectedly low or high. This holds for cost transparency instated voluntarily by a business but not when a business is forced to do so such as being required by law.
Even if prices aren’t exactly what the customer might envision, the customer appreciates the act of cost disclosure. It’s all about the psychology of disclosure and trust. Cost transparency represents an act of intimate disclosure and fosters trust. Heightened trust enhances consumers’ willingness to purchase from a business.
Cost transparency conveys more sensitive information to consumers than operational transparency alone by referring to the disclosure of the costs to produce a good or provide a service. But it can be risky because it makes the business vulnerable to experiencing negative consequences such as consumer ire or supplier price increases.
We conducted six experiments to illustrate the effects of cost transparency.
One experiment was a partnership with a dining services organization of a large university in the northeastern U.S. in which a month of lunchtime sales was studied. That organization revealed the costs of producing a bowl of chicken noodle soup, including the cost of each component and the total cost. Cost transparency is associated with a 21-percent increase in the probability of buying a bowl of soup with the probability increasing from 2.3 percent to 2.8 percent per customer.
Another experiment looked at a private online retailer and its sales of a leather wallet. For three of the wallet colors, the online product detail page included, among other information, the costs incurred to produce the wallet. The company mistakenly failed to use the graphic on two of the colors for the wallet.
We compared the daily sales between the wallet colors before and after the graphic was introduced over a 92-day period. The infographic increased sales of the wallets by 22 percent. These studies imply that the proactive revelation of costs can improve a company’s bottom line.
The study was reported in Marketing Science, a premier peer-reviewed scholarly marketing journal published by INFORMS, the leading international association for operations research and analytics professionals.
Bhavya Mohan is a professor in the marketing unit at the University of San Francisco.
Ryan Buell is a professor in the technology and operations management unit at Harvard Business School.
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