- 07 Oct 2014
- Working Paper Summaries
Lifting the Veil: The Benefits of Cost Transparency
Overview — Most managers think about cost transparency in terms of a supplier-firm relationship: when there is a two-way sharing of cost information between a firm and its suppliers, with the goal of collaborating to reduce costs. What does cost transparency do, however, in customer-firm relationships, when firms voluntarily disclose their variable costs explicitly and directly to consumers? This is the question the authors examine in this paper. Results of several experiments indicate that one-way cost transparency enhances consumers' attraction to the brand, in turn increasing their willingness to buy. Overall, marketers can potentially improve both brand attraction and sales by revealing costs. Key concepts include:
- Relative to other marketing tactics, cost transparency might be an innovative and inexpensive way to build brand attraction and sales.
- Disclosing sensitive cost information appeals to consumers regardless of their prior relationship with a brand.
- Benefits of cost transparency weaken—but do not reverse—when a firm discloses higher prices relative to cost
A firm's costs are typically tightly guarded secrets. However, across six laboratory experiments and a field study we identify when and why firms benefit from revealing cost information to consumers. Disclosing the variable costs associated with a product's production heightens consumers' attraction to the firm, which in turn increases purchase interest (Experiments 1-3). In fact, cost transparency has a stronger impact on purchase interest than emphasizing the firm's personal relationship with the consumer-a much more involved marketing tactic (Experiment 4). Further experiments explore boundary conditions and suggest that the benefit of cost transparency weakens as firms increase price relative to costs and when markups are made salient (Experiments 5-6). Consistent with our lab findings, a natural experiment with an online retailer demonstrates that cost transparency improves sales. In particular, cost transparency led to a 44% increase in daily unit sales. This research implies that by revealing costs—typically tightly guarded secrets—marketers can potentially improve both brand attraction and sales.