When booking an international flight, the choice often comes down to “expensive but direct” or “cheap with connections.”
But what if an airline warned customers that the direct flight was frequently delayed? Would customers appreciate knowing that they might spend more to get to their destination later?
At least in some cases, the answer is yes, according to Harvard Business School researchers who tested the effects of highlighting a product’s trade-offs with almost 400,000 customers of Australia’s largest bank.
MoonSoo Choi
“When customers have a more holistic view of the trade-offs of an offering, it helps them make more well-informed choices, which enhances the quality of the customer relationship,” says Buell, who’s also the Finnegan Family Associate Professor of Business Administration. “Those who choose the offering will engage with it more.”
Equally important, the researchers found that in this context, identifying negatives prominently had an “insignificant effect” on customer acquisition rates.
Trade-off transparency at a credit card powerhouse
Commonwealth Bank, Australia’s fourth-largest company, agreed to let Buell and Choi test the benefits of trade-off transparency among its prospective credit card customers. Commonwealth Bank is the country’s biggest issuer of credit card loans, with almost 27 percent of market share and $50 billion in annual transactions.
For five months, the bank randomly offered customers on its websites two sales pitches—one that emphasized a credit card’s features and another that also highlighted downsides that would normally only appear in the terms and conditions.
For example, some customers considering a low-fee card also learned that its 20 percent interest rate was higher than average and that the card didn’t provide travel insurance.
After qualified customers activated their credit cards, Buell’s team tracked their monthly spending for nine months. The researchers also monitored whether customers closed their accounts during that time.
The data helped researchers compare the loyalty and profit potential of customers who received each marketing message. After all, credit cards are one of the most lucrative businesses for banks, which profit largely from cardholders’ interest payments.
When credit card customers have all the facts
The researchers found that people who opened an account after learning about a card’s downsides spent 10 percent more each month than customers who heard only the benefits. Their nine-month cancellation rate was also 21 percent less, and they were 11 percent less likely to make late payments on a month-to-month basis.
"Sometimes, a credit card looks really great and then it turns out to have some hidden fees ... It kind of stings you."
The increase was larger among customers older than 28, who presumably had more experience with credit cards and thus could use the trade-off information productively. With more data to inform their decisions, these customers went on to spend 19 percent more each month and defect 34 percent less during the first nine months of their credit card relationship.
“They're having a better experience, which is good for the customer,” Buell says. “But obviously, that's also really, really important for the organization.”
Buell and Choi detailed their findings in the working paper Improving Customer Compatibility with Operational Transparency. Although the team didn’t probe why customers spent more, they suspect that providing more information helped people choose products that were more compatible with their financial needs, creating a better customer experience.
“Sometimes, a credit card looks really great and then it turns out to have some hidden fees or a higher interest rate than you expected, or some other negative surprise when the bill shows up,” Buell says. “It kind of stings you.”
Transparent messaging didn’t matter as much to customers acquired through a promotion. Two months into the experiment, Commonwealth Bank offered a typical credit card incentive—$300 to customers who opened particular cards and charged $1,000 to them during the first 90 days.
Although the promotion helped Commonwealth Bank attract more customers, they didn’t spend as much or stay as long as those gained without the deal. What’s more, the presence of the promotion erased the positive effects of transparency—highlighting a possible tension between promotion-based strategies designed to influence and transparency-based strategies designed to inform.
Competitive advantage through transparency
Putting it all out there has long helped disruptive startups give their customers more control and set their brands apart. The online apparel retailer Everlane provides detailed descriptions about the factories that produce its clothing. And Lemonade has upended traditional insurance by taking a set portion of a customer’s premium and giving money left after paying claims to charity.
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“It’s a way to clearly communicate that ‘We are unique in the space,’” Choi says. “Here’s what we are and here’s what we aren’t.”
More traditional organizations have also been opening up. The US Department of Veterans Affairs tells patients how long they should expect to wait for care. Patagonia lists the suppliers for each item on its website, while Southwest Airlines’ “transfarency” campaign pledges to save customers from hidden fees.
After all, customers are already turning to Google searches and Amazon product reviews for their due diligence. By going a step further and highlighting their products’ shortcomings, companies might save consumers that step and help them buy with confidence. And, with time, hiding a product’s downsides might eventually become its own operating risk.
“If transparency becomes more of a norm in certain industries, I imagine that a switch will get flipped and the companies that aren’t transparent will raise red flags,” Buell says.
Share the good and the bad, but not the ugly
Although Commonwealth Bank ultimately adopted the approach it piloted through Buell and Choi’s study, executives should weigh several considerations before dropping the veneer of perfection:
- Will the disclosure reveal a solvable operational problem? Any trust that an airline might gain from including a flight’s delay rate would likely evaporate if it seems like many flights spend extra time on the tarmac.
Increasing trade-off transparency provides managers an opportunity to ensure that what they reveal will not only help customers make better decisions, but reflect favorably on the organization. Trust will arise from transparency if it reveals the organization is worthy of trust, so shoring up operational problems is an important first step. - Will the trade-offs make competing products seem more appealing? Displaying a dish’s nutrition information might help diners make informed food choices. However, if the menu seems broadly unhealthy, it might send health-conscious customers straight out the door.
Managers should ask themselves whether their offerings are genuinely aligned with the needs and preferences of the customers they’re hoping to serve. If so, informing customers by providing transparency can help deepen the relationship. If not, providing transparency will generate feedback that facilitates learning and improvement. - Will the negative information paralyze customers? While knowing a product’s trade-offs clarified decisions for many Commonwealth Bank customers, diligently detailing every trade-off could overwhelm people, driving them to abandon the choice altogether. Managers should thoughtfully design the presentation of trade-offs to inform, not overwhelm.
Executives who wonder how trade-off transparency might impact their company’s operations should consider testing the approach on a small scale, says Buell, who has been studying the effects of giving consumers more information for more than a decade. A pilot test can help companies understand how consumers react to the experience.
“The experiment doesn't have to be expensive,” he says. “It doesn’t have to be overly complicated, particularly in a world where so many customers are already learning about companies online. But it’s an experiment worth running.”
“By doing so, managers and customers alike stand to learn a lot about how well the company’s offerings fit with customers’ needs and preferences, so that better decisions can be made on both sides.”
About the Author
Danielle Kost is senior editor of Harvard Business School Working Knowledge. [Image: fermate]
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