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MARKET PERSPECTIVE: What we’re learning about transparency in business

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Insights from the field of behavioural science have proved that humans are irrational in predictable ways. And as improvements in the field lead to greater understanding of what biases drives our day-to-day decisions and actions, more and more businesses are wondering how they can apply this data to their own customer base. Rafael Batista, senior manager from Commonwealth Bank’s behavioural science team, shines a spotlight on the value of transparency, and how businesses are tapping into these insights to improve outcomes.

Financial decisions are complex. Whether it’s spending $4 on a coffee, or $1 million on a house, human psychology plays a much greater role in the decision-making process than many businesses give it credit for – but understanding the way people think about financial decisions and applying that thinking to the way we design products and services can significantly improve customer interactions.

Through improvements in the field of behavioural research, it is becoming clear that other factors, beyond price, are hugely influential in purchasing decisions. One of these factors is transparency; an increasingly important consideration for the value offering in the vast global retail industry.

There’s more to price than just cost

While price is important to consumers, thinking it’s the be all and end all of consumer decisions is an error. Transparency is one factor that, when considered strategically, can have a very positive impact on both the consumer and the business.

Price is of course critical in consumer decisions, but it’s relative to the context in which those decisions are being made. The objective cost of something is certainly important, but your interpretation of price also depends on the situation you’re in. Psychologically, this is similar to lighting a match in a bright room versus in a dark room; sure the brightness of the match is important, but matches lit in dark rooms are perceived to be much brighter.

Let’s suppose you’re on holidays in another country and are asked to pay $6 for a coffee; there’s a process that you go through to decide whether that’s a good price or a bad price. You might think, well, I buy coffee in Sydney all the time. It’s typically about $3.50 or $4, so $6 is pretty high. So you decline. However, if you walk into a store that has one option at $7, the other option at $5, you look at the $6 option and you might think “Well, $6, that kind of fits, right?” Context matters.

Transparency as value

In the eyes of a consumer, price often plays two roles. For some, price simply reflects the cost of the transaction. Yet for others, price is seen as a signal of the quality; higher price means higher quality. So if a business drops prices too low, not only will they not recover the costs of production, but they may devalue that item or service in the eyes of the consumer.

However, it can be hard to know how each customer will interpret the prices of your goods or service – will it be seen as a cost or as a signal of quality? Behavioural research shows transparency might help businesses get around this. If a business is able to explain clearly what is behind the pricing, customers can better understand what has gone into the production of the item.

In the United States, one mobile service provider has taken a novel approach to demonstrating value to new customers. They start by asking the customer to fill in a questionnaire about their current service provider, how much they’re paying, what they get for that price, etc. After the questionnaire, they will actually present this back to the customer on a screen alongside information about their own service. In many cases, the customer might be paying less for their current plan, but not getting as much value for that price. The company will then offer them a new plan, and say “You won’t save on this plan” but where it competes on the service, they note, “here are other benefits you’d enjoy.”

While transparency might mean that you lose some consumers because the person doesn’t want to pay extra for your service or products, the customers you do gain are much more satisfied with your products and customer service.

Transparency can add value in the mind of the consumer, which can attract a more loyal and satisfied customer base.

Transparency provides choice

Transparency can also help companies by explaining how they land on the price for their product – especially if it’s a higher price point than competitors. It could be that this product is ethically sourced or costs more to produce due to higher quality materials – this detail might make consumers happier to pay up for it if the value is communicated effectively.

Transparency has proven helpful to companies even when they are providing what might seem to be negative information. In the USA, a clothing retailer created a rating system that showed how sustainable their products were, providing detailed information on where their products were coming from.

In being transparent, they satisfied a lot of watchdog groups, and gave their customers enough information to make their own choice about the price they were willing to pay for more sustainable products. The retailer found customers who are given the ability to make an informed purchasing decision were actually happier.

This is just one example of how individual the concept of value can be. Some consumers might be willing to pay extra for “environmentally friendly” or “ethically sourced” products, whereas others might be happy to buy the cheaper goods, knowing the trade-offs that come with it.

Transparency as a service to the customer

Transparency can also be a valuable customer service tool when it comes to the one thing customers care more about than their money – their time.

Behavioural research has found that when you’re transparent about what’s taking so long, people are a little bit more comfortable waiting. The best examples of this are in airline search websites where they say “we’re searching through 4,252 flights to find the right one for you”. That’s a very transparent view on what the machine is doing in the background – it’s searching for flights, there are a lot of them, so it is going to take some time. This small piece of information can make the consumer more willing to have the patience to stick around and make a purchase.

This example of providing some background information on what is happening is also becoming more common with delivery services. Domino’s Pizza is another company that now does this; when you order pizza, they show you when it’s being made, then where it is and how long until it will arrive on your doorstep. These small but significant elements of transparency have a big impact, because they help people to make sense of the process and fill in the gap of what’s going on in the background.

This psychological process is hugely important to decision making, and a big reason why sample offers and recommendations work really well. The human mind is designed to make sense of things, it likes to imagine what an experience or product will be like, so providing an insight can improve or enrich customers’ decisions by tapping into these natural tendencies.

Well-directed transparency can improve businesses’ relationships with their customers. People are less likely to trust a review that says a product or service was 100 per cent perfect – being honest or open about the positives and negatives can build trust. For the customer, having the opportunity to mentally “trial” a product or service can lead to a better decision and less regret.

Lessons in behavioural psychology for retailers

The key lessons for Australian retailers are that providing transparency to customers makes for good business, if you approach them strategically and with your consumers’ best interests in mind. Consumers are generally willing to pay for the value they perceive – whether that is enhanced service, ethical products or convenience – and transparency goes a long way in highlighting that value to the customer.

Rafael Batista is a behavioural scientist within Commonwealth Bank. In his role, he looks to design and develop ways for the Bank to responsibly use behavioural science to enhance the financial wellbeing of its customers and boost internal productivity and performance of its employees. Prior to joining CommBank, Rafael was an Associate at the Busara Center for Behavioural Economics, where he managed a series of projects to understand the psychology of poverty and how people make decisions when faced with financial scarcity.

DISCLAIMER: This article has been prepared by Business Insider solely for informational purposes and is not to be construed as a solicitation, an offer or a recommendation by the Commonwealth Bank of Australia. This information does not have regard to your financial situation or needs and must not be relied upon as financial product advice or Investment Research. You should seek professional advice, including tax advice, before making any decision based on this information. We believe that the information in this article is correct and any opinions, conclusions or recommendations are reasonably held based on the information available at the time of its compilation but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made in this article. Commonwealth Bank of Australia ABN 48 123 123 124.

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