PRICE IS RIGHT

Ma­te­ri­als, MAN­POWER, mar­ket­ing, even toi­let pa­per. SHOULD com­pa­nies make ALL of their ex­penses PUBLIC? Wel­come to the world of TRANS­PARENCY pric­ing.

Collective Hub - - AT WORK - WORDS AMY MOLLOY

To pro­duce one quilted or­ganic cot­ton ruf­fle dress, the cloth­ing brand Hon­est By spends €14.10 on fab­ric, €15.60 on quilt­ing fill­ing, al­most €3 on bias tape and €1.10 on the zip­per that runs up the back of the gar­ment. There’s also the pocket zip­pers – €2.50 for two – and the sewing thread, which costs ap­prox­i­mately €1.55. Let’s not for­get the brand’s la­bels, which are bought in bulk, and work out cost­ing €0.6684 per unit. Then there’s the se­cu­rity seal and hang tag, which cost €0.20 and €0.29 re­spec­tively.

In total, the man­u­fac­tur­ing cost of one dress is €141.61, but the Bel­gium brand sells it for €566.44 (be­fore VAT). The mark-up is used to cover com­pany costs such as rent, in­sur­ance, in­tel­lec­tual prop­erty rights, le­gal and ac­count­ing costs, mar­ket­ing and web­site op­er­a­tion.

In the past, de­tails such as these would have been a closely guarded se­cret. But Hon­est By, which calls it­self the ‘world’s first 100 per cent trans­par­ent com­pany’, lists de­tailed price cal­cu­la­tions on its web­site for ev­ery item they sell.

Its founder, Bruno Pi­eters, de­cided hon­esty is the best pol­icy while work­ing for large in­ter­na­tional re­tail­ers.

“I saw how the com­pa­nies I worked for, and oth­ers, would move their pro­duc­tion from Bel­gium or France to China, Viet­nam, In­dia or Ro­ma­nia,” he says. “But they would still be [charg­ing their cus­tomers] the same prices they asked for be­fore. And, along the way, dozens of work­ers were fired. It sad­dens me to see how so many peo­ple con­tinue to fi­nan­cially sup­port these prac­tices through the pur­chases they make. I wish there would be more sol­i­dar­ity.”

After launch­ing his own la­bel, the former Hugo Boss art di­rec­tor de­cided to hold him­self ac­count­able by en­sur­ing that all the brand’s out­go­ings – in­clud­ing staff, re­search, utility costs and even of­fice sup­plies – are public knowl­edge.

“There is a small crowd out there who are becoming more aware, and know it’s in their best interest to ask ques­tions about the prod­ucts they buy,” says Bruno. “That is the cus­tomer who shops at Hon­est By. They want to know that what they are buy­ing is in sync with their own val­ues. I’m sure that in the near fu­ture it will be com­pletely un­think­able to not know what you’re pay­ing for.”

Hon­est By are not the only brand pub­li­cis­ing their pric­ing. From cloth­ing re­tail­ers to web designers, and even hous­ing de­vel­op­ers, this prac­tice of ‘trans­parency pric­ing’ is a ris­ing trend – and it could win over cus­tomers.

“A firm’s costs are typ­i­cally tightly guarded se­crets,” write Bhavya Mo­han, Ryan W Buell and Leslie K John in Lift­ing the Veil: The Ben­e­fits of Cost Trans­parency, a pa­per based on a study for Har­vard Business School. “By un­pack­ing the costs, you have the op­por­tu­nity to ex­plain ev­ery­thing you did for the cus­tomer in putting a prod­uct to­gether. When firms com­mu­ni­cate the ef­fort that went into mak­ing a prod­uct, con­sumers tend to value it more.”

Over the course of six lab­o­ra­tory ex­per­i­ments and a field study of an on­line re­tailer, the re­searchers found dis­clos­ing the vari­able costs as­so­ci­ated with a prod­uct’s pro­duc­tion height­ens a cus­tomer’s at­trac­tion to a firm. In par­tic­u­lar, cost trans­parency led to a 44 per cent in­crease in daily unit sales. They also dis­cov­ered that ‘price par­ti­tion­ing’ – di­vid­ing a price into sub-com­po­nents – caused con­sumers to per­ceive prices to be lower, and made them more likely to buy a prod­uct.

But, how do you put trans­parency pric­ing into prac­tise?

“Trans­parency pric­ing was part of our core DNA from the be­gin­ning,” says Scott Gabriel­son, the founder of ac­ces­sories brand Oliver Ca­bell, which breaks down pric­ing on their web­site, in­clud­ing the cost of ma­te­ri­als, pack­ag­ing, qual­ity con­trol and ship­ping. (A week­ender bag sold for US$285 shows a price break­down that in­cludes: can­vas at US$16.02, leather at US$11.58, lin­ing at US$5.68, zip­per at US$4.27, cut­ting, man­u­fac­tur­ing, and qual­ity con­trol at US$48.12, tran­sit at US$5.84, du­ties at US$7.40, pack­ag­ing at US$7.24 and ship­ping at US$9.89.) >

By UN­PACK­ING the costs, you have the OP­POR­TU­NITY to EX­PLAIN ev­ery­thing you did for the CUS­TOMER in putting a prod­uct TO­GETHER.

“We actually col­lected nearly 10,000 emails [from in­ter­ested cus­tomers] be­fore the brand went live, sim­ply from an in­fo­graphic we posted on­line de­tail­ing our costs and pric­ing.”

As an on­line re­tailer, they found it par­tic­u­larly ben­e­fi­cial. “Qual­ity can be hard to com­mu­ni­cate on­line,” says Scott. “It’s one way of help­ing to show qual­ity if your prices are a bit higher.”

And it’s not just cloth­ing brands that are jump­ing on the trend, ei­ther. Ore­gon start-up Alit has brought trans­parency to the wine in­dus­try, break­ing down the cost-per-bot­tle on their web­site. (US$5.66 on farm­ing and fruit, US$2.14 on their five em­ploy­ees, US$2.88 on re­cy­cled pack­ag­ing.)

Sim­i­larly, the data anal­y­sis start-up Mat­ter­mark posts reg­u­lar break­downs of “how we spend money”, to ed­u­cate their clients and their ven­ture cap­i­tal­ists (US$25,000 per month on mar­ket­ing, plus US$14,000 for travel ex­penses and an­other US$525,000 to cover their 43-per­son work­force).

The so­cial me­dia man­age­ment ser­vice Buf­fer also has a trans­par­ent pric­ing pol­icy, not only going public with the salaries of all team mem­bers, but also the amount they spend on servers, of­fice rent, team re­treats, com­put­ers and equip­ment and ‘Kin­dle books and cul­ture’ ($1593.50 per month, which is 0.5 per cent of their monthly costs as a com­pany).

“With build­ing soft­ware, it’s of­ten more ob­scure with what goes into pro­duc­ing an app or a prod­uct,” wrote co-founder Leo Widrich on a com­pany blog. “With ev­ery new ‘unit’ that you pro­duce, you don’t nec­es­sar­ily in­cur more costs, so set­ting a price can of­ten seem ar­bi­trary. Un­til we spent this time to clearly out­line the costs and break­down, we re­ally didn’t have a good idea of how our money was spent… Know­ing the ex­act break­down and track­ing it over time might help us to ad­just prices, so we can offer Buf­fer’s tools to the widest au­di­ence pos­si­ble.”

Be­ing open about costs could also ben­e­fit your ta­lent pool – after be­ing trans­par­ent about com­pany wages, Buf­fer were in­un­dated with ré­sumés from in­ter­ested ap­pli­cants.

But there are dan­gers to un­bri­dled hon­esty, warn some ex­perts. “In my ex­pe­ri­ence, itemis­ing all ex­penses can take the con­sumer’s fo­cus away from the value of what they’re re­ceiv­ing and onto the price,” says Ben Lai, a sales coach and di­rec­tor of Suc­cess Part­ners Australia, a sales train­ing com­pany. “The value of a prod­uct is not re­ally de­ter­mined by the costs to pro­duce or de­liver it, but by how much the cus­tomer ben­e­fits from it. There are scep­ti­cal individuals who hold a neg­a­tive opin­ion on profit. They may be de­terred by seeing the whole­sale and re­tail markups.”

His ad­vice? Find a com­pro­mise, and re­alise trans­parency pric­ing may at­tract some cus­tomers, but re­pel oth­ers. “Trans­parency and ac­count­abil­ity are important to keep busi­nesses hon­est,” says Ben. “To this end it is ben­e­fi­cial to make fi­nan­cial re­ports public. However, I think dis­clos­ing prod­uct profit mar­gins can be coun­ter­pro­duc­tive when fo­cus­ing cus­tomers on ben­e­fits they will en­joy. It’s cer­tainly not wrong, but I wouldn’t rec­om­mend it.”

The Bri­tish sneaker brand, Seven Feet Apart, may be on the right track. Instead of fo­cus­ing on where they spend money, they’re rad­i­cally hon­est about how they save money. Promis­ing price trace­abil­ity from ‘block to box’, the brand’s web­site dis­closes their cost-cut­ting strate­gies, which in­clude things like not sell­ing through third-party re­tail­ers and not pro­duc­ing un­nec­es­sary sam­ples.

With seven per cent of their prof­its going to local so­cial en­ter­prises, their pric­ing struc­ture has won over a fa­mous fan, our pre­vi­ous cover star Jamie Oliver, who or­dered seven pairs for him­self and his fam­ily mem­bers.

But they don’t give all their costs away to the public.

“If some­one wanted to es­ti­mate the costs and prof­its through our sup­ply chain, it would be quite straight­for­ward for them to cal­cu­late, be­cause we do dis­cuss the cost of man­u­fac­ture on our web­site,” says co-founder Matthew Bag­well. “But we be­lieve that al­most all our cus­tomers ac­cept that, be­tween the cost of man­u­fac­ture and the price they pay, there are un­spo­ken ex­penses that need to be paid.”

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