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