Profit from Transparency

Profit from Transparency

Should your customers compare prices, post opinions and pit you against your competitors? Absolutely

The Internet has ushered in the age of information democracy by shifting the balance of power toward customers. Nowadays, customers can compare prices through shopping engines. They can pit sellers against each other through reverse auction services like FreeMarkets. And they can get unbiased feedback on products and services through third parties like and CNet. Information transparency is here to stay.

Transparency is a good thing for customers, but it seems to threaten suppliers. One of my favourite questions for executives is: if your customers knew everything about your products, your costs, your prices and your competitors' offerings, would you be better off? Judging from the uncomfortable silences I usually encounter in response, most executives believe that transparency is an enemy of profit. Their reasoning: customers will take advantage of better information to drive down prices and profit. Harvard Business School's management guru Michael Porter echoes that thought."The great paradox of the Internet," he says,"is that its very benefits - making information widely available; reducing the difficulty of purchasing, marketing and distribution; and allowing buyers and sellers to find and transact business with each other more easily - also make it more difficult for companies to capture profits."

But is transparency always a threat to profit? Will it set off a spiral of lower prices, intensified competition and commodified products? Not necessarily. I believe that transparency can be good for profit. To profit from transparency, companies need to understand two key principles about customer decision making. First, customers never buy solely on price, even though companies might think they do. Second, prices may be transparent to customers, but value often remains opaque. By making their value propositions visible to customers, companies can benefit from the democratisation of information.

I recently participated in a conversation between the CEO of a midsize pharmaceutical manufacturer and a supplier of plastics who was trying to get the pharmaceutical company to switch to plastic bottles instead of glass. Plastic bottles seem to be as close to a commodity as one could imagine. Naturally, the conversation began with the pharmaceutical CEO asking if plastic bottles were cheaper. Being a good marketer, the plastics manufacturer pointed out that the price of the bottle should not be the sole focus of attention. First of all, he said, plastic weighs less than glass, so the transportation costs for the drug company would be lower. Second, plastic is not as fragile, so the breakage loss would be lower. Third, plastic bottles would save on labelling cost because labels could be imprinted directly. Fourth, being a local supplier, the plastics manufacturer would deliver more frequently in smaller batches, resulting in reduced inventory holding cost. On the negative side, the production line would run somewhat slower with plastic.

As the conversation progressed, it became evident that the drug company's value equation for packaging included a number of considerations besides price. After accounting for variable costs, such as inventory, breakage, logistics and line efficiencies, the plastic bottles would be a better value even at a higher price. The moral: there is no such thing as a true commodity.

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