Show your costs to boost sales
Show your costs to boost sales
Sales of a chicken noodle soup increased 21.1% when people were shown the costs of making it. The effect works for most products.
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📝 Intro
Radical transparency is on the rise.
Companies who practice it publicly share all sorts of metrics and information about their business (e.g. monthly revenue, employee satisfaction). But does this benefit sales?
This Harvard and University of San Francisco study answers part of that question.
When it comes to disclosing your costs the answer is yes, it does.
Show a breakdown of your product’s costs to boost conversions
Impacted metrics: Customer acquisition
Channels: Pricing | Packaging | Website | Marketing communications
For: Both B2C and B2B
Tip type: Existing research (April 2020)
📈 Recommendation
Disclose a breakdown of your product’s costs to increase sales.
For example, if you’re selling a pair of jeans, show that they cost €25.50 to produce - as well as the breakdown: €13.82 from materials, €5.59 from labor, €3.55 from duties, etc.
(People said they were 14.2% more likely to buy this chocolate bar when they were shown the version with a cost breakdown [right] - Click to zoom in)
🎓 Effects
People are more likely to buy when companies disclose a product’s costs (e.g. $3.57 raw materials, $2.12 shipping).
In experiments:
People were 19% more likely to say they would buy a $115 wallet when it was accompanied by an infographic showing its costs
Sales of chicken noodle soup bowls ($4.95) in Harvard’s campus canteen increased 21.1% when costs were disclosed (see image below).
People were 16.1% more likely to bid for a gift card for an Everlane backpack (vs a J.Crew one) when they saw cost information about it.
For the effect to work, the cost disclosure must be voluntary, not forced (e.g. by regulation).
The effect was tested and held in experiments when profit margins were as low as 17% and as high as 55%.
(Breakdown of costs that was displayed in one of the experiments - Click to zoom in)
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🧠 Why it works
When a company discloses its product costs we trust them more
This makes us like them more and more willing to buy from them.
✋ Limitations
Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested. Likewise, suspiciously low margins (e.g. negative or very low) could negatively impact the effect of trust that drives increased sales.
It’s unclear if the effect works when someone is already close to and trusts a brand.
The study focused on consumer products (e.g. food, travel) and didn’t test B2B products and services. However, considering the principles driving this effect, it’s likely to work in a B2B context too.
🏢 Companies using this
Everlane is one of the very few retailers to have embraced cost transparency, as part of their ‘radical transparency’ efforts (you find a breakdown at the bottom of each of their products).
In the world of tech startups, the concept of transparency and building ‘out in the open’ has been growing (e.g. GrowSurf). However, costs may or may not be something they disclose (GrowSurf doesn’t).
⚡ Steps to implement
Make an analysis for your product’s total costs (including an estimated cost per item of your fixed costs).
Present the information in a simple to understand infographic alongside the product (e.g. on the price tag, on your website).
If there are many individual costs (more than 5-6), try to group them so the information is presented in a simple manner and isn’t overwhelming.
🔍 Study type
Lab, online, and field experiments. United States
📖 Research
Mohan, B., Buell, R. W., & John, L. K. (April 2020). Lifting the veil: The benefits of cost transparency. Marketing Science, 39(6), 1105-1121.
🏫 Affiliations
University of San Francisco and Harvard Business School. United States
Remember: This research could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.
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