Or how thinking of tomorrow helps to win today.
Book. “Reckonism: How Information Technology Strengthens Reputation Over Power, and Transparency Makes Privacy Safer” may seem like a purely theoretical work if one doesn’t shift their thinking in a new direction and consider the advantages that transparency offers for business. Of course, every employer would love for the job market to be transparent, so they wouldn’t have to guess when reviewing candidates’ resumes. However, the employer will do everything possible to maintain their own opacity. Even basic details of a job opening, such as salary or expected overtime, are often not disclosed until the very last moment.
Table of Contents
New time
At the same time, the concept of reconism implies mutual transparency, where the benefit lies in being open oneself. In the labor market, full disclosure of working conditions allows for the selection of candidates who are already prepared for those conditions, rather than those who are forced to continue working because they haven’t found a new position yet. However, the aim of this article is not to discuss tactics or strategies for managing human resources, but to examine market behavior as a whole.
And now it turns out that all the recommendations from business consultants and economists are becoming irrelevant simply because these people grew up and were educated in an old paradigm. In a context where, in most cases, the product and consumption were separate. Only a small part of the entire economy operated under the opposite conditions. These were doctors, hairdressers, consultants, and other professionals who provided clients with an understanding of their product only after consumption, rather than before.
But what is happening now? Right now, we have all deeply entered the so-called post-industrial economy. An economy where a large part of the gross product is generated through the provision of services rather than through material production itself. Moreover, material production has already surpassed the point where one could judge a product solely by its appearance and list of specifications. Now we have terms like “usability,” and reliability, response time, and accuracy of feedback to user actions have become important. Even household appliances or cookware reveal all their “secrets” that distinguish one manufacturer’s products from another, forming the basis of added value not in the store, but at home. How easily does the coating scratch? How easy is it to wash in the dishwasher? How does it handle a voltage spike? What is the actual water consumption, and will this light bulb really last for 4000 hours?
High demands for end products translate into high demands for raw materials. Even iron ore, which is still an example of the separation of production and consumption, now has so many grades and properties that its actual suitability for a particular production process can only be assessed by trying it out in practice. The foundation of any economy is agriculture, and it is rapidly transforming from a process of mixing manure with boots into a high-tech industry, where services account for a significant portion of the product’s value. Harvesting – a service. Storing the harvest – a service. Treating with chemicals – a service. The quality of seeds (how well the chemically treated granules work) can only be determined by planting them, and the quality of tomatoes can only be assessed by tasting them, and so on.
Example
What does all this mean for business? To understand the inadequacy of old business paradigms in the new era, let’s consider a simple example. Suppose a company sells trailers. What does this company actually sell? Trailers? No. Ten other companies sell trailers too. What does the consumer pay for when buying a trailer? They pay for the trailer itself, of course, but they also pay a little extra for something that allows the selling company to survive. In the past, this was referred to as “markup” or “commission” or something similar. In reality, the seller produces a certain product that the buyer consumes. Given that the manufacturer offers the same price for trailers to everyone (except in non-standard market situations), the buyer will choose a trailer seller based on the expectation of receiving a certain product for a specific amount of money (which is not the trailer itself). This product is vague, complex, and difficult to describe in words. It includes the smile, the time taken for processing, the accuracy in addressing minor issues, and the subsequent service. It encompasses everything that constitutes the “satisfaction from the purchase” for the buyer. And this product has that important characteristic we mentioned at the beginning: it cannot be evaluated without experiencing it.
In today’s world, a large part of a product’s value can only be assessed after it has been consumed. However, if we dig deeper, we find that the consumer is not actually consuming the product itself, which we have struggled to describe in words, but rather the differences between similar products offered by various sellers. In other words, what the consumer is buying is what sets this seller apart from the others and what is more acceptable to them. A buyer chooses a specific trailer seller because it is more convenient, closer, faster, seems more reliable, cost-effective, comfortable, and even more prestigious. They will only be able to evaluate this after purchasing the trailer, but initially, they make assumptions and act based on those assumptions.
How exactly does the buyer form their assumptions?
Let’s take another example. Understanding that a product cannot truly be evaluated until after purchase, we can imagine a situation where people at a market are selling cats in bags. One seller has a beautiful, colorful bag with the label “elite Persian cat,” another has a simple canvas bag labeled “cat – mouse catcher,” a third has a bag that says “ordinary cat, inexpensive,” and a fourth has a photo of a fluffy cutie stuck on their bag, and so on. It’s impossible to check the contents of the bags. Each has a different price. Which bag should you choose? This is exactly the state consumers find themselves in when buying something from a particular seller. And consumers will think they are reasoning logically as they make their choice:
- Some might think that a pricey silk bag with a staggering price tag must contain a worthy cat. But if there are bricks inside, it just means that prestigious cats now look like that.
- Someone will choose the bag with a handle, since they don’t know where the cat is anyway, at least it will make carrying the bag more convenient.
- Someone will choose a sturdier bag, thinking that the cat inside won’t be able to scratch its owner.
- Someone went to the market to buy a cat for a specific purpose and will end up with a bag labeled “mouse-catching cat,” believing that this bag most likely contains a cat that can catch mice.
- Someone will ask all the sellers to weigh the bags and will choose the heaviest bag or the lightest one, who knows.
But most people will act, as they believe, quite pragmatically. They will choose the cheapest bag with a cat, since it’s still unknown whether there’s a cat in that bag.
And the other sellers, seeing how quickly the cheap cats in bags are selling, which the clever ones have quickly learned to label differently, start lowering the prices on their own cats in bags. In this situation, the greatest profit, and thus the best offers and the highest sales volumes, will go to the one who doesn’t even have a cat in a bag. He can lower the price to the limit, pushing all the others out of the market, as it simply isn’t profitable for them to sell their cats under such conditions. Those who remain in the market will also be selling bricks, but not cats. Meanwhile, the most cunning will push ideas that expand the definition of a cat to “ceramic parallelepiped with holes.” You might say that this doesn’t happen? Just look at the games with “megabytes”/millions of bytes among hard drive sellers, or read about the contents of products that are still labeled, according to the packaging, as “cheese,” “sour cream,” “butter,” or “nut-chocolate spread,” which are made up of 75% palm oil.
Such markets are referred to as “markets with asymmetric information,” where the seller knows more than the buyer about what is in the bag. It has also been proven that in the absence of some market regulator, such markets collapse. Real cat sellers have no place in these markets—they incur losses, and consumers begin to reject the bricks and become distrustful even of the bags that actually contain a cat.
Regulation
The world would be terrible if everything were truly like that. Fortunately, there has always been a state that took on the role of regulating such markets. It introduced licensing, outlined quality standards, monitored compliance by sellers with these standards, and punished dishonest sellers. In some markets, these measures led to satisfactory results; for example, the pharmaceutical market is relatively safe for consumers. However, in other markets, such as insurance or banking, it has not been possible to account for everything, as the reliability of operations for clients has always been at odds with the essence of financial business, which involves the freedom to take certain risks. This allows for the concealment of the proverbial cat in the bag behind the demand for freedom. And, of course, one cannot imagine state regulation of the supply of a product like “satisfaction from a purchase.”
But right now, the whole world has reached a state where what is actually being sold is “the satisfaction of the purchase.” In most cases, it is impossible to force a person to choose a product or service from just one seller; they will compare their options. “Satisfaction from the purchase” is not just a smile. It involves real money that is spent or saved when making a purchase. It includes costs that cannot be assessed in advance, such as the time spent searching for information about a product or service, delivery costs that the buyer may estimate beforehand but are still uncertain, expenses related to complaints, resolving the consequences of a seller’s dishonest behavior, or legal costs, as well as costs associated with waiting for delivery, implementing the chosen solution, and restructuring business processes, and so on. All of this is commonly referred to as “transaction costs.” When a buyer chooses something identical offered by two different suppliers, they are purchasing it at a price that is listed on the price tag plus the transaction costs. The lower and more predictable these costs are, the more willingly the product will be purchased.
Old approach
However, as we have already understood, “transaction costs” or “satisfaction from a purchase” cannot be assessed without consuming it. Just like in more down-to-earth examples, government or other public regulation only provides indirect assessments of the possible quality of a product. A hairdresser’s diploma does not guarantee a good haircut, and a doctor’s diploma does not guarantee that they didn’t doze off in lectures or buy their diploma through bribery.
The old approach to selling this kind of product was similar to the market for cats in bags, where the winner is the one who creates the impression of an expensive cat in a bag while actually putting bricks inside. Let’s assume that the bricks can always be returned, but then the question of transaction costs arises. This is often exploited by suburban hypermarkets, which sell cheap junk at a price that makes customers reluctant to return to the store during the return period. They can also create difficulties with the return process, such as long lines. The key is to create the impression of a good deal, and the product will sell. To ensure that the product isn’t returned, they obviously don’t put bricks in the bag. However, through advertising and propaganda techniques, they create the illusion for the customer that they are buying something more than what is actually being sold. A deodorant supposedly makes a person irresistible, cigarettes make them cool, and a portable computer makes them influential and wealthy. In any case, what is sold only minimally corresponds to the claimed characteristics. No one invests money in improving the formula of a deodorant if it only enhances the product’s properties without providing a reason for marketing activity, which can be conducted without changing the formula at all. Often, what is sold doesn’t meet the customer’s expectations at all; it merely creates the illusion of having what they purchased. A close example is sausages and hot dogs that contain almost no meat, “dairy” products made from palm oil, or an insurance policy that no one intends to pay out.
Antiselection
Packaging is more important than the product itself, and the money spent on marketing a product can always be factored into its price. This is why we see milk on the shelves sold not in one-liter bottles, but in 920-gram containers. The 80 grams represent the cost of the brand, which is taken from the consumer’s wallet.
There is a concept that is very characteristic of markets with asymmetric information, known as adverse selection. A good demonstration of this phenomenon is a bank’s choice of lending strategy. The higher the interest rate on a loan, the greater the chances that the borrower is someone who has no intention of repaying it. To counter the risk of non-repayment, bankers raise interest rates again, but this leads to even more defaults on loans. In this case, bankers are the “buyers,” as they are the ones paying borrowers money (in hopes of receiving a product – income from the loan). However, adverse selection exists in all markets.
The world is becoming flat. Everyone has equal access to the same resources. Everyone has more or less the same information. It used to be somewhat like this, but now it’s almost always the case. If two sellers are offering something at different prices and the difference is significant, the one selling it cheaper is likely offering a lower quality product. Alternatively, if we introduce another variable, we can argue that the seller who promotes their product heavily is spending less on other things and, therefore, is selling something of lesser quality. After all, if we assume that everyone is operating under more or less equal conditions, then the money spent on advertising or promotional expenses has to come from somewhere else. They either have to raise the price of the product or compromise its quality.
For the consumer, this translates into a simple rule: The easier and more obvious a purchase seems, the greater the chances that you are overpaying or even getting a subpar product. The worst way to find a service provider is to rely on advertising. A true master doesn’t have time to handle a flood of orders from ads and doesn’t need them. Those who advertise are either newcomers to the market or hacks who can’t gather recommendations. And most importantly, this simple knowledge is spreading among consumers faster than ever before. Advertising is becoming less effective and is starting to work “in reverse.” More and more businesses are consciously creating minimalist websites and offices, rejecting advertising, and relying on referrals, reasoning from the customer’s perspective: “Ah, a fancy website and they advertise – that means they’re expensive.”
Anonymous and reputational communities
Ethology distinguishes between two types of communities: anonymous, where individuals treat each other equally or rely on certain status signals and are unable to form expectations about the behavior of specific members, and reputational, where individuals are developed enough to remember who is who. Anonymous communities are large; an example is an ant colony. Reputational communities are smaller; an example is a wolf pack. Humans initially relied on reputational interactions, but as community sizes grew, reputational interactions were replaced by anonymous ones. We behave in the subway, in traffic jams, or in supermarkets no more rationally than ants. Importantly, we instinctively still try to build social connections, identify leaders, establish our own social status, find rivals, or gather followers around us. However, the human brain is not capable of tracking a large number of social connections, and the maximum number depends on individual abilities, while the average for the population is limited by what is known as “Dunbar’s Number” — around 200-300 people.
The tactic of selling bricks instead of cats works well in anonymous communities. No one personalizes the seller or the buyer, which means the deception can continue. This tactic is also effective for those who monopolize the flow of information and become authorities in the eyes of consumers, making them figures to remember. Using this approach leads to fewer real friends in people’s minds and more brands, which they use to categorize the real people around them. Our maximum number of social connections is limited by nature, and if we recognize a couple of dozen politicians, a few dozen brands, and well-known artists and athletes, there simply isn’t room left for real people. We become puppets, controlled by non-existent images. The more information we receive from a particular image, the higher its perceived authority and value. Our brains perceive Coca-Cola as the leader of the pack. We know more about wristwatches than about our classmates. We can be sold air, as high levels of information asymmetry are constructed and adverse selection is exploited. We are trapped.
Networks of people
We’ve been trapped until now. And that’s bad news for marketers. They awkwardly try to enter a new world with old methods, but it’s not going well for them.
The monopoly on information is no more. Thanks to the development of information technology, people now have two opportunities: a) to influence those around them just as effectively as a propaganda machine, and b) to build their own social connections, the number of which exceeds Dunbar’s number.
Now, in a person’s “personal network,” real people occupy most of the space. It’s no longer possible to sell bricks instead of a cat, as the seller is identified and becomes recognizable, not just to one disgruntled buyer, but to an entire community. In the past, it was possible to “inflate” the perceived value of a product or service through marketing, but now that bubble bursts instantly thanks to a couple of reviews on social media. It has come to the point where the worse the product, the less it should be talked about. That way, it will sell for a longer time.
Of course, this doesn’t apply to everyone. In Ukraine, 65% of people still don’t understand the purpose of the internet, let alone social networks. They can’t use them as a tool that provides the opportunity to gain the experiences of thousands of people. For 65% of the population, the old trick of “cats in bags” still works. But the world is changing. With every newborn, with every smartphone, the old world is fading away, and no one seems to be ready for the new one.
Businesspeople are astonished that advertising stops working, yet they continue to spend money on it. Marketing departments are still trying to create brands and legends, but the audience that is effectively receptive to them is rapidly shrinking to teenagers who haven’t yet been allowed online and to retirees who have never even considered the internet.
If before we were confused about which laundry detergent to buy from a dozen similar options based on price and our emotions, meaning advertising, now, when one in a thousand dares to try a different detergent and tells everyone that it’s better, we can choose the best detergent more rationally.
Now it’s no longer scary to set a higher price for a better product – word of mouth is becoming more powerful than advertising, and good products will bring customers back for a second, third, and even fourth time. Now you can open the bag before buying the cat. And even if you can’t, you can learn from the experiences of others instead of relying on a “pack leader” dictating what and how to buy.
Solutions
It turns out that the old doctrine, which dictated an increase in information asymmetry, no longer works in a world where information is becoming more and more evenly distributed. What sellers are actually selling is “the satisfaction of the purchase,” and now buyers can assess this before making a purchase. This is something to take advantage of, rather than relying on outdated methods like “cheap, cheerful, and billboard advertising.” If the main product of modern business is “the satisfaction of the purchase,” which can be evaluated in advance, then it is worth investing in its development. If a bag at the market can be opened, there’s no need to invest in the beauty of the bag anymore. Instead, we should invest in the pedigree of the cat. Most importantly, in a market where people stand with both open and closed bags, no one will buy anything from those with closed bags, regardless of the price tag on the bag.
This is the essence of the new, reconceptualized approach – to make your business more transparent, your social connections broader, and to encourage the exchange of experiences among clients, rather than imposing one-sided propaganda.
Indeed, some employers are already hesitant to hire individuals who don’t have well-developed social media profiles. Why choose candidates blindly when you can assess them for who they really are, who their friends are, and what they are genuinely passionate about, rather than just relying on what’s written in their resumes? Naturally, this practice doesn’t apply to banks and large FMCG corporations, where the core business continues to thrive on a high level of information asymmetry, and they fear social media like the plague, praying that nothing undesirable leaks out.
But we understand that if there’s something to leak, then “something is rotten in the state of Denmark.” Just as a passerby on the street is more likely to lose their wallet in a darker area, a less transparent business poses greater risks for consumers.
That’s why now is the time for small companies. The economies of scale that large companies benefit from are becoming less effective with the advancement of technology, and the sheer scale of production often leads to a decline in quality and customer satisfaction. The more customers there are, the harder it is to please everyone. A small company can focus on a niche, a micro or nano niche, consisting of just a hundred clients, and cater to their needs. Nowadays, when information flows freely, if a company is worthy, people will learn about it and come to it. Additionally, a small company is free from the large bureaucratic machinery that consumes a significant portion of revenue. Small companies are more agile and can respond more quickly to market changes. They can also pivot to a different market more easily if necessary. In our modern post-industrial world, a world of services, the size of a company, constrained by rules, regulations, and procedures, often does more harm than good, and customers are likely to find greater satisfaction with a small company than with a large one. Of course, there has always been and will always be a place for large companies. But that place is becoming smaller and smaller. Just as in the 20th century, during the era of “factories, newspapers, and steamships,” there has always been room for crafts, manual labor, and hand-painted propaganda posters created by artists.
A big secret for a small company
How effective is advertising? It’s easy to calculate if you know how many percent a particular ad will increase sales. For instance, if one billboard boosts sales by 0.01%, then its placement, costing 1,000 hryvnias, becomes justifiable when sales reach 10 million hryvnias. Naturally, advertising is only truly viable for large companies. At the same time, small companies often see no economic sense in spending money on mass advertising. Experience shows that 80% of customers for small businesses are repeat customers, or if the business doesn’t involve repeat orders, they are clients who came through recommendations. Companies that fail to build referral networks simply do not succeed and are filtered out of our sample by the laws of natural selection.
In other words, small companies are already working in the field of reputation management, and social media is not a threat to them but rather an asset. However, one by one, companies are making mistakes by thinking that by actively engaging in social networks and blogs, and indulging in what is now called “crappy PR,” they can attract customers. Of course, that’s not the case. Large and extensive social connections, whether in real communities or virtual ones, are not the reason for good sales; they are a result of them. One should not put the cart before the horse.
But how can they find and retain clients then? In fact, they just need to realize two things.
1) As mentioned above, most clients exit the reputation network.
You can’t make money without standing out from the rest.
The meaning of the second point becomes clear when we realize that the main product produced by the business—“customer satisfaction”—requires no initial investment, incurs no fixed costs, and can be easily replicated by competitors. Sooner or later, price competition begins among companies for the same product, which is already transparent and understandable to customers, and the earnings of market participants tend to zero.
So what should we do?
Here’s the story. Somewhere in the Urals, there’s a bricklayer named Misha the Brick. A wonderful guy! Every year, he goes around checking the stoves he’s built to make sure everything is in order, even though he lives dozens of kilometers away. He doesn’t even try to “retain clients.” The stoves he builds come with a lifetime warranty. His clients don’t expect to need any other stoves. He just stops by to check in, ask how things are going, and chat. This man genuinely loves his work and his clients. So, are there any chances of successfully finding a job in the area “controlled” by Misha the Brick? No. Which bricklayer will be recommended? Misha. Why? Because everyone knows him (reputation) and he won’t run away (reputation again). Who will people turn to for stove repairs? Misha.
That’s why such a simple method of retaining customers is hardly used by anyone. Who has ever received a call from a car dealership asking, “How’s the car?” Which contractors, who have done repairs or construction, regularly visit their clients and build a friendship with them? Nowadays, it’s the opposite—cut corners, steal some materials, and then “sell” to the next customer. But as mentioned earlier, that approach is no longer effective. The most cunning and clever way to increase sales now is through genuine love for the customer and for one’s work.
Here’s another example. Travel agencies. They are essentially selling the same thing – the product of tour operators. Their service is expertise, matching the right hotel to the right person. And how do they sell it? Unknowingly, they think they are selling tours, but they end up giving their product away for free to “price shoppers,” people who call a dozen agencies asking for hotel or tour recommendations. As a result, they already know all the details of the tour and choose the cheapest offer – the one where the travel agent is willing to lower their commission the most.
Maybe it’s worth being more transparent? Perhaps agents should tell clients right away what the commission is and invite them to come in to choose a tour? If a client wants the maximum discount and has the audacity and stubbornness to jeopardize a relationship over five dollars, then they should do their “homework” on the spot and get the discount they want. Why do travel agents prioritize building relationships with clients last, or even fear genuinely inquiring about their lives? The only thing they focus on is the size of the discount, and in the end, they end up with a “portfolio” of greedy and unpleasant clients, who are neither enjoyable to work with nor understand what it means to have a warm relationship with the person sending them on vacation.
The new approach, one based on transparency and sincerity—a reconceptualized approach—not only involves building relationships or helping clients develop a vision of their expectations from interacting with the company. It encompasses everything related to creating a strong reputational network that will sustain the business indefinitely. What else can be done to achieve this?
- Don’t try to “promote yourself” before you become an expert. If you perform worse than your clients expect, and you have many clients due to the “promotion,” you will simply ruin your business. Start your venture in the shadows, while not many people know about you and your reputation network is still being built. You’ll have more opportunities to avoid damaging your young reputation.
- Turn your business into an interesting and engaging endeavor. A carpenter can talk for hours about his craft, the challenges he faces, and the solutions he finds. Instead of inventing “trade secrets,” he should share them, showing exactly what his work entails and what he is being paid for. A table or chair may not seem expensive to a client until they see, either in person or through a video, how many hours of meticulous and skilled labor went into its creation. Clients will always compare it to their own experiences and understand that what they are buying is a product with a story. If people are captivated by your work, then the “leader of the pack” will no longer be Coca-Cola, but your business.
- Be an expert. Make sure everyone talks about you as a true expert, not a fake one. Don’t be afraid to take on students who may later become competitors. Competitors will emerge whether you nurture them or not. But students will always remain students, and a teacher will always be a teacher. Clients are more likely to choose a teacher. You just need to ensure that everyone knows who the teacher is.
- Understanding that any product or service can be copied, embed the essence of your uniqueness into what you offer. You cannot be replicated. Bring yourself into your business.
- Don’t copy others, don’t become a copycat. Instead, create new products and new markets. Come up with new ideas for people and… keep moving forward. When others copy your “new,” you’ll have something even newer. Keep moving all the time. You can only stay balanced on a bike while in motion.
- Be the sole source of news about yourself, both good and bad. It’s better for you to address any issues with a client than for an unhappy client to do it themselves. Fix the mistake and talk about it. Those who do nothing make no mistakes. Don’t be afraid of bad news. It’s the big, unwieldy corporations that fear it. Sharing bad news yourself can actually help you.
- Do things that will last, be remembered, and be talked about. Sell not just a product, but an experience. Make sure your customers receive more than they expect, not less. They will share their experiences with others, and those others will come to you. Remember the growing power of the customer and that traditional advertising is losing its effectiveness.
Remember that the era of anonymous buyers and sellers is over. You will increasingly find that customers know everything about you, and you need to know everything about your customers. This is your circle. The ears and eyes of these people belong to you. You shouldn’t make them turn away from you. No need for PR. What you need is sincerity. No need for marketing. What you need is value. No need for advertising. What you need are recommendations. The world is changing. It is changing forever, and you need to be ready for it. And reconism is the approach that will help you be prepared for this new world.