Under otherwise equal conditions, people would prefer to do business exclusively with their friends. In reality, these other conditions are not so equal. However, people still want to do business with their friends.
Jeffrey Gitomer
Table of Contents
New time
We have already deeply entered a post-industrial economy, where a large part of the gross product is generated through the provision of services rather than through material production. Moreover, material production has surpassed the point where one could judge an item solely by its appearance and list of specifications. Now, terms like “usability” have emerged, and factors such as reliability, response time, and accuracy of feedback to user actions have become important. Even household appliances or dishware reveal all their “secrets” that distinguish one manufacturer’s products from another and form the basis of added value, not in the store, but at home. How easy is it to wash dishes in this dishwasher? How does it handle a power surge? What is the actual water consumption, and will that light bulb really last for 4000 hours?
With each passing day, the distance between a product and its consumption is increasing. In the past, a product could be evaluated before it was consumed. Only a very small part of the entire economy operated under the opposite conditions: after purchase, customers could gain insight into the product from doctors, hairdressers, consultants, and a few other professionals.
It turns out that all the recommendations from business consultants and economists are becoming irrelevant simply because these individuals grew up and were educated in an old paradigm where consumers had a clear understanding of a product before making a purchase. From this perspective, consumers behaved rationally—they compared options, drew conclusions, and made decisions. However, as we move further into this new era, human behavior increasingly resembles that of a buyer choosing one cat in a bag from several options. Even if we can physically handle a new mobile phone, we are unable to fully grasp how it will actually perform. End products have become complex and difficult for consumers to understand.
The complexity of end products, in turn, means that raw materials must now meet higher standards than before. Even iron ore, whose extraction is still an example of the separation of product and consumption, now has so many grades and properties that its actual suitability for a particular production can only be assessed after attempting to work with it. The foundation of any economy is agriculture. However, 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 is a service. Storing the harvest is a service. Treating with chemicals is also a service. The quality of seeds can only be determined by planting them, and the quality of tomatoes can only be judged by tasting them.
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 product itself, of course, but they also pay a little extra for something that allows the selling company to survive. This used to be called “markup” or “commission.” In reality, the seller provides a certain product that the buyer consumes. 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 (which is not the trailer itself) for a specific amount of money. This product is vague, complex, and hard to describe: it includes the smile, the time taken for processing, the accuracy in addressing minor issues, and the subsequent service. This is 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 the modern world, most products can only be evaluated after consumption. However, if we dig deeper, the buyer is not actually consuming the product itself, which we struggle to describe in words, but rather the differences between similar products offered by various sellers. In other words, what the buyer consumes is what sets a particular seller apart from the rest, and what is most acceptable to them. They choose to pay a specific trailer supplier because it is more convenient, closer, faster, more reliable, more cost-effective, more comfortable, or even more prestigious. They will only be able to assess all of this after purchasing the trailer. But initially, they make assumptions and act based on those assumptions.
How does the buyer think?
Imagine a marketplace where people 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 “mouse-catching cat,” the third one says “ordinary cat, inexpensive,” and the fourth has a photo of a fluffy cutie stuck on the bag, and so on. It’s impossible to check the contents of the bags. Each bag has a different price. Which one should you choose? This is exactly the situation consumers find themselves in when buying something from various sellers. Of course, consumers will think they are reasoning logically when making 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, then it seems that’s just how prestigious cats look now.
Someone might choose a bag with a handle: since they don’t know what the cat is like anyway, at least they’ll make it more convenient to carry the bag.
Some people might choose a sturdier bag, thinking that the cat inside won’t be able to scratch them.
Someone went to the market with a specific goal and will buy a bag labeled “cat-mouse catcher,” believing that the 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 one. Or maybe 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 actually an animal inside.
The other sellers, seeing how quickly the cheap cats in bags are selling, will start lowering the prices of their offerings. In this situation, the highest profit and, consequently, the best deals and the highest sales volumes will be secured by those who don’t even have a cat in a bag. Such a seller can lower the price to the limit, pushing all the others out of the market, as it simply won’t be profitable for them to sell their cats under those conditions. Those who remain in the market will also be selling bricks, but not cats. And the most cunning will promote ideas that expand the definition of a cat to include a “ceramic parallelepiped with holes.” Sounds impossible, you say? Then take a look at the games with “megabytes”/millions. [11]. byte among hard drive sellers or read about the composition of the product that is still called, according to the packaging, “cheese,” “sour cream,” “butter,” or “nut-chocolate spread,” which is made up of 75% palm oil.
Such markets are referred to as “markets with asymmetric information”: the seller knows more about what is in the bag than the buyer. This has been proven. [12]. In the absence of some market regulator, such markets quickly collapse. Real sellers of cats have no place there—they incur losses, while consumers simply start to refuse bricks and become distrustful even of bags with real cats.
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 norms, and punished dishonest participants. In some markets, such measures led to satisfactory results; for example, the pharmaceutical market is quite safe for consumers. In other markets, such as insurance or banking, it is impossible 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. And, of course, it is hard to 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 the very concept of “purchase satisfaction” is for sale. In most cases, it’s impossible to force a person to choose a product or service from just one seller; they are likely to compare their options. “Purchase satisfaction” is not just a smile. It also involves real money spent or saved during the transaction: on finding information about the product or service, on delivery, on complaints, on dealing with the consequences of a seller’s dishonest behavior, on legal costs, on waiting for delivery, on implementing the chosen solution, and on restructuring business processes. All of this is commonly referred to as “transaction costs.” When a buyer chooses between identical products offered by two different companies, they are essentially purchasing that something at the price indicated 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 experiencing them. Just like in more down-to-earth examples, government or other public regulation only provides indirect assessments of the potential quality of a product. A hairdresser’s diploma does not guarantee a good haircut, and a doctor’s diploma does not ensure that its holder stayed awake in lectures and didn’t buy the certificate instead.
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, selling cheap junk at a price that makes customers reluctant to return for the specified return period. They can also create difficulties with the return process, such as long lines of equally disgruntled consumers. One cable television operator in Kyiv employs this tactic, aiming to reduce customer churn not by improving service, but by creating administrative hurdles when it comes to canceling contracts.
The main thing with this approach is to create the impression of a good deal; then the product will sell. To ensure that it isn’t returned, they obviously don’t include any bricks. However, through advertising and promotion, they create the impression for the buyer that they are purchasing something more than what is actually being sold. A deodorant supposedly makes a person irresistible, cigarettes make them cool, and a laptop 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. Moreover, marketing can be carried out without changing the deodorant formula at all. Often, what is sold doesn’t meet the customer’s expectations at all. The product merely creates an impression for the buyer of what they have acquired. A simple example is sausages and hot dogs that contain almost no meat, “dairy” products made from palm oil, or an insurance policy for which no one intends to pay out.
Antiselection
Packaging turns out to be more important than the product itself, and the money spent on marketing a product can always be deducted from the price of that product. As a result, we find milk on the shelves sold not in one-liter bottles, but in 920-gram containers. The 80-gram difference represents the cost of the brand, which is taken directly from the consumer’s wallet.
There is a phenomenon that is very characteristic of markets with asymmetric information—adverse selection. An example of adverse selection is a bank’s choice of lending strategy. The higher the interest rate on a loan, the greater the chances that it will be taken out by someone who has no intention of repaying the lender. To mitigate the risk of default, bankers raise interest rates again, but this leads to even more hopeless debts. In this case, it is the bankers who are the “buyers,” as they are the ones paying borrowers money (in hopes of receiving a product—the income from the loan). Such adverse selection exists in all markets.
As mentioned above, the world is becoming increasingly flat: everyone has roughly the same access to the same resources; everyone has more or less the same information. If two sellers are offering the same item at different prices, and the price difference is significant, the cheaper seller is likely offering a lower-quality product. Adding another variable to the equation, we can argue that the seller of the product supports its sales with strong advertising, which means they spend less money on other things. Therefore, they are probably selling a lower-quality product. After all, if we assume that everyone is operating under roughly equal conditions, then the money spent on advertising must come from somewhere else: they will either have to raise the price of the product or compromise on its quality.
For consumers, 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 follow advertising advice. A true master doesn’t have time to handle a flood of orders from recommendations and doesn’t need advertising. Those who advertise are either newcomers to the market or hacks who can’t get recommendations. And, most importantly, this simple knowledge is spreading among consumers faster than ever before. Advertising is losing its effectiveness and starting to work “in reverse.” More and more companies are consciously creating minimalist websites and offices, opting out of advertising and relying on recommendations, reasoning from the customer’s perspective: “Ah, an expensive website and advertising. They probably have high prices too.”
Anonymous and reputational communities
Ethology, the science of animal behavior, distinguishes between two types of communities—anonymous and reputational. In anonymous communities, individuals treat each other equally or rely on certain status attributes, as they are unable to form expectations about the behavior of specific members of the group. In reputational communities, individuals are sufficiently developed to remember who is who.
Anonymous communities are vast, like an anthill. Reputation-based communities, on the other hand, are few in number, resembling a wolf pack or a family of primates. Humans originally relied on reputation-based interactions, but as communities grew larger, they were gradually replaced by anonymous ones. We behave in the subway, in traffic jams, or in supermarkets no more rationally than ants. Yet, we still try to build social connections, identify a leader, establish our own social status, find a rival, or gather followers around us. Unfortunately, the human brain is not capable of tracking a large number of social connections. Their quantity is limited by what is known as Dunbar’s number — between 100 and 230 people.
The tactic of selling bricks instead of cats works well in anonymous communities. No one personalizes the seller or the buyer, which means consumers can be deceived repeatedly. After all, information about the outcomes of completed transactions won’t reach the next naive buyer. This tactic also benefits those who monopolize the flow of information, gaining authority in the eyes of consumers, leading to a situation where people have fewer real friends and more brands. As they recognize these brands, they sort the real people around them. We involuntarily associate people with the cars they drive, attributing certain personality traits to them. We evaluate our conversation partners based on the brand of their watches. The label on the clothes we wear matters to us.
The maximum number of social connections we can maintain is limited by nature, and if we get to know a couple of dozen politicians, a few dozen brands, and well-known artists and athletes, we simply run out of space for real people. We become puppets, controlled by non-existent images. The more information we receive about a particular image, the higher its authority and value seem to us. Our brain perceives Coca-Cola as the leader of the pack. We know more about wristwatches than about our classmates. And we can be sold air, as high levels of information asymmetry are created and exploited through anti-selection. We are trapped.
Networks of people
In fact, we were trapped only until recently. There is no longer a monopoly on information. Thanks to the development of information technology, people have gained two opportunities: to influence those around them just as effectively as a propaganda machine and to build their own social connections, where the number of people exceeds Dunbar’s number. And this is bad news for marketers. They clumsily try to enter this new world with old methods, but they are not succeeding.
Now, in a person’s “personal network,” real people occupy most of the space again. It’s no longer possible to sell bricks instead of a cat, as the seller is identified and becomes recognizable, not just to the disgruntled buyer but to the entire community. In the past, it was possible to “inflate” a bubble of perceived value for a product or service through marketing, but now that bubble bursts instantly with just a couple of reviews on social media. From now on, the worse the product, the less it should be talked about. That way, it can be sold 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 to gain insights from thousands of people. For this portion 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 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 receptive to them is rapidly shrinking, consisting mainly of teenagers who haven’t been allowed online yet and retirees who simply aren’t interested.
In the past, we were confused about which laundry detergent to buy from a dozen that were roughly the same price, and we based our choice on emotions, specifically advertising. Now, when one in a thousand dares to try a different detergent and shares that it turned out to be better, we can make a more rational choice.
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 customers will return for a second, third, and even fourth time for a good product. Now you can open the bag before buying the cat. And even if you can’t, it’s easy to learn about the experiences of others instead of relying on the “pack leader” dictating what 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. This means that the so-called “satisfaction from purchase” can now be assessed by buyers before making a deal. This is something to take advantage of, rather than trying to rely on old methods: cheap, aggressive marketing, and billboard ads. After all, if the main product of modern business can be evaluated in advance, it makes sense to invest in its development. If a bag at the market can be opened, there’s no need to spend money on the beauty of its packaging. It’s better to invest that money in the cat’s pedigree or its training. And most importantly, in a market where there are people with both open and closed bags, no one will buy from the latter, regardless of the price of their goods.
This is the essence of the White Sales paradigm — to make your business more transparent, to broaden your social connections, and to encourage the exchange of experiences among clients instead of imposing one-sided propaganda.
Some employers are already hesitant to hire people who don’t have filled-out profiles on social media. Why choose candidates blindly when you can assess them based on who they are, who their friends are, and what they are genuinely passionate about, rather than just what’s written in their resumes? Naturally, this practice doesn’t apply to banks and large FMCG corporations, where the main profits continue to be generated through a high level of information asymmetry, and they fear social media like the plague: what if something leaks out?
But we understand that if there’s something to leak, then “all is not well in the Danish kingdom.” Just as a passerby on the street is more likely to part with their wallet in the darker areas, a less transparent business poses a greater danger to the consumer.
That’s why now is the time for small companies. In the past, large corporations, relying on their revenue, could afford to spend money on advertising and see a small percentage increase in sales that was significant in monetary terms. A small company, lacking high sales volumes, didn’t benefit from advertising because the cost of advertising exceeded the profit from increased sales. Now, advertising is becoming less effective, and large companies are losing their advantages.
The price effect of scale for large companies is diminishing with the advancement of technology, and the scale of production itself often leads to a decline in quality and a decrease in the satisfaction of the average customer. The more customers there are, the harder it becomes to please each one. A small company can choose a niche (micro or even nano) consisting of a hundred clients and meet their demands. Nowadays, when information knows no barriers, people will inevitably learn about this company if it deserves attention. Moreover, it is free from the enormous bureaucratic machinery that consumes a large portion of its income. A small company can respond more swiftly to market changes and can more easily switch markets if necessary. In the modern post-industrial world, a world of services, the size of a large company, constrained by rules, regulations, and procedures, often does more harm than good. Most likely, a customer will derive less satisfaction from a large company than from a “boutique” one. Of course, there has always been and will always be a place for large corporations, but that space is shrinking. The most successful and dynamic among them are moving away from monolithic hierarchical structures, essentially transforming into a “cloud” of smaller firms and companies connected by contracts. We are witnessing a new revolution, similar to the one that occurred at the turn of the 19th and 20th centuries. Back then, despite the emergence of “factories, newspapers, and steamships,” there was still room for manufactories, manual labor, and propaganda posters drawn by artists rather than printed by machines.
A big secret for a small company
How effective is advertising? It’s easy to calculate if you know how much it increases sales. For example, if one billboard costing 1000 hryvnias boosts sales by 0.01%, it becomes worthwhile if sales reach 10 million hryvnias. Small companies often don’t see the economic sense in spending money on mass advertising. Experience shows that 80% of customers for small businesses are either repeat customers or those 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, naively believing that by actively engaging in social networks and blogs, and focusing on SMM, they will be able to attract customers. Of course, that’s not the case. Strong and extensive social connections, whether in real communities or virtual ones, are not the cause of good sales; they are a result of them. One should not put the cart before the horse.
But how can we find and retain clients then? In fact, you just need to realize two things:
1. As mentioned above, most clients come from the reputation network.
2. 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, does not incur 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. At that point, the earnings of market participants tend to zero.
Like on the palm of your hand.
So, in modern times, businesses are forced to become transparent, and this is good news for consumers. However, transparency is only beneficial when it is mutual. What does the current one-sided transparency of businesses towards consumers/clients, who for the most part can remain anonymous, mean? It signifies extreme discomfort for entrepreneurs, a threat described in F. Kotler’s book “Chaotics.” One-sided transparency is unappealing to anyone. No one is willing to live in a reality show like “Behind the Glass” for free. This discomfort is not imagined; it stems from a conscious or unconscious sense of danger. If you are walking through a forest and someone is watching you without your knowledge, it never bodes well. It is much more reassuring when you know for sure whether someone is watching you and who that person is.
Few people realize what a terrifying and inhumane weapon marketers and PR professionals can wield thanks to social media, which, in fact, make manufacturers transparent to consumers. It’s hard to find anyone who would disagree that a series of 10-20 striking “black” posts in blogs or social networks, supposedly “from personal experience,” can bring any FMCG manufacturer to their knees. If your company has a main competitor and you clearly understand that customers’ rejection of the competitor’s products will boost your sales, then the investments made in social black PR will pay off many times over in the very first season.
The only thing that might prevent companies from using such competitive tactics is the fact that there are often multiple competitors in the market, and the exit of one player could be a public benefit for the other companies. Consequently, no one will invest in creating this benefit, expecting that someone else will do it. However, beyond simple pragmatism, a manufacturer can genuinely suffer from a persistent disgruntled consumer who seeks revenge. This results in a completely asymmetric confrontation. Ten blog posts may cost about a dozen hours spent “for pleasure,” while addressing the consequences could require measures that involve sums with four or five zeros.
In the new world, sellers desperately need tools that will allow them to prove that publications are false, expose anonymous troublemakers, and hold them accountable. Sellers need to know their consumers personally. The old system of sales stimulation, embraced by marketers and based on an anonymous crowd of “average” consumers, has now become the Achilles’ heel of any manufacturer. Understanding and addressing the problem is only possible if there is concrete evidence that yes, such a consumer exists, yes, they purchased a certain product that turned out to be of poor quality, and yes, there is a shortcoming here.
Interestingly, the new market—online sales—was formed with the ability to track consumers from the very beginning. Online stores dealt with registered users right from the start. It was always possible to understand who they were and what the discussion was about. From the very beginning, any complaint made online could be calmly and adequately addressed immediately with a follow-up comment, starting the conversation by asking the complainant for their invoice number or registration details. The largest marketplace in Ukraine. hotline.ua It specifically maintains a review system for vendors, where they can communicate with consumers. Consumers are carefully accounted for and tracked, to the point that some companies don’t even bother issuing any warranty cards. Why would they? It’s already recorded who bought what and when.
De-anonymization of consumers brings the relationship between merchants and buyers back to a time when they knew each other face-to-face and, consequently, could not deceive one another. This means that we are talking about establishing not anonymous, but reputational relationships between consumers and sellers. In such conditions, the seller builds their reputational assessment (that is, a set of expectations) regarding the consumer, while the consumer, being counted and tied to the seller through a loyalty program, develops their own model of expectations. Yes, businesses can no longer afford to make mistakes. However, they can now address each consumer individually, even if it’s through smart analytical programs that create such “targeted” offers.
Retailers, like any other business, also strive to obtain a tool for “counting” consumers or, as it’s commonly referred to now, to build a loyalty program. Interestingly, the technical capability for this “counting” is not questioned by anyone. We take computers and databases for granted. Just a short while ago, maintaining a loyalty program would have been too expensive for a company. Thanks to IT, there is a constant reduction, even to the point of being negligible, in transaction costs.
Loyalty programs are essential not only for business security but also for targeted consumer stimulation. If your product is purchased regularly, business analytics can help you identify shifts in consumer preferences and enable you to make a specific, appealing offer to a particular customer at the right moment. Unfortunately, the information gathered through loyalty programs is often used clumsily by sellers, who simply offer bonuses. Few engage in customer analytics. Hardly anyone thinks to greet a customer by name at the checkout if they present their card. And very few realize that the increase in sales among registered customers is likely due to all their relatives using the same discount card, rather than some magical rise in loyalty and consumption levels. This was a real example of how marketers assessed the effectiveness of a discount loyalty program for one of the home appliance retail chains. In their view, which I hastily corrected during a personal meeting, it was perfectly normal for a customer to buy three refrigerators, two washing machines, and five food processors in a single year. Moreover, they didn’t even attempt to analyze consumer behavior; they simply handed out bonuses, effectively giving discounts for reasons other than what they intended.
It’s interesting to trace the history of airline loyalty programs. Initially, loyalty programs were created for hotels. Travelers could earn bonuses and discounts by being loyal to a specific hotel chain. This allowed hotels to “buy” the loyalty of business clients, providing clear expectations for service levels and distinguishing a particular hotel, as a member of the chain, among hundreds in the city. Airlines observed this and developed their own programs. However, when it comes to choosing an airline, passengers often have little choice. The market is monopolized. Each route is served by one or two carriers, who often have purchased block seats on each other’s flights. There is no real choice. Thus, the flight attendant’s phrase at the end of the flight, “Thank you for choosing our airline,” sounds rather ironic. In fact, the “miles” that airlines offer to passengers are, in 90% of cases, simply unnecessary. Consequently, airlines lose money when a passenger, who needs to fly anyway, opts for a cheaper option than they should have. Meanwhile, airlines know nothing about the passenger other than their travel history.
Today, more than ever, it’s important to know your customers personally. Your relationships with them should be based on information that goes beyond just their presence in the store or their purchase history. If possible, create loyalty programs, customer communities, organize client meetings and business clubs, and stay informed about when and what your customers are spending their money on. This way, you can find new buyers among those who spend money on the same things your customers do. Expand your loyalty program and involve other companies that offer something specifically for your customers. Make your customers transparent to you, just as they expect you to be transparent with them.
Transparency as Added Value
Imagine five packs of dumplings lined up on a shelf. They all have the same price and similar packaging. The first pack is made of cardboard. The second one differs from the first by having a transparent package. Both are simply labeled “Dumplings.” The third pack additionally lists an approximate composition, for example: flour from grains, vegetable fat, flavoring identical to natural. The fourth pack provides a detailed composition, while the fifth pack includes not only the composition but also the address of a webcam installed in the production workshop, a page with a very detailed recipe, and a link to “live” accounting records showing exactly what the factory purchased from suppliers.
Which dumplings would you prefer to buy? The question is almost rhetorical. The more reliable (and this is important) information is provided about the dumplings, the higher the demand for the product will be.
More “transparent” dumplings can be sold at a higher price since the demand for them is greater. This means that a simple way to increase the added value generated by a business—ranging from consulting to steel rolling—is to ensure its transparency, quite literally.
Is this news? Yes and no. Yes, because the very idea of transparent business seems to contradict both the theory of information asymmetry and the established practice where some soft drink manufacturers still believe that their “trademark” is the secret recipe, which has long since become an open secret. In other words, the entire marketing department of a large international company believes that the success of their business and consumer preferences are ensured by an air of mystery surrounding the product’s ingredients. They naively think that as soon as the recipe is published, millions of clones will immediately rise from the ashes and start competing with their product. Meanwhile, one of the leaders in the closely related beer market doesn’t worry about the production of beer by thousands of breweries around the world. After all, it’s not about the recipe; it’s about economies of scale and strong marketing support.
No — because the idea of transparency has long been embraced by the food service industry. There are layouts for cafeterias and restaurants where customers can see the kitchen. Naturally, this requires more attention to cleanliness and proper food handling procedures. But this is precisely what creates added value. A cafeteria with an open kitchen instills more trust. This type of layout emerged in the mid-20th century in response to “urban legends” about meat patties made from toilet paper and chefs urinating in the pots.
You can also watch live how the ground meat sold right there in the supermarket is made—the meat processing area is often separated from the sales floor by glass. In the Middle East, bakeries are almost always set up so that customers can see how the bread is made and what it is made from.
A simple question: do you like it when “juice” is labeled something like “100% orange,” and then in green on green it adds the word “nectar”? Are there really people who think this should appeal to someone and that consumers want to be deceived? How much easier would it be to be honest? Consider this as a consumer before you put that 920 ml bottle of milk on the shelf.
What is really happening? There is a product and there is a price. By removing the unnecessary, you can use the formula:
Money + Transaction Costs = Product Cost + Promotion
In this formula, the left side of the expression corresponds to the buyer’s expenses, while the right side corresponds to the seller’s expenses. The seller, wanting to get your money, can manipulate the right side of the formula. So far, it has been much easier to invest in advertising rather than in the product itself. The consumer had no voice (and in places where they still have no voice, this continues). The seller is limited by law, for example, the requirement to indicate the weight of the product on the milk packaging. But the seller resists fiercely and writes this number in small print. After that, they package the milk in sets of three, prominently displaying “3 for the price of 2!” in a way that the attractive slogan on the overall packaging overshadows the note that the milk package contains not 1000 ml, but only 920.
Buyers have been overcharged and will continue to be overcharged. The seller’s smile is still cheaper, and very few people go to the market with their own scales. Why is that? Because you spend not only money on the product but also effort to gather information about it. This is part of those very transaction costs—non-obvious but quite significant. The more a person values their time, the less they will stand around choosing products off the shelf. Or worse, calculating which market has the best price for a product and where it’s more cost-effective to go, taking transportation costs into account. There’s even less chance that someone going out for carrots will bring not only scales but also a mass spectrometer. People strive to minimize their costs, assuming the quality of the products is roughly the same. They focus on price, not by visiting every seller, but by taking a “market sample”—visiting two or three sellers and getting an average price for the product from their perspective. The more hidden the true information about a product, the less effort a person will expend to obtain it. They will choose something out of nothing, guided by emotions rather than analytical results. They might pick the smile of the “Cheerful Milkman,” or what others have bought, or something that is… more expensive (“higher quality and more prestigious”), or something that no one else has chosen. In any case, they will have a method.irrationalof choice, as rational choice is too expensive. This is exactly what marketers take advantage of. Simple math — and nothing personal. “We are not deceiving you. We add propaganda to the product on one side and increase your transaction costs on the other.”
But today, propaganda is becoming increasingly expensive, and its effectiveness is declining. In the mass market, these methods no longer mean anything, and to exaggerate, it’s hard to sell more than one unit of a failed product. News about poor quality and discrepancies between the product and its advertising spreads quickly.
Today, the material efforts to ensure transparency are becoming increasingly accessible. Anyone can install web cameras in the workshop and move accounting online. However, not everyone considers these possibilities, and unfortunately, in our environment of constant struggle for information between businesses and the ruling elite, it is not always safe. It is essential to develop procedures and plan projects for information disclosure in a way that maximizes transparency while not jeopardizing the company’s well-being.
Reputation is the ultimate currency.
Whether you like it or not, Facebook has already been invented. And if your product is worthy of consumers’ attention, everyone will know about it right away. It has become a norm that bad news spreads instantly. Therefore, quality must be impeccable by default.
Now you don’t have to wait for the unscrupulous competitor hiding behind asymmetry to fall victim to social media. On the contrary, you need to showcase what makes you better, what you do and how you do it, and reveal what your competitor is afraid to show. After all, you are already doing things well, and you have nothing to be ashamed of.
If there are bad news, take control of them yourself. You will stop rumors, show your openness, willingness to answer all questions, fix the issue, and do everything to ensure it doesn’t happen again. It’s quite simple, as a café owner, to write in your blog that you had to throw away a batch of fish today, and also describe the efforts you are making to prevent fish from spoiling in the future. This way, you won’t have to worry about a disgruntled employee posting pictures of rotten fish on their page with comments like “Look, this is what they feed us.” Bad news is also necessary because overly positive “social media activity” has already started to wear thin. Are there problems in your business? Describe them, and make your customers root for you.
You no longer have, and will never have, the time to develop a PR strategy and reputation management policy. Your reputation simply must be impeccable from day one. And it can only be impeccable if you have nothing to hide and there is no ground for speculation.
Sales in a Flat World
Today, every consumer can instantly access a vast number of suppliers. In such a world, it seems almost impossible to make sales at all. Often, people don’t really understand what the role of a salesperson actually is. Are salespeople riding a train without a locomotive?
Once, I encountered a situation where a new local internet provider was trying to compete both with another local provider and with the telecom giants. All of them offered high-quality, high-speed internet through optical fiber lines. However, despite the apparent similarity of the services provided by all the providers, customers for some reason preferred to work with one of them, bypassed another, and completely ignored the third. This means that, despite the technical specifications, there is something that makes customers choose one provider over at least two others.
Of course, price competition played no role. Reputation was much more important. The new provider entering this local market was unfamiliar to clients who had already chosen one of the two existing providers and saw no reason to change. And if reputation is directly linked to the density of communication, then the only right solution I suggested to the provider was:
a) test drive,
b) “refer a friend” promotions,
in the sponsored first month of connection, if there is a contract with a competitor,
g) preemptive uploading of the most popular files distributed on torrent trackers to the provider’s local servers — so that people can confidently tell each other that “they really have faster internet,” despite having the same actual “bandwidth.”
And precisely because all the providers were “out in the open,” meaning they were in a flat world, clients began to pay closer attention to the new option. Especially since the newcomer practically eliminated the transactional costs associated with switching providers.
As a result, three months later, the new provider had captured 20% of the local market, after which the second local competitor started a price war, trying to compete with both the newcomer and the major operator. Like many others, he made the typical mistake of a seller—he assumed that price mattered. He didn’t gain any new customers, and six months later, he had to shut down his business. Now, in that neighborhood, there are still just two providers with “fiber optics”—our newcomer and the major telecom that hasn’t gone anywhere.
So, apart from reputation in a flat world, the client focuses on convenience. On everything that reduces their transaction costs. For example, when buying computer components, a customer is more likely to purchase everything in one place rather than in five different ones. This convenience is sometimes prioritized over price or minor differences in the technical specifications of the components.
Recently, I was looking for a battery at the request of my mother-in-law. I was interested in the possibility of getting the item delivered on a weekend at 7 PM. I chose the first online store that met my requirements. The price wasn’t a major concern, as it was within a reasonable range (+/- 10% of the average cost).
All these examples indicate that the world can never be perfectly flat. It’s important to note that the idea of a flat market is only relevant when consumers know everything about a product and have a clear need for it. This is where we find what we can manage—consumer awareness. Learn. others. Share recipes Be active online, share interesting stories about your business, and so on. In a flat world, you won’t be able to build competitive advantages by drowning out the competition with advertising or gaining benefits from market share. You need to “build” your audience—people who will recommend you to others. Don’t hesitate to ask your customers to write reviews about the products they’ve purchased on their blogs and social media pages.
Your chance to attract more customers than the neighboring online store lies in the fact that the consumer will learn about the product from you. They will see you as the expert and therefore trust you. Of course, this is assuming the prices for similar products are comparable.
Develop a philosophy. restrictions …with which you can stand out in a crowd. So that your fans love you not just for what you have, but for what you definitely won’t find anywhere else. For example, you will never sell Chinese products. Or, on the contrary—only Chinese ones. Decide for yourself. Reputation is about clear expectations, so shape them. Consumers love reliability and appreciate when their
Always ask yourself the question: “What makes me better than others?” Finding it hard to answer? Ask yourself: “How am I different from the rest?” Cultivate That is where your uniqueness lies. Take pride in it, live it.
Chapter Summary
Main ideas
More and more goods and services cannot be evaluated until the moment they are consumed.
The difference between the purchase price and the selling price is the added value created by the seller.
In markets where “cats in bags” are sold, meaning services that cannot be evaluated in advance, there should either be government licensing for market participants or support for a well-developed reputation system. Otherwise, all sellers start offering “bricks” instead of “cats.”
Make the choice to use your services easy and obvious for the consumer. Think about how to make your business more transparent and how to spread your reputation among others.
You don’t get a second chance to build your reputation. Information technology works against large companies but in favor of those who are honest and transparent.
· Advertising should sell. If you can’t measure the direct monetary impact of your advertising, don’t invest in it.
The transparency of your business is worth the money it will ultimately earn. In a market full of “cats in bags,” the best way to sell a product is to open the bag. Then, closed bags won’t be perceived as bags with cats at all.
In the new world, competition should not be based on the price of the product, but on transactional costs: the buyer should expend less effort to understand your product—”getting the cat out of the bag”; it should be more convenient for them to purchase from you at the same price; their expectations of you should always be met; the risks taken by the buyer when entering into a deal with you should be minimized; and they should have a pre-existing opinion of you based on a solid reputation.
If the world becomes flat, even the smallest hill will stand out. Beware of being like everyone else.
Exercises
– Estimate by what percentage one billboard will increase sales. Compare its cost with the increase in profit (not sales volume) generated by this activity. Is it worth placing it?
– Outline a plan for how, besides advertising, you can tell people about yourself and what you sell. How can you encourage existing customers to do this?
– Develop a loyalty program that increases your sales rather than decreasing the average transaction value.
Where to start?
· Consider how you can make your business more transparent. Webcams in the production area? Asking customers to write about you on social media?
– Develop principles. Walk away from sales if their consequences could harm your reputation, and don’t regret the losses.
What can you do to learn more about your customers? Can you predict their next purchases based on their buying data?
[11].Professionals in the information technology industry consider a “megabyte” to be 1,048,576 (220.) byte. However, marketers refer to a “megabyte” as 1,000,000 (106.) byte. Minor deception helps sell less capacious data storage devices at a higher price.
[12].“The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” by George Akerlof