Full transparency in pricing

Posted by Elizabeth Harrison in Personal Finance on 26 March 2013 - Elizabeth is a Senior Credit Analyst at checkmyfile.

With news of horsemeat in beef products, large companies not paying their taxes and a general mistrust and scepticism when it comes to big business, it makes a refreshing change to find a company aiming for full transparency with its business practices.

In recent years we have witnessed a growing interest on the part of consumers in the origin of products and sustainable living. Organic and fair-trade products fill the shelves of our supermarkets and a greater focus is placed on supporting local businesses.

Keebunga, a Cornish company specialising in products for outdoors enthusiasts, follows on from this approach and takes it a step further by aiming to provide the full history of every item it sells.

Customers not only see where an item is made and what materials have been used, but also get a full breakdown of the costs involved at each stage of the product’s manufacture. This information is shown in such detail that you will learn just how much the packaging and tags of a t-shirt cost (30p) and that £2.70 of its final price covers the shipping from India, where it is manufactured, to Keebunga HQ. Additional figures provide the breakdown of manufacturing costs, VAT and gross profit.

For the customer, the aim is to inspire confidence to know exactly why a product costs what it does and this honest and open approach also works in Keebunga’s favour, as building consumer trust will help to promote brand loyalty.

Keebunga’s founder, James Williams, seems to set great store by the old adage ‘knowledge is power’. By providing customers with as much information as possible, Keebunga is enabling them to make informed decisions.

With many companies glossing over poor labour practices in the manufacture of their goods, and as some would go as far as to say that dishonesty and deception have crept into trading practices and are on the increase, it is reassuring to know that a product satisfies your own ethical standards and that the company itself shares your values.

It was James Williams’ own interest in sustainability and good business practices which led in part to the transparent approach. He says, "When you start going down this route, you realise that for every decision there are arguments on both sides – for and against getting the manufacturing done in China or the UK, or for using organic cotton or non-organic cotton, for example. So I decided to make the company as transparent as possible – that way customers can decide what's important to them."

Taking his example of organic versus non-organic materials to demonstrate the advantage of transparency, the breakdown of costs provides clear reasons why the overall cost may be higher than a competitor’s prices without the need for justification at every stage.

As the cost of using such materials is set out in black and white, the business does not have to rely on the customer recognizing that the higher overall product cost is due to the use of organic materials rather than it being a simple matter of higher profit margins.

So there are certainly advantages for all concerned. Williams even believes it will improve relationships with suppliers as they will benefit from the free publicity. But can such honesty regarding the inner workings of the business pay off long term? Is this anything more than a novel idea to help the company stand out?

From the point of view of the customer, there are no real downsides. If the price is right, you buy, and the more information you have relating to that product, the better. But for the business, total transparency is a potentially risky strategy.

First of all, you are in effect providing competitors with all the information they need to copy the product or to undercut the pricing strategies. Williams believes the loyalty of his customers means that they will not jump ship if a competitor takes this information and uses it to undercut prices but does he have too much faith in consumer loyalty?

The practice also leaves little room for profit. When price is a key factor for customers, the business may feel it has to justify certain costs and it can be difficult to build in profit. A full breakdown of the associated costs means Keebunga must also reveal how much of the final price accounts for profit.

The company has obviously felt the need to justify this figure somewhat by stating that this goes back into product development, marketing and also covers the running costs of the business. Will a transparent approach mean the business keeps profit to a minimum in an effort not to appear greedy? Should they have to justify profit anyway? After all, they are a business not a charity.

It’s certainly promising to see a company trying a new approach but whether or not this is a viable business model remains to be seen. Perhaps it will provide Keebunga with a competitive advantage over its rivals in a saturated market or maybe we will prove happy in our ignorance as long as the price is right. Either way, with consumer trust at a low, it’s an encouraging sign to see another business promoting honesty and transparency.

Elizabeth Harrison is a Credit Analyst at checkmyfile. She has a degree from the University of Manchester in French and German.

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