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Show your costs to boost sales (ariyh.com)
221 points by tdmckinlay 13 days ago | hide | past | favorite | 142 comments

"People said they were 14.2% more likely to buy this chocolate bar when they were shown the version with a cost breakdown."

What people say they would do and what they actually do are 2 very different things.

The conversion rate of actual behavior needs to be tested for this to mean something useful.

Author of the summary here:

You are right regarding the chocolate bar experiment.

That's why the researchers ran multiple experiments, some of which measured actual behavior:

- 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

- Sales of chicken noodle soup bowls ($4.95) in Harvard’s campus canteen increased 21.1% when costs were disclosed

Hi Thomas, thanks for your work. I am a fan!

Just a minor comment: I find using decimals places (like 16.1% and 21.1%) in human experiments pretty irritating. It feels like false precision.

After all, these experiments must have confidence intervals. If I had to guess, I’d assume at least a +/- 5 ppts variability in all these numbers.

What’s your view on that?

Thank you so much!

I agree that the figures can vary for many reasons and we shouldn't expect them to be exactly the same (some things we don't end up controlling for).

At the same time, if we take the experiment of the soup for example:

They measured 9,227 sales of it so the 21.1% increase is quite robust and I'd expect the error margin to be much lower than 5% either way - so in some ways the precision is warranted.

I also feel that if I were to round a 21.4% to 20% I'd be miscommunicating the findings of the research :)

You are confusing confidence intervals (used to say that you are confident the increase is positive at all) with error margin (the false precision in the 3rd significant figure).

You are right, my bad! Thanks for catching that in the comment above, I've updated it

That does not bode well for the rest of the methodology...

Mixing up terms in casual conversation happens to everyone, and is not a sign of a meaningful problem.

I don't know why people downvote you:

//> we finally have an absolute number of sales measured, but no way of knowing - representing all sales within a period or just cherry picked?

//> for the rest of the population, did it reduced sales?

//> was there any randomised test or not, because in the latter case there could be other biases we're unaware of

//> the increase is compared to what exactly?

//> any WHY is purely speculative as what was measured was WHAT people did. Internal motivation is in this case unproven, there is just a potential correlation.

//> confuses me to hell people taking about error margins and confidence intervals for something measured directly.

"if I were to round a 21.4% to 20%"

Right, but you'd round 21.4% to 21%, not to 20%.

You're assuming that you can only round to the nearest 1% which is not true at all. If you round to the nearest confidence interval and the CI is 5% then you would round to 20%. That said, I would prefer both the precise number and CI communicated together like sibling comment mentions.

Or ideally keep 21.4% and include the 95% CI. There’s nothing misleading about the extra precision when the CI is included.

Agreed. Actually, I wish the norm was to communicate percentages with confidence intervals by default, because I feel like the tacit implication is colloquially "100% CI unless communicated otherwise."

Thanks for explaining! Your point about miscommunication makes a lot sense to me!

> I find using decimals places (like 16.1% and 21.1%) in human experiments pretty irritating. It feels like false precision.

Whether you say 21.1%, 21%, or 20%, you still have a single number. You could make an argument that decimal places like 21.147258% add clutter, but without an actual measure of uncertainty, all you're doing is reporting a summary of the data in the sample with different amounts of arbitrary rounding. That's not particularly helpful as a substitute for the full distribution.

It's not just a number. It's a string of characters conveying information about a measured value. The way it's specified conveys information about the number of significant figures (https://en.wikipedia.org/wiki/Significant_figures).

Significant figures are not a universal standard, they are an imperfect way to in-band information about confidence, by sacrificing precision.

21.1% is implying a different confidence interval than 21%. At least to me.

Yup, 21% and 21.0% do implicitly convey different information even though they’re the same number.

> - Sales of chicken noodle soup bowls ($4.95) in Harvard’s campus canteen increased 21.1% when costs were disclosed

What sales decreased in relation to this? Would overall sales increase if all food items had costs listed? Or would people gravitate to the meals with the lowest margins, figuring them to be relative bargains?

It's really not simple to draw a conclusion from the limited data set here.

It's kind of lazy of you to disclose the Backpack and Chicken Soup cases in a declarative way. You present no references, no drill-down on whether all other effects were equal in these cases. For example, did chicken soup sales continue for an extended period of time and were not driven by other factors such as "a cold going around" or low temperatures? Trust is certainly a factor in consumer behavior, but it nowhere near the sole factor in decision-making that your 'summary' tries to present it as.

You're also lacking cases where the markup is high, 500-2000% is common among a wide range of products, from Fashion to SaaS.

Edit: I'd also add, in the case of food products, if all vendors adopted the transparency strategy, once consumers see typical margins in that industry are in the 5-10% range, suddenly that not-unreasonably-priced organic chocolate bar looks like a high margin item...

Sorry for the downvotes you get, it's appalling. The whole piece is superficial and riddled with inconsistencies. I guess we can take it as entertainment? It's what non-marketers think a growth marketer does, just put in text form. I'm not here to make friends, but if you state that you got 21% increase, you better show the work. In a world where everybody lies, you better have proof.

Honestly, I downvoted because most of the utility in these articles to me isn't the precise number, it's the idea. After all, I don't really care that chocolate bars work this way if I'm selling a SaaS product. I'm going to run the numbers myself.

It's the idea that this could work.

I want to encourage people to honestly communicate ideas to me and I want to discourage people who would discourage those first people.

I explicitly don't want to restrict only the highest-quality research. I want to permit some amount of scamming me.

Text form, with emojis!

> You're also lacking cases where the markup is high, 500-2000% is common among a wide range of products, from Fashion to SaaS.

The article does cover those cases explicitly:

> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested.

Basically they didn't even bother because it's pretty clear that someone selling a commodity for a massive markup is not going to benefit from this approach. Of course, that doesn't mean this hypothesis isn't worth testing...

Disclosing your costs if you have a modest profit margin and also modest absolute costs is good signaling on multiple fronts (as long as you're credible):

- Higher parts/ingredients costs are a signal indicating good quality

- Low profit margins make customers feel like they're getting a good deal

- The appearance of transparency signals your own confidence in all aspects of your business

It's also equally lazy for you to demand such an in depth and thorough argument and sources when you can pop into a search browser and do some fact checking yourself. No one owes you anything. This is a discussion board, not a dissertation defense.

FWIW, the paper "Lifting the Veil: The Benefits of Cost Transparency" doesn't mention confounding factors like weather or temperature, only the possibility of revealing labor costs. "Fact checking" this study would require reproducing it, not searching the web.

>No one owes you anything.

and no one owes the author page views or their time either.

>This is a discussion board

Exactly, we're having a discussion on what the article is missing and why it matters.

I came up in a time where merit meant something. And this summary literally has no merit at all.

I’ll bet the Harvard students saw a new fancy chicken bowl and bought it out of novelty.

What about the "guilt effect" of showing that the high price is mostly because of the labor costs involved. Wouldn't that potentially dirty your experiment of just showing "cost" vs. involving a human element?

Chicken Nood Soup bowls for $4.95? Don't they usually sell for a buck at the grocery store? Unless it's a high end brand.

Most of the cost was labor, according to the picture in the article. I don't know which dining hall or cafe the "canteen" they're referring to is, but much of the food sold on Harvard's campus is produced by unionized dining hall staff with decent pay, hours, and benefits, which affects the costs.

Personally I could see that information back firing, some places are very stingy with ingredients like chicken, and I'd feel doubly cheated if they did that after admitting it's only 5% of their total cost!

This was in a cafeteria.

At Harvard

Good point! Sadly, I don't have access to the Harvard study (https://pubsonline.informs.org/doi/10.1287/mksc.2019.1200), so maybe someone with access to it could check it, but the linked article might be misleading in some aspects (depending on the results of the study shown in the paper).

From the study's abstract:

> A preregistered field experiment indicated that diners were 21.1% more likely to buy a bowl of chicken noodle soup when a sign revealing its ingredients also included the cafeteria’s costs to make it.

From the linked article's sub-title:

> Sales of a chicken noodle soup increased 21.1% when people were shown the costs of making it.

The study's abstract mentions that they were more likely to buy a bowl of chicken; it's not mentioned that they actually bought it.

Here's open access to the full study: http://ssrn.com/abstract=2498174

"21.1% more likely" is how articles phrase a 21.1% increase in observed frequency.

"Sales increased 21.1%" is equivalent as long as the unit price remained the same.

The article is very confusing on this front.

> People said they were 14.2% more likely to buy this chocolate bar when they were shown the version with a cost breakdown

Surely that cannot be correct. Possibly 14.2% of the people who were asked said that they would be "somewhat" more likely to buy X with more data stuck to its label (does any data improve sales? Did they A/B the label by adding random info?). This is very different from them acting upon it though.

Actually, the figure 14.2% does not even appear in the research article. The experiment was between two groups of random Mechanical Turk workers: one group was not shown the cost breakdown while the other group was. The workers answered how likely they were to buy the product on a scale from 1 to 7. If you calculate the average increase from one group to the other, sure enough the number you get is 14.2% but it is not a probability.

Exactly this. Plus, I didn’t see “profit” mentioned anywhere in the costs, and the article also touches upon the (mostly obvious) fact that for high margin goods this would impact them negatively.

The effect was tested on profit margins as low as 17% and as high as 55%. Outside those ranges it's unclear if it will still work.

I understand, so maybe my critique was a bit of my personal views.

Rather I meant that it’s a bit odd that costs are clearly specified, but the consumer has to calculate the profit themselves. In my mind, that actually makes it less transparent as high profit margins are what drive the crazy capitalist market we have today, and associating small values to material and labor doesn’t make me feel better when the profit is the “artificial” portion of my purchase price.

I think the assumption is whatever the difference in what the item costs vs the total listed on the package is the profit

As it says in the article "Sales of chicken noodle soup bowls ($4.95) in Harvard’s campus canteen increased 21.1%"

Interesting. I'm curious how they got to $3.23 of labor for 16 ounces. And I suppose that drops as they sell more, assuming it's made in large batches.

There's no reason to believe the costs are accurate at all. Obviously a business would lie if they applied this theory to their pricing. The experiment was based on the presence and magnitude of numbers in the advertising.

Is there an official name for this sort of effect? I've been looking for something to call this. For example, we've had this effect at work when trying to organize social outings; people say they're interested in some activity X (e.g. hiking, board games, etc.), but then the day of that event comes and nobody shows up. The bar is very low to say you're interested in something, but doing actually takes effort.

Social Conformity - it would be costly for the participants to say no, from a social standpoint, but when the wallets have to open, there is always an excuse.

We fight this by giving everybody a token bit of public labor - tell someone they need to bring cookies, another needs to bring party-hats and someone else to bring punch and you'll find that they don't want to let others down.

expressed vs revealed preference

Sure. You could call pretty much all research into question using this argument. A huge amount of research is done based on questionnaires.

It’s been a while since I worked retail but unless something has drastically changed most people don’t read product packaging very closely. I would constantly have people walk up to me with an item and ask a question that was not only clearly answered on the package, but the information was _highlighted_ for them. I just don’t think most people would even notice the cost breakdown let alone read it and think about what the information means.

You're sure it's most people? The people coming to ask you questions are a self selected set...

People have been ignoring the highlighted bullshit on the package since long before they were pop-up ads on the internet

I've done substantial amounts of a/b testing and experimentation around ecommerce pricing and it's pretty rare for a maxim like "show your costs to boost sales" to hold to in either 1) the long run or 2) across multiple product types, audience types, brands etc.

Especially with something relatively novel like this, results are very prone to bias since novelty has the tendency to increase purchase-intent in the short-term.

As far as audience, I'd say the audiences of folks interested in a $115 wallet, Harvard students, Everlane/J Crew shoppers, and craft cocoa buyers are on the more affluent and/or intelligent side, which may compound the novelty effect or at least have the transparency resonate more.

Yeah, seeing the cost breakdown for luxury goods like this feels totally different than for seeing one for other things, like a bottle of Coke or a handmade good from Etsy.

Yeah I don't think a cost breakdown on my drop ship products on Etsy would increase sales. We roughly double the price vs. cost of goods, but it's not like we're rolling in dough because at our volume fixed expenses take up a really significant amount of our profit.

What if you amortized your fixed costs (equipment?) over expected life span and included that in the breakdown?

What do you find works best

Most "premium" products costs are mostly Advertising, R&D, paying employees/shareholders, etc. They're valid things to spend money on, but don't reflect the "top quality ingredients" that consumers expect the money to be spent on.

I suspect many consumers wouldn't like to know that the $1500 iPhone they just bought only has $400 worth of actual parts in.

Point taken, but perhaps a bad example. When I buy an iPhone, I'm paying a little for materials, but mostly I'm purchasing the culmination of tens of billions of dollars of R&D that possibly surpasses any other product on Earth.

A better example might be a luxury brand wallet where they sell the illusion of better quality, but that may or may not be true.

Luxury brand wallet owners feel much the same way about their wallets that you do about your iPhone.

>I suspect many consumers wouldn't like to know that the $1500 iPhone they just bought only has $400 worth of actual parts in.

This is neglecting software development, maintenance, new features rolled out, etc. Yes, you're overpaying beyond cost, Apple would go out of business if you weren't. The question is are you overpaying for the functionality or value you get out of the product/service and are the margins too fluffy.

In the case of a designer wallet or velben goods in general, you're really paying for the status and symbolism in the inflated margins. This may be true of some iPhone owners who don't use their phone or buy one every quarter but not most, they're getting utility and value out of the devices that's likely worth the cost.

Velben goods get a bit complex as well because of intangible value in social situations. Sure, that designer wallet is a waste of money. My $10 leather wallet does the same thing and is probably more durable (even blocks RFID, yay). There is much theater to life, however, and velben goods can land you in situations surrounded by those will wealth that leads to opportunities you might not otherwise have.

Impression and perception is difficult to assess value (advertising and marketing in business sure think its valuable), but you'll find you may get bumped in lines, have better service, land a job, or something else all because of such social impressions. This is the entire reason people don't wear flip-flops, athletic shorts, and t-shirts into the office or interviews and why some people carry thousands of dollar hand bags around. The question is: what's your ROI on these impressions? It's difficult to measure and frankly to me seems typically like a net loss. I personally think it's crazy and could care less if you waste money to flaunt wealth or play status games, but I've witnessed the effects first hand of success in this realm to not completely discard the intangible value that may exist.

>In the case of a designer wallet or velben goods in general, you're really paying for the status and symbolism in the inflated margins. This may be true of some iPhone owners.

Or indeed, most.

Apple is hardly shy about marketing itself as a purveyor of luxury goods.

>Apple is hardly shy about marketing itself as a purveyor of luxury goods.

And why would they?

Should they instead market themselves as a purveyor of shit goods? Sounds like a sure fire way to increase sales /s

Perhaps, but I think most luxury brand buyers fall into one of two categories:

1) They are paying more for quality materials, durability and perhaps a hand-made feel (that may or may not be in line with reality).

2) They are paying more so that they can get something that most others can't only because it's too expensive.

I really can't believe that people who buy $2000 handbags think that the handbag company is doing any R&D into handbags.

But perhaps they do...

You can replace R&D with trust, material quality, worksmanship or some other ethereal hard to pin down quality.

OK, now how do you think a non-technical person with no interest in R&D (or even knowledge of the term) would react to the question of why they buy an iPhone.

I suspect that you'd find the iPhone purchase motivation is pretty much the same as the luxury wallet.

But that reflects an ignorance of how cost accounting works. Sure, it might include $400 of parts, but a hell of a lot of R&D, equipment, labor, and overhead are amortized into that phone. A very cursory look at Apple's latest income statements shows that the net profit margin on their revenue is about 20%, meaning that the phone's actual cost to produce is somewhere around $1200 (assuming a $1500 retail cost).

Yes, but will you be the one to explain that cost accounting to each buyer?

"Yes Maaam, we'll spend $200 of the money you're about to give us on a fancy campus with hammocks to try to attract good engineers. Oh, and the massive billboard outside that made you walk into the shop in the first place."

TBH, I've consistently found that "average people" have a better intuitive understanding of costs/profit than the average engineer. That may sound strange, at least it does to me, but I've noticed it for as long as I've been in this profession.

Yes - I was listening to a tech podcast and they thought that Apple earned 20% on the accessories and products from other companies that they sell in the physical Apple stores.

It was cringeworthy.

How has this manifested itself? Where do you see that engineers tend to go wrong?

This was not an easy question to answer :-)

I guess what I've noticed is that although if you pressed them, engineers (across a range of fields) understand that businesses need to generate a healthy profit to stay afloat, they still seem to be uncomfortable with the idea of "profit" at all. And they seem to be surprised when you bring up the question of "how will you make money from that?" Whereas the "general public" tends to think of it with an approach of "make as much money from it as you can because it might not last."

I know that's not a very good description but it's the best I can do at the moment.

[deleted] Responded to wrong person.

I'm willing to buy a $1500 phone w/ $400 in parts because it has a better user experience than $150 phone with $50 worth of parts.

Why are you comparing a $1500 phone and a $150 phone? And how is that even relevant?

Totally agree.

I am too, willing to buy a $300 000 car w/ $100 000 in parts because it has a better user experience than a $30 000 car with $10 000 worth of parts.

Exactly this. A lot of consumer gadgets that cost $60 involve spending $30 on ads.

To be honest I don’t pay for expensive parts, I don’t really care if they cost $100. Instead I pay for a final product that can last me more than 2 years without becoming crap. I bought my first iPhone 4 years ago, today it works like the first day (I only had to replace the battery a few months ago). I never experienced that from any Android, I’m not saying there aren’t good quality Android phones out there, but I never found it and I got tired of not finding it. If another brand can give me that same reliability and for less money I’ll happily and quickly switch.

Try any Samsung Sx product. You won't even have to replace their battery after only 4 years.

I agree with the gist of this comment, but not the numbers. I don’t have sources to hand at the moment, but while Apple’s margins are notoriously high, they’re not that high. OLED screens are quite expensive.

Here's a source that says the cost is $415. You're right that the OLED is expensive, it costs $23 more than the LCD it replaces.


It should be taken with a massive grain of salt, but [1] suggests $431 BOM cost for an iPhone 12 Pro.

[1]: https://www.counterpointresearch.com/bom-analysis-iphone-12-...

That sort of item might benefit from displaying upfront costs instead of BoM. It'd be an interesting study.

> only has $400 worth of actual parts in

Heh. Yeah 400 ;)

This seems like a great marketing technique for up starts trying to compete in the quality/price space. In the chicken soup example, for instance, cost to produce is a strong indicator that the soup has quality ingredients, and isn't just a big markup on some generic condensed soup.

It's a similar thing with the backpack, but in the other direction - this price isn't low because we cheaped out on manufacturing and materials, it's cheaper than J. Crew because they spend too much on marketing.

The line item cost breakdown is an indicator of honesty and product quality, which of course increase trust. That's not going to work if you're selling $10 shirts for $120

The shirt costs $70 in "labor" of the CEO.

Upstarts, perhaps. Startups, I wonder if seeing that the $50 gadget costs $60 to make will have a positive impact. It may signal that the cost is being subsidized by investors (and the business may disappear) or by selling your data. But I'm all for transparency to make better decisions.

Well then the presence of a cost breakdown becomes a selling point. If the price of your product is unusually low compared to your competitors that openly display their costs and you don't, maybe that would raise some (deserved) suspicion that something else is going on.

We've got a couple of local BBQ place's funded by proceeds from the sale of a local tech company. The founder just posted a video on Facebook yesterday explaining why their popular wings were being taken off the menu.

He breaks down their exact costs, why they're currently selling them at a loss and why they'd have to raise prices 50% to make the dish profitable.

A lot of people were angry when they announced the wings were being taken off the menu. Here's his reply, I thought it was absolutely brilliant marketing.


It's a nice video, but I don't really understand the formula.

They make the claim that they need to price products assuming 30% goes to food / ingredients, 30% goes to labor, 20% goes to fixed costs, and the remaining 20% is kept as profit. Thus, the increase in wing cost means they have to increase the price from $14 to $22.

However, the labor and fixed costs don't increase just because the ingredient cost increased. They list the new price of wings as $6.56. Assuming the $14 price was based on the formula, this is an increase of $2.36. They could keep the wings on the menu for $16.50 and make the same amount of profit as before.

Exactly, this is so dumb. Our food costs went up a bit, so we have to give everyone a raise to match the percentages?

This is amazing!

Not about the chicken-wing issue per se... but the fact that a local small business has the wherewithal to make a corporate presentation on facebook for their community to judge.

That's really sweet.

great find. it might've been worth increasing the price though, to see if customers still bought them or not in practice. with a note on the table or menu explaining why the price increased.

want to, uh, just summarize it here?

The video isn't that long ;<). To summarize basically they have three choices:

1. Increase the price of wings 50%

2. Cheapen the ingredients

3. Take it off the menu until the price of ingredients drop

After surveying their customers they found demand would drop drastically if they raised prices. They don't want to cheapen the ingredients because it would hurt their brand so the only real choice was to take them off the menu.

There's another choice, they could opt to continue selling the wings at a loss, if that created goodwill or especially if it promoted the sale of other profitable items (e.g. drinks, other side items). This is called a "loss leader" and is a common marketing play seen in supermarkets.

Yeah, but I didn't want to watch it on Facebook.

In a more business sense, Id say this is a mixed bag.

I have some clients I'm extremely open with about team and jobs costs. Usually more experienced people who know we're all here to make a dollar, know a good job isn't the cheapest, know everything looks simpler before you actually do it. Generally operate on my preferred methodology of 'everyone be reasonable'.

With some people, not always but often more junior, I limit detail. Some people want to micro manage quote breakdown pricing, question and screw down individual costs to the bone. Or use your details to improve their job plan and go to the next vendor and see if they can get it a bit cheaper. Etc. So when you know these people or feels like it will be, as few lines as possible is best.

The article is interesting and all, but the fact that I had to wade through 3 separate "subscribe to our newsletter!" sections before even getting to the start of the real content is ridiculous.

I counted a total of 6 different places where the user is asked to sign up for something or take some sort of action. Good lord.

I didn't even read the page ultimately, since I couldn't identify where to start reading.

Roughly every half screen of scrolling, the content formatting changes dramatically (and clearly some of it was subscription info, which is not how I want to start reading), and then I was at the end of the page... I'd failed to identify the "body" of the article and so closed that tab.

Sadly this is standard practice now on every "website" out there.

Substack makes it way too easy to fill your articles with "Subscribe" and "Share" buttons; you can do it with one click.

It worked for me, I did sign up.

The thing that jumps out at me is that I don't believe the numbers presented in their main example. $0.26 for the noodles in a single bowl of soup? What are they doing, hand making fresh noodles from artisanally grown heirloom grain hand harvested by fully tenured professors at their normal hourly rate?

Maybe it works for products and services that are priced based on the costs (i.e. cost + a competitive margin). Not so much if you can do a value based pricing. Which is the case when you don't have too much competition, when you're not selling a commodity.

If showing your costs puts your product in a good light, then do it, if it doesn't, don't. The article just shows that cost breakdown is one thing you can use in your marketing.

It is the same as showing where your ingredients come from. No product will show "made with GMO corn from the most productive industrial farms". If it is shown, it means there is something desirable about it.

Transparency isn't always a good thing. I think JCPenney’s tried it, and it was a huge marketing failure.

Many comments here came up with a 'clever' comeback in the form of "Oh yeah? What about grossly overpriced product XYZ? I bet it wouldn't help their sales." Well no shit, sherlock. This advice isn't for them, it's for their competitor's product ABC who is aiming to make an honest product for a fair price. To head off such dense comments perhaps a better title would be:

> Show your costs to boost sales for honest products

omg, brace for BS marketers start putting fake cost numbers on their products to boost sales..

Wouldn't that be illegal?

Outright lies would be, but hollywood accounting is a thing even when the relationship is adversarial.

For example set up two companies, company 1 purchases the ingredients for cheap, does some minor amount of work on them, and sells them to company 2 for way too much money. Company 2 then turns them into soup and makes 0 profit. Cost breakdown on the soup makes it look like the ingredients were really expensive, but actually it's just that company 1 is making the profit instead of company 2, and they happen to have the same owners. (Note: Not legal advice... I don't know if this exact scheme would be legal, but I'm pretty sure schemes like it would be).

Within a single country, legal, since ultimately the same tax is paid and Corp 2 isn't lying about its expenses. (Corporate income taxes are usually flat rates, not progressive/step rates, and most corporate groups file a single consolidated return for the entire group.)

Across borders, it would be a huge violation of transfer pricing laws and result in huge penalties. But the marketing part of it would still be legal.

What you've described is actually pretty similar to how Coke/Pepsi is sold: Company 1 (Coke/Pepsi) makes the syrup, which they sell for inflated prices to Company 2 (the bottler/distributor), which then sells it to a store (Company 3) for a less-inflated wholesale price, and the store usually sells it at very small markup as a loss-leader.

Yes, your point? That's never stopped them before!

Yes, and you can include everything in 'labor'. Like the cost of labor of the BS marketer.

I think this would actually work even if forced by regulators, assuming the company is honest and publishes reasonable numbers.

I worry about companies lying to make numbers more "realistic" to customers or to hide marketing spend.

I used to work with a IT service provider (hardware, support, monitoring, help desk etc) which had to me an interesting pricing policy on hardware - they were an IBM reseller, so they just sent the customer the price list they got from IBM and said they added 10% on top of the IBM wholesale price. I guess the 10% covered installation and configuration and such.

They did quite well, which probably had a lot to do with coming across as honest. Certainly more honest than the kind of vendor where you have to ask some guy with a really fancy watch for a quote - I've met a couple of those.

I would say I would be more likely to buy the chocolate, but not the chicken soup. The bulk of the cost being an opaque category like labor wouldn't sit right with me. I feel like I am being tricked. Whose labor? The chef, the server, the farmer, the truck driver, the CEO. I think if the broke this category out more it would work better.

I think this generally works, at least as a justification for price increases (if your suppliers increase their price, people don't blame you for increasing yours). But this is also true:

> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested.

We don't see Google talking much about its costs, for instance.

I'd like to see how this actually plays out in real life, aka. people buying instead of saying they would buy.

Also, for "regular" physical goods it's more or less easy to do the cost break down in a clear way, but what about services and software?

> 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.

Seems pretty logical. Most companies try to screw their customers as hard as possible. When you're shown proof one of them isn't doing that, you're much more open to doing business with them.

What's the incentive for companies to be truthful? Why wouldn't I claim higher costs for ingredients or labor?

And why doesn't the price include things like money paid to shareholders and ceo?

There's a very fancy, very expensive hotel in Newfoundland that I was lusting over recently. Anyhow, I saw an "Economic Nutrition" panel on their website, formatted similarly to the familiar Nutrition Facts panel seen on food packaging. They break down the cost of a stay into categories (Labor, Marketing, etc) and by geographic areas that benefit. It's an interesting technique ... although it did not convince me to actually book a stay at the $2000/night hotel.


Yes it's always a great idea to boast about my costs, that way my competitors can see my cost structure and margin to undercut me!

Interesting idea but I have serious doubts that those who eat in the Harvard canteen are a good representation of the general public.

That can't be true in all cases.

There are a few hypothetical exceptions discussed, but the authors were surprised to see that in all the cases they looked at, it seemed to help.

> 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.

> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested.

that seems like the important thing to test to be able to make such a broad statement.

Would love this try this, but seems difficult for software products. Stating server costs etc might be a good start?

Yes, whenever I try to buy something if you hide the price behind a sales call, I'll just assume it's some absurd amount of money. There's no reason to do this, have pricing front and center and be honest about it. My dream service would say something like $10 a month flat rate hosting, and in bold print underneath say it's not a promo rate. I think digitalocean does this

This is not what the article is talking about, at all. This is a completely different concept, of showing the input costs for FMCG goods.

Same, if I have a choice between a service that shows the price and one that doesn't show the price, I tend to prefer the one that shows the price with the assumption that the one without the price is probably only catering to very large businesses and/or is trying to price gouge me for whatever they can get, which doesn't sit well with me.

Hiding the price also makes the whole purchase process more costly (time intensive) for the buyer and it prevents impulse buying.

Yup. I had to call iStockPhoto about pricing and the entire thing soured me so bad on it that I basically told them I was out. I shouldn't have to call to get a price. It wasn't even my money and the company would've paid it just the same. But the principle of the matter is that if you want to piss customers off, hiding information is a clear way to do so.

I used to use and love iStockPhoto. I discovered DepositPhotos through an AppSumo deal, switched, and never looked back. Even their regular prices are better than iStock for similar photos.

Nice. I'll have a look at this. Thank you!

This is not what the article is about. The article is about disclosing cost and profit alongside price.

Clicking the link to read the article is absolutely free, give it a try.

This is regarding costs to produce items, not prices.

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