The Formula that Makes Companies Trusted and Profitable—Revisited

Customers are willing to pay a premium when they buy from companies they trust. With the continuously increasing new customer acquisition cost, keeping loyal customers has significant financial value to the company. Customers are loyal when they trust the company, and not only loyal—they recommend the company to other customers. Five variables significantly impact customers' trust in the company and its profitability. It starts with the company’s cost, continues through the perceived price the customers believe they will pay and the value they believe they will get, and ends with the actual price the customers realize they had to pay and the value they actually got. This article will analyze the relationships between those variables that make customers trust the company and make the company profitable.

(Note: This article revisits the same topic in an article published a year ago, but with some new perspectives gained from students in my entrepreneurship classes.)

The value of being a trusted company

In a 2018 survey, I found that people considered the importance of trustworthiness as the most important quality the highest for salespeople or companies you buy from. 77.6% of the time, trustworthiness was the most important quality, compared to 61.2% in other relationships.

Furthermore, in a later survey, I found that when two competitors sell the same product or service for the same price, customers will buy from the company they trust 100% of the time. I also found that, on average, customers are willing to pay a 29.6% premium when they buy from a trustworthy salesperson or company.

But trustworthiness is important not only during the buying decision moment. Customers are loyal to companies they trust, thus reducing customer acquisition costs. It is always better (easier, faster, and cheaper) to keep your existing customers (which you will when they trust you) than hunt for new customers.

Finally, loyal customers will be your advocates and “recruit” new customers for you (with or without a referral bonus). Since trust is transferrable (the 5th Law of Trust), prospective customers will trust your company because someone they trust trusts your company.?

Perceived vs. actual (price and value)

To discuss the five variables, a few terms must be defined.

• Price is easy to define and quantify. It is the amount (in dollars or any other currency) the customer gives to the company (or salesperson) in return for the product or service they are purchasing.
• Value is the customer's benefit from that product or service. It can be quantified (in dollars or any other currency) by using the price the customer is willing to pay for that product relative to other things that cost the same amount.
• The following discussion will address perceived (price and value) and actual (price and value). Perceived (price or value) is determined when the purchase decision is made and therefore drives that decision. It is what the customer believes they are paying and the value they believe they will get from the product or service. The perceived price or value will determine whether the customer will make a favorable purchase decision and whether they trust the company before making that decision.
• The actual (price or value) is determined long after the transaction; it could be years, months, weeks, days, or even hours after the transaction is complete. The actual value and price are important because they will determine whether the customer will trust the company long after the purchase was made, whether they are likely to purchase additional products or services from the company, whether they will be loyal to the company, and whether they will recommend it to their friends and acquaintances.

The variables

There are five variables in the formula. They are:

• Cost: what it costs the company to sell one product (or service unit). There is no perceived cost, as we assume that the company knows the actual cost.
• Perceived price: the price the customer believes they will pay for the product. The discussion around the Total Cost of Ownership (TCO) and whether operating, residual, and other costs should be involved in the perceived price is outside the scope of this article. For the purpose of this article, the assumption is that whether the customer considers only the purchase price or the total cost of ownership is consistent across the perceived and actual prices.
• Actual price: the price the customer realizes they paid after all is said and done.
• Perceived value: the value the customer believes, at the moment of purchase, they will get from the product over time.
• Actual value: the value the customer realizes they really got over time.

Why are perceived and actual (price and value) different?

Sometimes, the perceived and actual prices are different because we, the customers, didn’t do the math right. The perceived and actual values are different because we potentially didn’t understand what we were getting, even though the information was provided very clearly.

Unfortunately, that only happens in a minority of cases. In most cases, it happens because the company, or the salesperson, leads us to believe that the price was less than it really was or that the value was more than it really was. They do it intentionally and knowingly and deploy sales and marketing techniques designed to achieve precisely that. There is no other way to describe it: they mislead us.

Of course, companies will meet the legal requirements of full disclosure, but those requirements do not include the condition that the text will be large enough so you can read it or said slowly enough for you to understand it.

There are different possible customer reactions to the relationships between these variables, which are different at the various stages of the purchase process. Some relationships between variables play a role before the purchase, some during the purchase, and some after the purchase.?

The economic decision

When the perceived value is lower than the perceived price, customers don’t buy. It’s a straightforward economic decision, and since it is based on the perceived price and value, the decision is made when the customer decides to purchase (or not to purchase). However, that decision will not affect the customer’s willingness to consider buying products from the company at a later date. The customer doesn’t feel misled in any way; it just didn’t make economic sense. Other customers might see a higher value for the same product and decide to purchase it. The value you get from a product is personal and not universal. We should add that the decision to buy, and the perceived value, are both subject to the level of trust we have in the company before making the purchase decision, and, as stated above, there is a 29.6% premium for trusted companies.

Taken advantage of

If we have visibility to the cost the company is paying for one unit of product or service, and we believe that they are making a tremendous profit on that sale, we feel that the company takes advantage of us. We may buy from them because they are “the only game in town” because their competitors are not charging less, but we will not be happy and find the first opportunity to switch to a cheaper competitor offering the same value. Customers understand that the companies they buy from must make a profit, but they frown upon those companies if they perceive the profit to be too high, asking them to pay a much higher price than they should. We don’t trust those companies because of their actions during the purchase decision moment. Note that under these conditions, we would feel taken advantage of even when the perceived value is still higher than the perceived price.

Predictability and trust

When the actual price is the same as the perceived price, and the actual value is the same as the perceived value, the customer will trust the company. I paid what I thought I was paying and got what I thought I was getting. No surprises, no tricks; everything was “above the surface.” Customers trust companies that are predictable and transparent.

Under-promise and over-deliver

When the actual price ends up being less than the perceived price and/or the actual value ends up being higher than the perceived value, the customer considers the company to be under-promising and over-delivering. Many customers enjoy this kind of positive surprise and will trust the company to be loyal to it and purchase more from it.

Feel cheated

When the customers realize that the actual price was higher than the perceived price and/or that the actual value was lower than the perceived value at the time they made the purchase decisions, they will not trust that company anymore. They were misled by the company, which used sales and marketing perception tricks, small print, 500-word-per-minute verbal disclosures, or any other technique that caused them to think they were paying less and getting more. If they could, they might return the product for a refund, which is costly to the company. If they can’t, they will simply not trust the company and not buy from it again.

One of the biggest concerns is that such behavior is becoming routine and almost expected. It causes us not only to distrust the specific company that exercised such techniques but also to distrust all companies, including companies that haven’t practiced those, because it hurts our trustfulness. The level of trust we have in any company is the product of our trustfulness in all companies and the specific company’s trustworthiness (the 8th Law of Trust).?????????

Too good to be true

When the actual price ends up being significantly (a very personal and subjective term) lower than the perceived price, or the actual value ends up being considerably higher than the perceived value, the customer may get suspicious. It’s one thing to think that I would pay $800 and find that, through some special promotion, I will be paying only $600, and it’s another when I thought I would pay $800 and find out I only paid $50. That’s highly suspicious. We believe that “when something is too good to be true, it often is.” We also believe that “you get what you paid for.” And therefore, if I thought I was going to pay $800 and get $800 of value, and then I find out that I only paid $50, should I suspect that the value I’m going to get is not $800?

This happens when the perceived value is dramatically (again, subjective) higher than the perceived price. What am I missing? Customers may decide not to purchase simply because things become unclear.

Finally, the same would happen if the customer has some visibility into the cost that the company has to pay to deliver one item or service unit to me and find that their price is lower than their cost. When I know that the company is not making money and, in fact, is losing money, I get suspicious. Definitely not trusting.

Leaving money on the table

There is another reason not to have the actual value too high above the perceived value or the actual price too low below the perceived price: we are leaving money on the table, which is not good for our profitability.

The formula for profitability and customer loyalty

And here it is: the formula to have a profitable and trusted business that will convince customers to buy and have them trust the company, stay loyal, buy again, and recommend the company to others.?

• The actual value should be the same or a little higher than the perceived value.
• The perceived value should be the same or slightly higher than the perceived price.
• The actual price should be the same or slightly less than the perceived price.
• The actual price should be higher than the company's cost of delivering the product or service.

Keep those relationships between the five variables, and you will have buying customers that trust the company not only when they make the purchase decision but also long afterward, making them returning customers and referring others to your company, saving you new customer acquisition costs.

Summary Table

Want to hear more? Listen to the podcast episode: https://podcasts.apple.com/us/podcast/s8e7-the-formula-that-makes-companies-trusted/id1569249060?i=1000599544980