The Trust Economy: How Supply and Demand Dynamics Shape Trust

We all know that trust is the ultimate currency in building strong relationships between companies and their stakeholders. Both trust and trustworthiness (its essential precursor) can be characterised as:

• essential – no company can survive without them
• ubiquitous – they’re present in every business function
• contextual – no one size fits all situations

Given these truisms, this article explores how trust and trustworthiness can be thought of and operationalised by companies using the microeconomic concept of supply and demand.

Although that concept isn’t without its flaws, it provides a useful explanation of how market economics is thought to work, so provides a useful framework to think about the role of trust in that same market.

Supply and Demand

For those of us who haven't been near an economics textbook for many years, supply and demand is a fundamental economic concept that describes how prices are determined in a market economy. It revolves around two key elements:

• Supply - refers to the quantity of a good or service that producers are willing and able to sell at various prices; and
• Demand - represents the quantity of a good or service that consumers are willing and able to purchase at various prices.

The relationship between supply and demand influences the market equilibrium, where the quantity supplied equals the quantity demanded. This equilibrium determines the price at which a good or service is sold.

When demand increases and supply remains constant, prices tend to rise. Conversely, if supply increases and demand remains constant, prices typically fall. Understanding this interaction helps explain how market forces allocate resources efficiently and how prices adjust in response to changes in consumer preferences, production costs, and other economic factors.

Understanding these is essential for analysing how markets function, predicting the impact of changes in market conditions, and making informed economic decisions.

Given that trust and trustworthiness are essential, ubiquitous and contextual in market settings, using the same economic model as an analogy to describe the ‘trust economy’ is insightful.

Law of Supply

Principle: As the price of a good or service increases, producers are generally willing to supply more of it, and vice versa, all else being equal.

Production costs, technological advancements, and availability of resources can affect supply, influencing the market's ability to respond to changes in demand.

Trustworthiness as Supply

Trustworthiness can be viewed as the "supply" of trustworthy behaviour, qualities, and attributes that an individual, organisation, or entity provides. These include key elements such as humanity, transparency, competence, integrity, reliability and communication.

Just as companies invest in production capabilities for the supply of goods and services, they must also invest in building their trustworthiness to ensure there is demand. For example, this could involve training programs, robust ethical frameworks, or transparency initiatives.

Large organisations with established reputations might find it easier to "produce" trustworthiness at scale, similar to how large manufacturers benefit from economies of scale.

In more complex systems, trustworthiness might depend on a "supply chain" of reliable actors, each contributing to the overall trustworthiness of a product or service delivered to the end-user.

Using this analogy, the supply curve would represent the quantity of trustworthiness available at different levels of perceived cost or effort required by the company to maintain that trustworthiness.

Low Cost, High Supply: If it is relatively easy or cost-effective for a company to maintain high standards of trustworthiness (e.g., through efficient governance, strong ethical standards, or transparent communication), there will be a high supply of trustworthiness.

High Cost, Low Supply: Conversely, if maintaining trustworthiness is costly (e.g., in industries with high corruption risks, prevailing unethical behaviours, or where transparency is difficult), the supply of trustworthiness might be lower.

Law of Demand

Principle: As the price of a good or service decreases, the quantity demanded by consumers generally increases, and vice versa, all else being equal.

Factors such as consumer preferences, income levels, and the availability of substitutes can shift demand, making it dynamic and sometimes unpredictable.

Trust as Demand

Trust represents the "demand" side, where stakeholders (customers, employees, investors, suppliers, etc.) seek to place their trust in a company that demonstrate trustworthiness. This "demand" can fluctuate based on various factors, including past experiences, reputation, and contextual needs.

Different "consumers" of trust may have varying needs and preferences, leading to segmented markets for trust. For example, some might find it more difficult to trust than others or focus their interest in factors such as data security, financial stability or ethical behaviour.

Strong, positive experiences lead to brand loyalty in economic markets. Similarly, consistently trustworthy behaviour leads to sustained trust (even in the face of minor setbacks) and this feeds directly into brand loyalty.

Economic recessions reduce overall demand. Similarly, societal events that shake public confidence and negative experiences at the individual level could lead to a "trust recession" where people become generally less willing to extend trust.

The demand curve would represent the level of trust stakeholders are willing to place in a company at various levels of trustworthiness.

High Trustworthiness, High Demand: When a company is perceived as highly trustworthy, stakeholders are more willing to "buy into" or place their trust in that company.

Low Trustworthiness, Low Demand: If a company is perceived as less trustworthy, the demand for trust will be lower, meaning stakeholders are less likely to trust the company.

Price Mechanism

In this analogy, the "price" of trust might be conceptualised as the level of vulnerability or risk one is willing to accept when trusting another party. By its very nature, all trust involves vulnerability (risk).

Just as riskier investments demand higher returns, situations requiring more trust might offer higher potential rewards (e.g., deeper relationships, more lucrative business opportunities, etc.).

If trustworthiness becomes too easy to claim without substance (we all know of companies that talk the talk but don’t walk the walk), it could lead to "trust inflation," where more trust is required to achieve the same effect, similar to how monetary inflation reduces purchasing power.

Market Equilibrium

Principle: The point at which the quantity supplied equals the quantity demanded is known as the market equilibrium. At this price, there is no excess supply or demand.

Market equilibrium can be disrupted by external factors such as government intervention, sudden shifts in consumer behaviour, or changes in production conditions, leading to surpluses or shortages.

Whereas in the economic model, equilibrium occurs where supply meets demand, in the trust model, equilibrium occurs when the level of trustworthiness a company supplies meets the level of trust that stakeholders are willing to place in it. This balance creates stable relationships and efficient social or economic interactions.

Positive experiences can create virtuous cycles where trust and trustworthiness reinforce each other, leading to stronger, more efficient relationships or systems. On the other hand, major breaches of trust can act like market crashes, rapidly resetting expectations and behaviours across a system.

Trust Surplus: If a company’s trustworthiness exceeds the level of trust stakeholders are willing to give, there may be an excess of unused trustworthiness, potentially leading to underutilisation of resources dedicated to maintaining that trustworthiness.

Trust Deficit: If stakeholder demand for trust exceeds the company’s level of trustworthiness, there could be a trust deficit, leading to dissatisfaction, loss of business, or reputational damage.

Shifts versus Movements

Principle: A movement along the supply or demand curve occurs when the price changes, leading to a change in the quantity supplied or demanded. A shift in the supply or demand curve occurs when a non-price factor (like technology or consumer tastes) changes.

Distinguishing between shifts and movements is crucial for accurately interpreting market changes and predicting future trends.

Supply Curve Shifts (Changes in Trustworthiness): If a business improves its trustworthiness (e.g., through better governance, improved communication, or ethical behaviours), the supply curve might shift to the right, indicating more trustworthiness available at the same cost but posing lower risk. If trustworthiness deteriorates, the supply curve would shift to the left, increasing the vulnerability (risk) to the stakeholder.

Demand Curve Shifts (Changes in Trust): External factors, such as economic conditions, cultural changes, or scandals, can shift the demand curve. For example, in times of economic uncertainty, stakeholders might demand more trustworthiness (shift right) leading to increased vulnerability (risk) or may become more sceptical and reduce their trust (shift left) and level of vulnerability (risk).

Elasticity of Demand and Supply

Principle: Elasticity measures how much the quantity demanded or supplied responds to changes in price. If demand or supply is elastic, small changes in price lead to large changes in quantity. If inelastic, quantity changes little with price variations.

Elasticity affects how consumers and producers respond to market changes, influencing pricing strategies and policy decisions.

The responsiveness of trust to changes in perceived trustworthiness can vary greatly depending on context.

Initial interactions might see trust levels change rapidly based on small cues, similar to volatile new markets, leading to high elasticity in new relationships. Whereas long-standing trust might be more resistant to change, like stable, mature markets, indicating low elasticity in established relationships.

During crises, trust might become highly elastic, with rapid shifts based on perceived handling of the situation as is often seen when company behaviours don’t meet market expectations and this is reflected in lower market capitalisation.

Market Disequilibrium

Principle: When supply and demand are not in balance, it leads to either a surplus (excess supply) or a shortage (excess demand).

Disequilibrium can lead to inefficiencies in the market, such as wasted resources in the case of a surplus or unmet consumer needs in the case of a shortage. Corrective measures, such as price adjustments, are often required to restore balance.

The "market" for trust is not always efficient, with information asymmetries and irrational behaviours caused by mental short cuts (heuristics) and biases playing significant roles.

Overinflated trust in certain entities or systems can create "bubbles" that eventually burst, similar to economic bubbles. Some highly trustworthy entities might be undervalued due to poor visibility or communication, similar to undervalued stocks.

Implications

So, what does this all mean? There are several implications flowing from the supply/demand characteristics of trustworthiness and trust.

Market Dynamics

Just as in an economic market, the interaction between trustworthiness (supply) and trust (demand) is dynamic. A business needs to continuously assess and adapt its strategies to maintain the right balance.

Various mechanisms can act as "market forces" to help align trust and trustworthiness:

• Measurement systems and related metrics (like those offered by Trustgenie ) act like credit scores in financial markets, providing quick assessments of trustworthiness, trust and reputation.
• Just as financial regulators oversee markets, bodies that enforce ethical standards or professional conduct can serve to maintain the integrity of the "trust market."
• Shifting social expectations around trust and trustworthiness can act like market trends, influencing behaviour across society.

Strategic Investments

Businesses may need to invest strategically in maintaining or enhancing trustworthiness, akin to investing in increasing supply capacity in an economic model.

Crisis Management

In situations where trust has been damaged (a shift in the demand curve), businesses need to react quickly to restore equilibrium, similar to how businesses might adjust prices or increase production to meet sudden changes in demand.

The analogy described in this article illustrates that trust is not a static concept but rather a dynamic interaction between a business’s trustworthiness and the trust stakeholders are willing to place in it (just as supply and demand operate in a market economy. When considered in this light, it is clear that trust directly impacts economic outcomes.

Managing this interaction effectively requires careful attention to both internal capabilities and external perceptions.

Worth Thinking About

Using the analogy of supply and demand to position stakeholder trust at the centre of all activities represents a powerful strategic approach for companies. Here's how this could be applied.

Strategic Alignment

Integrating Trust into Core Strategy

Companies should view trust as a core component of their value proposition, just as they would with a key product or service. By treating trustworthiness (the supply) as a critical asset, companies can align their strategy to ensure that every decision, process, and interaction reinforces this trustworthiness.

Continuous Monitoring

Just as companies monitor market conditions to adjust supply levels, they should continuously assess their own trustworthiness and trust levels with stakeholders. This could involve using tools and analytics like those offered by Trustgenie to understand where trust stands, how it is evolving and what the next best steps might be to address performance gaps.

Investing in Trustworthiness

Building Trust Capacity:

Companies can invest in the factors that enhance their trustworthiness, such as robust governance structures, ethical practices, transparent communication, and strong corporate social responsibility (CSR) initiatives. This is akin to investing in the production capacity in the economic model.

Risk Management:

By identifying areas where trustworthiness is vulnerable (similar to supply chain risks), companies can proactively address these issues to prevent trust deficits. This might involve, for example, strengthening internal controls, improving stakeholder engagement, or enhancing crisis management capabilities.

Demand Creation and Enhancement

Proactive Trust Building:

Companies can engage in activities that create and enhance demand for their trustworthiness. This might include marketing campaigns that highlight their ethical standards, community engagement programs, or customer loyalty initiatives that emphasise the company's commitment to stakeholder interests.

Tailored Communication:

Just as companies might segment markets to understand demand for different products, they can segment their stakeholders to understand their trust profiles and trust needs. For example, what builds trust with customers might differ from what builds trust with employees or investors. Tailoring communication and actions to these specific needs can enhance overall trust demand.

Balancing Trust Supply and Demand

Feedback Loops:

Establishing strong feedback mechanisms allows companies to quickly understand when trust levels are out of balance. If there is a trust surplus (high trustworthiness but low stakeholder trust), companies may need to communicate their trustworthiness more effectively. If there is a trust deficit (high demand for trust but low trustworthiness), companies must quickly address the root causes of mistrust.

Adaptive Strategies:

Companies should be agile in adjusting their strategies to maintain trust equilibrium. This could involve scaling up trust-building initiatives during times of uncertainty or crisis, or shifting focus to different stakeholder groups as needs and expectations evolve.

Long-term Value Creation

Sustainable Trust Development:

Just as sustainable supply chains focus on long-term resource management, sustainable trust development involves creating systems that maintain and enhance trust over time. This might include fostering a strong corporate culture of integrity, investing in long-term stakeholder relationships, and committing to ongoing ethical practices.

Trust as a Competitive Advantage:

By consistently supplying high levels of trustworthiness, companies can differentiate themselves in the market. Trust can become a unique selling proposition (USP) that attracts and retains customers, employees, and investors, leading to long-term value creation.

Cross-Functional Collaboration

Unified Approach:

Trust should not be siloed within a single function like PR or Compliance; instead, it should be a shared responsibility across all functions—marketing, HR, operations, finance, etc. Each function should understand how its actions contribute to the overall supply of trustworthiness and how it meets stakeholder demand (trust).

Collaboration and Integration:

Cross-functional teams can work together to develop integrated strategies that build trust across the stakeholder spectrum. For instance, HR can focus on employee trust through transparent communication and fair practices, while marketing can focus on customer trust through honest advertising and customer service excellence.

Measuring and Reporting on Trust

Trust Metrics:

Companies can utilise specific metrics to measure trustworthiness and stakeholder trust levels, similar to how they would measure supply and demand in economic terms. These metrics can be integrated into regular performance reviews and dashboards.

Transparent Reporting:

Just as companies report on financial performance, they can also report on trust-related performance. This might include disclosures on ethical practices, stakeholder engagement, and trust-building initiatives, providing stakeholders with clear insights into the company's trustworthiness.

Leveraging Technology

Digital Trust Platforms

Companies can use technology to enhance trust, such as through blockchain for transparency in supply chains, AI for personalised customer experiences, or digital platforms for stakeholder engagement. These technologies can help supply trustworthiness more efficiently and effectively.

Data-Driven Decisions:

By using data analytics, companies can better understand the drivers of trust and how different actions impact stakeholder perceptions. This can lead to more informed decisions that enhance trust.

Scenario Planning and Contingency Strategies

Preparing for Trust Crises:

Just as companies plan for supply chain disruptions, they should also plan for potential trust crises. This could involve scenario planning exercises to identify potential threats to trust and developing contingency strategies to address them.

Responsive Action:

When a trust deficit arises (e.g., due to a scandal or negative publicity), companies need to respond swiftly and effectively. This might include public apologies, corrective actions, or enhanced communication to restore trust levels.

Trust as a Cultural Value

Embedding Trust in Corporate Culture:

For trust to be at the centre of all activities, it must be deeply embedded in the company’s culture. This means hiring and promoting individuals who value and exhibit trustworthiness, encouraging open and honest communication, and creating an environment where ethical behaviour is recognised and rewarded.

Leadership Commitment:

Leadership plays a crucial role in setting the tone for trust within an organisation. Leaders who model trustworthiness and prioritise stakeholder trust in decision-making help reinforce the importance of trust throughout the organisation.

By placing stakeholder trust at the centre of their activities using the supply and demand analogy, companies can create a robust framework for maintaining and enhancing trustworthiness, ultimately leading to stronger, more sustainable relationships with their stakeholders. This approach not only drives immediate value but also positions companies for long-term success in a trust-centric business environment.

Summary

While this analogy between trust/trustworthiness and economic supply and demand shares similar limitations, it nonetheless provides a rich framework for analysing the dynamics of the ‘trust economy’ in various contexts.

It highlights the complex interplay between those offering trustworthiness and those extending trust, and suggests ways in which this "market" might be understood, managed, and potentially improved to capture improved economic results through higher revenue, lower costs, mitigated risks, and stronger reputation.