Price Label Breakdown

Translator: Dr. Hossein Akbari

When a company sets a price for its products, buyers are usually unaware of the production costs of that product. It seems that breaking down the price label creates value for customers. In fact, new research shows that when a t-shirt-selling company breaks down the production costs—such as raw materials (cotton), cutting, sewing, dyeing, and shipping for each t-shirt—final customers are more attracted to that brand and show a greater willingness to purchase from it.

Bahavian Mohan, a Ph.D. student in marketing at the Harvard Business School, says: "Breaking down costs gives you the opportunity to tell your customer everything you’ve done for the product or service offered. When companies share their production efforts with customers, it increases their customers' perception of the product's value."

Mohan, along with Ryan W. Boyle and Leslie K. John, professors at Harvard University, wrote the paper titled “Lifting the Veil: The Benefits of Cost Transparency.”

Honest Disclosure

The researchers state that when a company shares price information and breaks down its production costs—usually considered a closely guarded secret—it actually creates intimacy with the customers. People are often more attracted to brands that take this step.

Dr. Boyle states: "In personal relationships, when people share things with us, they make us feel more connected to them. The same relationship applies when interacting with companies."

The researchers conducted six laboratory studies to gather information about customers’ pricing preferences, where participants answered questions about a simulated t-shirt seller's website. The research also included a field study of sales at a real seller's site to show how the variable production costs of a t-shirt company influence customer buying behavior.

Key Findings from the Research:

1. When a company voluntarily discloses its costs, customers become more interested in the brand and are more likely to purchase from it. Dr. John says: "In fact, when customers realize that the company is not trying to earn extra profit by charging the disclosed costs, they feel empathy toward the company."

2. With this action, customers enter into a long-term and private relationship with the brand, such that they act as advocates for transparency and fair pricing when speaking to newcomers.

3. A company that announces its production costs—even if it has a high-profit margin on its products—still enjoys greater customer purchase intent and popularity. Dr. Boyle says: "We want to understand when price transparency can be harmful. For example, if the production cost of a t-shirt is $6.50, and the selling price is $10, cost transparency is acceptable (to motivate buyers). Even if the selling price is set at $35, five times the production cost, transparency will still have an advantage."

4. Price transparency only leads to failure when the product pricing is much higher than the normal market rate. A company that discloses its production costs while setting its selling price significantly higher than competitors' will face issues. For instance, if a company announces the production cost of a t-shirt is $30, while competitors state it is $25, and their profit margins are lower, customers will be less inclined to buy from the more expensive brand, reducing the brand's market appeal.

5. Dr. Boyle believes that cost transparency can backfire only when a company discloses its production costs but fails to show fairness in pricing, especially when considering excessive profit margins. "It’s surprising how unprofessional a company can act," says Dr. John. "Cost transparency won't succeed if the goal is to exploit the customer."