Sometimes it's good to get back to the basics when trying to understand a complex system like the current ecommerce environment. It seems that just as we've figured out how to market effectively using one social media platform or another, it changes wildly or becomes obsolete, and we have to figure it out all over again. But those are merely tactics that come and go rather quickly. It's better to focus on certain fundamentals about how marketplaces function, whether you're a traveling salesperson, a brick and mortar establishment, or online store, fundamentals that never change.
If you search back through your notes from your Econ 101 class, you'll stumble across a term that you might have forgotten, but which has a surprisingly significant impact on almost every decision you make in the market, regardless of whether you are the buyer or the seller. That term is "Transaction Costs.” These are all of the costs associated with the exchange of goods and services that are beyond the money price of the transaction.
On a recent episode of the EconTalk podcast, economist Michael Munger broke down transactions costs into three easy-to-remember categories: triangulation, transfer, and trust. We’ll quickly discuss the first two, but the focus of this article is on the third, trust, and the ways that it affects our businesses and how increasing trust can radically decrease transaction costs and increase sales.
The first category, triangulation, Michael Munger explains this way, "Usually in economics, we start with this idea that A has a widget; B has some money and wants a widget; then they negotiate on price. Well, how did they meet? How did they know that they have a widget? Do they speak the same language? Do they have a currency that they can use to consummate the exchange? There's a bunch of things that have to happen before you get to the 'And then there's a price' part. So, triangulation involves that."
Fortunately, in this day and age, technology has helped us overcome most of the issues that triangulation presents, at least for the online consumer. The same goes for the second category, transfer, for which Michael has the following to say, “We actually deliver the product. We actually make the payment. We clear the transaction in a way that both parties agree with.”
In the internet marketplace, many innovative technologies, like Shopify, have developed to make both of these transaction costs more efficient than ever before possible. Some of these technologies have gone beyond mere efficiency and even help placate our all-too-human neuroticisms. Not only will many delivery services tell you the exact time of your delivery, but you can follow your package’s journey with a precise GPS location.
A quick Google search with the keywords “trust as lubrication” (be careful with this search!) will bring up a bunch of feel-good quotes about trust as a social lubricant, organizational lubricant, or economic lubricant. But what do these concepts really mean?
Economists have devoted many lectures, essays, and books trying to flesh out the relationship between trust and the market. Since we’ve been using Michael Munger’s delineation of transaction costs, he said this about trust, “I know that you are not going to rob me. I'm not going to rob you. And we recognize that the thing that's being sold and the thing that's being used to purchase it actually are those things: There's no fraud.”
If we truly trust the person, we're buying from, and they trust us, this trust acts as a lubricant for the transaction, making it much more efficiently achieved.
My friend Scott has been traveling internationally for nearly a year and his recent time in Morocco exposed him to the function of trust in commerce in some very immediate and personal ways. Here’s the story from his mouth:
“It was my first day in the city of Marrakech,” Scott told me, “and my companions and I decided to brave the fabled Medina with its labyrinthine, narrow streets and alleys filled with souks (markets), cafes, workshops of all kinds, and so many people. Within minutes of entering its high walls, we were being cajoled and enticed to enter a showroom full of colorful djellabas (the traditional robes worn by many locals), scarfs, carpets, and much more.”
“We were offered our first ‘Moroccan Whiskey,’” Scott continued, “a very sweet mint and green tea that was mixed and poured in exotic ways, which only intensified the already mesmerizing atmosphere. Robe after robe was pulled from the walls for us to try on while being regaled with stories of the traditional Berber nomad artisans from the high Atlas mountains. These nomads, we were told, were only in Marrakech for one day this month with their beautiful wares made of wool, baby camel hair, and silk.”
At this point in the story, you might think that if it were you in this shop, you would be chuckling under your breath at the obvious con job being pulled. “But you weren’t the one standing there in a magnificent gold djellaba,” Scott says, “made of wool and silk with a scarf wrapped into a majestic turban on your head looking into the mirror and seeing yourself transformed into an Arabian prince. Plus, I’m sure there was something in that tea!”
Needless to say, Scott made his purchases and wandered deeper into the medina, where they found identical versions of their clothing that could be haggled down to less than half of what they’d already paid. And these vendors talked of cotton, not camel hair.
What happened next illuminates the necessity of trust in commerce.
“I stopped buying their products,” says Scott. “Not just the shop that had duped me, but from anybody.”
Not long afterward, Scott was visiting an actual Berber village near the Sahara Desert and found a showroom full of intricately woven rugs that the shopkeeper told him had been woven by his mother and other women in the village, some taking up to five months to finish. Once again the tea was flowing, and one after another these beautiful rugs were presented to us. "One particular style had caught my attention," says Scott, "with its brightly contrasting colors and delicate, yet strong, weave. I asked about the material. Cactus silk made from the fibers of an Agave-like native plant, I was told, dyed with natural products found in the desert."
Scott didn’t buy the rug. In part, he opted out because he was still quite distrusting of the vendors, but also because he didn’t have the means to transport a large rug on his travels. “But I was curious about cactus silk,” says Scott, “which a quick internet search showed to probably be nothing more than rayon thread, most likely imported from China.”
Scott’s research also uncovered that most of the local artisans might not even realize that there is no such thing as cactus silk, so the rug merchant may have been deceived as well.
Not that many years ago, a person that found themselves in Scott’s Moroccan dilemma would not have many options. They would have to resort to trying to verify the legitimacy of every purchase, which would not only be time-consuming but nearly impossible to do on the spot with every transaction.
But Scott lives in the internet age. So he turned to the best resource available for him to be able to trust the people he was buying from and the products they were selling: all of us.
Customer reviews and ratings are a large part of the modern social and economic lubricant. We might not be able to trust a single proprietor of an unknown business in a foreign country, but we can trust when 100 or 1,000 customers have had an exceptional experience with that business and detail it online.
We can also turn to well-known companies that have earned a reputation like Airbnb or Uber that we know will offer the exact product that is advertised and not perpetrate fraud when we give them our credit cards.
All that to say that if we really look at it, we realize that a good reputation is merely the collective agreement of your customers that you can be trusted.
Let's revisit the three critical elements of transaction costs for the online entrepreneur, in particular. The first two, triangulation and transfer, the marketplace has already taken care of and is continually innovating at exceptional speed. Companies like Amazon and Shopify, UPS and FedEx, provide the platforms for your customers to find you and quickly purchase from you using very secure technology. However, they can't provide you or your industry with a good reputation.
Building and maintaining your customer's trust, which translates directly into the type of reputation your business will have, comes down to two primary components: earning your customers trust and having that information spread broadly. And if we're to be frank with each other, no one has to tell you how to earn your customer's trust. You already know how to do that. You're a customer yourself, and you know precisely what you're looking for in a vendor or supplier. So, just be the same business you want them to be.
Probably the number one method that your reputation will be spread is by word-of-mouth. When someone has a great buying experience or a great product, they love to share it with people they know. Conversely, they’re more than happy to warn friends, relatives, and associates about a bad experience they had, so it’s critical to keep those experiences positive.
And just as with the first two components of transactional costs, the third component, trust, has been given a technological platform, a digital word-of-mouth. That’s the power of reviews. They allow people you don’t know to provide you with recommendations about the products and businesses that you interact with both online and out in the physical world. Adding that functionality directly to your online store, such as with our platform, Judge.me, will help ensure that your exceptional customer service and products get the recognition they deserve.
If you'd actually done the keyword search that I recommended at the beginning of this article, you would have noticed that the internet is saturated with quotes about trust. It's a massive part of the human experience both interpersonally and in the world of ecommerce. That's why these words of Warren Buffet's ring true regardless of the context, "It takes 20 years to build a reputation and five minutes to ruin it."
It is vital to do everything you can to ensure your customer's trust in you and your products and protect that reputation. It's not only paramount for your specific business but as Scott's Moroccan experience shows, for the reputation of your industry and the broader online experience. That's why it's also important to hold our peers to a high standard of trust since their treatment of customers can affect their willingness to engage with other online businesses.
And once you’ve earned that amazing reputation, give your customers the best possible methods to shout it from the proverbial rooftop.