Trust: The Vocabulary of Trust (Pt 2)

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September 16, 2020

This is the second in a four-part series on Trust. Part I defines a history of trust and outlines the opportunity to use trust as a basis for competitive advantage.

“Which companies do you trust?”

We’ve asked this question to hundreds of people over the years and there is usually a long pause — followed by a few hesitant answers. Amazon, Patagonia, and Apple are a few that are mentioned often. Others depend on the values and perspective of the person delivering the answer. The answers have also changed dramatically since the COVID-19 pandemic began — family-owned businesses, grocery stores, and not Uber have elevated their prominence.

But taking a step back, it is often a hard question for respondents because we ask it purposefully open-ended — we don’t provide a definition of trust. What we seek to understand from these conversations is not which companies consumers trust, but how they make the decision on what “trust” means.

What we seek to understand from these conversations is not which companies consumers trust, but how they make the decision on what “trust” means.

Trust isn’t binary. It has multiple layers and unbundling those layers is the key to harnessing trust and driving behavior change. Behavioral researchers frame trust with companies through three core pillars: ability, integrity, and benevolence.¹ Ability is fairly easy for customers to assess (“Will I get my package on time?”). Integrity is also measurable (“Did this company make the right business decision?”). But benevolence (“Did this company do the right thing on behalf of the customer?”) is the hardest to measure and where the levels of trust are most important to understand. For completeness, we internally add a fourth measure — time (“Do I see consistency of performance in the other three measures?”)

To understand benevolence we have to unpack vulnerability. In the typical institution-customer relationship, the institution has the power and the customer has little control. Institutional decision making is opaque and so far from the customer that she feels she has no ability to negotiate or win. There is very little transparency. Doing the right thing for the customer is often in direct conflict with maximizing profit, at least at that moment.

If you’ve ever booked a flight and needed to make a last-minute change, you know exactly the feeling. Change fees on most airlines are not transparent and $200 feels steep for a few clicks on a computer. But fees are an important component of annual revenue and thus profit and shareholder success. Southwest, on the other hand, has a long-held practice of no change or baggage fees. They call it “Transfarency”. It is rooted in behavioral research that creating this openness, honesty, and alignment with customers builds trust. The company shows its benevolence by taking on the financial risk of flight change costs. At the moment when the consumer is most vulnerable, she is helped by the airline instead of fined. Rather than framing Southwest as the cheapest airline, it should be considered the most aligned airline. It is willing to cede some economic control to build trust with its customers. COVID catalyzed three other major carriers to take a new stance on fees. United, American, and Delta all said they would pause change fees in order to incentivize customers to travel — a major change to their business models, at least for now. In 2019 the industry took in $2.8bn in change fee revenue. If we assume 80% operating margins and 5x EV/EBITDA valuations that equates to $10bn+ in enterprise value lost from the airline market using traditional metrics. To say nothing of other fees (baggage, etc), to keep these policies after the pandemic would imply a fundamental rethinking of both business model and company culture towards trust.

Types of Vulnerability

In a social context, one of the most effective ways to build trust is to show trust in the other party. When we make ourselves vulnerable, social barriers quickly crumble. This is one-to-one intimacy. Similarly, one of the best ways for a company to build trust with customers is to show trust to them (individually and in aggregate). This vulnerability to hundreds, thousands, or millions of customers is an example of intimacy at scale. Companies that take on risk on behalf of the customer are vulnerable to them. They willingly concede power and profits to better align with their customers’ interests.

In a social context, one of the most effective ways to build trust is to show trust in the other party.

We define five levels of vulnerability. As a company moves from up the scale, from level 0 to level 5, they build a deeper relationship with the customer and ultimately a higher valuation:

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Companies that understand where they are on the Trust Scale can identify ways to uplevel their customer relationships and build more valuable businesses. How (if at all) does a company make itself vulnerable to customers? How does it take risks on behalf of customers to build trust? With what actions does a company prove it has ability, acts with integrity, and is benevolent? Does a company repeatedly make these decisions to show its longitudinal commitment? With trust in institutions fraying, the bar for a customer to “trust a company” is rising, yet if done effectively building trust is immensely valuable.

Companies that understand where they are on the Trust Scale can identify ways to uplevel their customer relationships and build more valuable businesses.

How to Identify Trusted Companies

It is not always obvious whether customers trust a company. It is even harder to determine why and to what degree that trust exists, especially in the early days. We can garner some information from public reviews, but those are usually written by the vocal few rather than a representative subset. Surveys are more representative, but they are highly dependent on the quality of the questions as trust is notoriously hard to define, and the willingness of a participant to share openly. Fortunately, a handful of key performance indicators (KPIs) provide helpful insight.

  • NPS scores are an indication of customer satisfaction, and the willingness of a customer to refer a product to another. This is often correlated with trust but is not a standalone measure of trust. It is most helpful when evaluated alongside other KPIs. If a company is trusted by its stakeholders we also often see the following metrics.
  • Low Churn. Customers are less likely to leave companies they trust. These companies have helped solve points of customer frustration, and along the way created durable customer relationships. Aspiration* offers banking services. It has enjoyed very low churn (nearly 10X lower than the industry average for first-year accounts) as it offers customers a solution they can trust. In an industry with misaligned incentives, Aspiration creates trust through transparency, by taking an economic risk on its performance (customers choose what fee they pay Aspiration for its services), and by aligning with the values of its customers (donating 10% of revenue to charity or offering fossil-fuel-free deposits).
  • Low Customer Acquisition Costs (CAC). When customers trust a company, they want to tell their friends about it. Word of mouth becomes a powerful engine and companies do not need to spend much on marketing. Retail company Everlane, which launched in 2011, differentiated itself by transparently laying out its unit economics for every product so customers understand exactly the costs and profits per garment. They offered public tours of their garment factories in Los Angeles so customers could see how their clothes were being made. They have photos on their website of working conditions in overseas factories. The company has seen tremendous growth since launching this authentic strategy driven by word of mouth.
  • Extended Lifetime Value (LTV). As customers move deeper through the trust funnel with a company, they are more likely to trust adjacent offerings by the same brand. Hosts and guests were initially skeptical of Airbnb, but after building a platform for trust on both sides, the consumer lodging platform has expanded into business lodging and experiences.
  • Employee Engagement. Trust building starts internally with employees, and only then can it spread to customers. Employees at the outdoor gear company Patagonia have built an internal culture and mission alignment that results in “freakishly low turnover”, which gives confidence to the customers who depend on the company for outdoor survival. Starbucks employees, called partners, are offered full coverage of college tuition to earn a bachelor’s degree in order to show the company’s commitment to the development of its people. Similarly, to scale in China, it offered healthcare benefits to all partners’ parents, who are key influencers in the career paths of their children. Both initiatives have increased partner retention.

This list of common vocabulary is only the beginning in a much longer list of signals for trust/distrust. Please comment below to add others you see.

Part III of the Trust series will explain how to measure what trust is worth.

Footnotes:

* Denotes an Alpha Edison portfolio company

  1. Ann E. Schlosser, Tiffany Barnett White, & Susan M. Lloyd. Converting Web Site Visitors into Buyers: How Web Site Investment Increases Consumer Trusting Beliefs and Online Purchase Intentions.
  2. Varies by industry.
  3. This framework was developed pre-pandemic. For the next period of time, there will certainly be health vulnerability associated with in-person transactions.
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