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:
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.
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.
* Denotes an Alpha Edison portfolio company