To coin a fashion term, consumer trust is the new black

As consumers adapt to changing economic conditions, businesses are seeing two key trends emerge. How well firms respond to these trends will determine how well they weather the economic storm.

First, high unemployment rates have caused consumers to become cash-strapped. Many firms that had initially responded in knee-jerk fashion by offering deep discounts in an effort to lure in customers are now lamenting those decisions. The too-low prices are threatening profitability and at the same time increasing traffic at the low end, which is straining resources. The more strategic response is to manage costs and increase consumer value.

The other trend is perhaps more challenging: firms are experiencing a growing loss in consumers’ trust. One recent survey found that 62 percent of adults in 20 countries trusted corporations less this year than they did a year earlier. In Business Week’s annual top 100 Global Brands issue, trust is rated as the single most important factor differentiating companies such as Google, Amazon.com, Zara, Nestlé, Apple and H&M. Trust not only affects brand reputation, but also affects employee loyalty and motivation, new talent recruitment and more generally can affect public demands for increased government regulation.

So how do firms earn trust back? According to my colleague Chet Schriesheim, the University of Miami Distinguished Professor of Management at the School of Business Administration, trust is a willingness to allow oneself to be vulnerable to the actions of another. One respected academic framework suggests that trustworthiness has three components: perceived ability (competence), perceived benevolence (having the other’s well-being in mind), and perceived integrity (consistency between words and behaviors).

Firms must re-establish their own competencies. New advertising campaigns are hyping expertise. Dell’s tagline “Depend on Dell for Simple Solutions in Tough Times” and GM’s new “May the Best Car Win” campaign featuring a money-back guarantee are two examples. In service industries, corporate representatives are touting their own expertise, academic credentials and industry experience.

It’s hard for firms to show authentic benevolence, the second component of trustworthiness. This may be the primary cause of the current atmosphere of mistrust. Cecily Cooper, an assistant professor of management at UM’s School of Business Administration, focuses her research on trust repair. She notes that “the taint of an integrity violation lingers longer than that of a competence question, because it is perceived to be more diagnostic of who a person really is.” Critical to re-establishing trust is watching what the firm does after the transgression. As an example of a particularly poor response, Cooper cites the decision by U.S. auto industry executives to use private jets when they traveled to Washington, D.C., to request bailout money.

Some in the beleaguered financial service industry appear to have gotten the message. Bank of America is offering simple solutions for credit card customers. The firm’s new Basic Visa card will offer one rate for purchases, balances, transactions and cash withdrawals and one flat rate for late charges. The company’s move follows its earlier “clarity commitment” that explained on a single page what mortgage customers could expect to pay. In the fast food industry, companies are voluntarily exhibiting nutritional information on foods. McDonald’s recently sent out a team of “McMoms” to show skeptical parents how kids can continue to eat affordably at McDonald’s and keep the calorie count down.

The third component in our framework for trustworthiness is integrity. This is complicated to convey because it depends not only on firms’ actions but on customers’ interpretations of those actions. Firms need to spend more time educating customers so that they know how they are being best served. We all know that some of Bernard Madoff’s sophisticated investors were blindsided and lulled into a false sense of security. Customers are now wary and are demanding more time and more transparency from providers. The CEO of a financial services software platform company said that he has observed that contracts that used to be completed in two or three stages are now taking four or five. Today, firms entering into negotiations must understand that proposals will be more complex and that there will be more aspects to discuss and ultimately simplify. Rather than focusing on closing the deal quickly, firms must take the time in negotiations to build a strong relationship and trust. Further, going longer into the process serves as a signal as to how much the customer has “won.”

Bottom line: in today’s uncertain times, one thing is certain. The key to improved customer relationships is trust.