Consumer Savvy: Must Customers Understand Your Business Model?

I’ll put this on the table as a fundamental ethical principle for commerce:

If your business model relies upon customers not understanding your business model, your business model is not an ethical one.

We might justify this principle in at least a couple different ways. We could work from first principles, and say that making sure your customers aren’t deceived goes along with basic standards of respect for other human beings. A decent company wants its customers to benefit, and thinks it has genuine value to offer them. Or we could point out that information is essential to the functioning of markets, and that the moral underpinning of markets requires that market transactions at least approach the ideal of full information for all parties.

Ponzi schemes are the extreme example: they rely entirely on “customers” (i.e., victims) not knowing that they are part of a Ponzi scheme.

But there are plenty of other, less extreme examples. For instance, when pricing is central to your business model (e.g., positioning yourself as an airline offering low-cost flights) then deceiving people about the true cost of your product essentially means hoping they don’t understand your business model, which is essentially as follows: “Advertise low prices but charge high prices by adding hidden fees.”

Here are a few current headlines about companies that seem to violate this principle:

Note that this principle doesn’t stipulate that all (or even any) customers actually understand your business model. (There are lots of reputable companies I that I deal with every day without having any real clue what their business model is.) The principle only says that your business model can’t rely upon people not understanding. If you’re relying on people not to understand, that means you essentially have nothing of genuine value to offer them in the first place.

And for that reason, it strikes me that deception about one’s business model is even more egregious than other kinds of deception in business.

3 comments so far

  1. James Lambert on

    I think this issue crops up for most online services. We may kid ourselves that we are the customers of free services like search engines and webmail. But in reality their customers are advertising agencies, we the users, are the product. In these cases confusion about a company’s business model means misunderstanding our place in it.

  2. James Meacham on

    I think you are on to something very central here, Professor MacDonald. The most important justification for capitalism is that the people who exchange goods and services do so for a net gain in utility/value. I give you my money for your widget because the widget is worth more to me than the money (or the other things I could buy with it) and you sell me the widget because the money (or the other things you could buy with) is worth more to you than the widget. Without this rationale for the market system, its moral basis quickly falls apart. An unstated assumption is that both parties have complete knowledge (or reasonably complete knowledge) about the utility of the goods or services exchanged. Thus I think that *the* ethical question one has to ask of any transaction is: “if the partner in this exchange knew everything that I do about the exchange, would s/he still think this is an equitable exchange”. If the answer is no, then you are treading ethically questionable territory. As you point out, there are firms (some credit card companies, many of the lenders in the run-up to the subprime crisis, e.g.) that depend upon their customers not understanding the terms and conditions of the exchange. Or, in some cases (many pre-Dodd-Frank banks) firms assume that customers don’t understand the way the product works (e.g. overdraft charges that were manipulated by selecting which transactions were processed first). I think the basic idea here is correct, but I think it is a specific instance of a more general principle about information, utility, and ethics in the market system. While I can imagine limited counterexamples, as rule any firm that benefits from hiding information or, more subtly, relies on predictable cognitive bias (viz your recent blog posting re: same) in order to trick an exchange partner into participating in an exchange is very likely an ethically bad actor.

    • Chris MacDonald on

      Thanks for your comment. This sounds right, but I’ll just make two clarifications:
      a) The information assumption isn’t really unstated, at least to economists — it’s an important precondition for ideal markets;
      b) Seeking “equitable exchange” is hard; but the information requirement is needed for something even more basic than that, though, namely mutual advantage. Guaranteeing equitable benefit is a much tougher requirement.

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