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Honesty in Contracting

February 7, 2020

Conventional wisdom is that Sales and Marketing should extol the benefits of a product or service and avoid mention of any possible drawbacks or negatives. Those aspects are covered by the contract, typically in the form of limitations with regard to performance or use, but also in terms of potential recourse. In other words, we all know that sales people and marketing materials tell only part of the story and the contract often conveys a very different message.

Is this approach actually smart or effective? Especially in today’s environment of increased openness, would more overt honesty and transparency be a much better policy? It seems obvious that this might at least lead to higher levels of trust and might reduce the amount of time spent on negotiation, but at what cost? For example, does complete honesty deter potential buyers or cause them to switch to a less transparent competitor?

Recent research published in the Harvard Business School working  papers suggests that Sales and Marketing may have got it all wrong and that honesty has multiple benefits – more business, faster business and greater customer loyalty. The paper describes large-scale experiments where a business set out the benefits of their product or service, but also explained the limits or trade-offs. This meant that potential customers were much better informed in making their decision and no longer had to scour the small print in a contract to understand the offering or its limits.

How far can this extend? Right now, the research appears only to relate to consumer and small business markets, but might there be similar benefits in larger scale business-to-business contracts? Recent IACCM research into ‘as-a-Service’ contracting certainly suggests that there could be. IACCM discovered that offerings such as Cloud computing suffer significant delays in adoption due to a lack of clear understanding and unrealistic customer expectations. The advantages of lower prices, greater flexibility and reduced investment require customers to accept some loss of control and very little flexibility in negotiating terms. Perhaps explaining these trade-offs in the initial sales materials would similarly result in faster and better informed decisions as well as greater respect and trust in a supplier’s integrity.

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