Every day, we as consumers, citizens, family members, and friends experience hundreds of examples of how our trust undergirds the world we live in, and how fragile the world can be when trust is violated or broken. We’ve all experienced relationships that have faltered and beliefs that have been challenged as the result of a moment that altered our trust in a person, institution, or even corporation. It’s something so basic that the average person likely spends little to no conscious thought about trust, and how it effects the efficiency of the world around them.
A loss of focus on the importance of trust has led generations and entire nations to be seduced by the promise of regulation as a mechanism for protection against the violation of trust. The reality is that regulations and regulators replace the trust economy altogether and redirect the responsibility to act ethically and honestly away from the economic actors themselves and place it on the regulations and regulators. This ultimately leads to the outcry for further regulations and more complex legislation to take hold of the “evil corporations” and “greedy investors”. A clear understanding of the way in which the trust economy works to self-regulate shows how unnecessary and frequently harmful the regulatory system can be.
In my episode of Economics for Entrepreneurs with Hunter Hastings we spend a good deal of time discussing the beef industry. Clearly, if a food manufacturer produced adulterated product and customers became sick, we can imagine, with the trust economy as the master, how long that business would be able to continue selling product. The consumer’s trust that the product will be clean and safe would be destroyed. Conversely, as we look at these industries under regulation, we find that the consumer is confused about who to blame for any safety issues and often continues to buy from the offending party while continuing to look to government for the solution. As a result, we end up with a complex web of rules and institutions that, in the end, fail to close the loopholes and allow businesses to increase their concentration of power, leading to less innovation and less competition.
Consider the current case and controversy surrounding Facebook and its curating of news and information. Facebook seems to have violated the trust of a certain segment of their base by failing to convince them that their curation of news and treatment of private data is safe and unbiased. The natural reaction in the modern era is to look towards regulation as the answer rather than simply understanding the limited power that a private company holds over consumers in a non-regulated sector. The reality is that this violation of trust opens the door for a bevy of entrepreneurs to try their hand at supplanting Facebook by providing a product that focuses on transparency and innovates in regard to privacy and safety. Regulating Facebook, conversely, would only create a bureaucratic monster that likely would increase the barriers to entry for entrepreneurs and place an ever-increasing compliance cost on the backs of taxpayers, all while securing monopoly type powers for Facebook itself. For further evidence, Ryan McMacken makes a great case for why regulating Facebook would be a disaster in his recent article 3 Reasons Why Facebook’s Zuckerberg Wants More Government Regulation .
The lesson to learn for entrepreneurs is that trust decreases the complexity of a transaction, increases efficiency, and has the potential to decrease cost. A contract between individuals who have successfully completed hundreds of transactions without significant disputes or quality claims is likely a shorter document (perhaps even a boilerplate agreement) with less time spent on legal fees and more left unsaid and uncontrolled by the contract. Conversely, a counterpart who has a history of issues, default, or simply creating headaches may find that the document they receive has been pored over by legal teams and leaves absolutely nothing to chance. Additionally, the less desirable customers are likely to find that their counterpart has priced, to a certain degree, the risk associated with accepting this company as a customer and may decline to extend credit or, at a minimum, may limit terms. Additionally, an entrepreneur will find that the development of trust can yield easier access to new markets, lower barriers to entry, and eventually lead to higher profit margin as a trusted product is valued higher on average than a product which may yield higher rates of defect.
So how can we, as entrepreneurs, earn trust in a startup environment where there have not been a multitude of completed transactions?
1) Leverage past relationships and previously developed reputations.
For those of us who have forged longstanding reputations in previous endeavors, continuing to operate in a circle where this reputation is known, and past relationships have already been developed means a leg up against the “from scratch” start-up taking a leap into the unknown. A properly placed endorsement from another trustworthy individual or entity can ensure that others unfamiliar with your past will be assured of your integrity and continued strength.
2) Be authentic.
Everything has a cost. We can try to show potential customers that we value their needs, but if the sales pitch at any point fails to meet with reality then trust is broken, and the short-term gain becomes moot. Under-promising and over-delivering may mean a longer road to those first sales, but can generate a great amount of trust currency to be leveraged later.
3) Execute!
Ultimately trust rests in action. Vigilantly ensuring that the product is delivered as promised and avoiding any complications ensures that your customer has a positive experience and learns that you are as good as your word. Solid customer service for a start up business can be as important as the product itself (which can be difficult given limited resources and lean organizations).
4) Small concessions can build great trust.
One of the advantages of being a start-up is that your organization is not large and institutionalized. You are not forced, due to the problems of organizational size, to implement hard and fast rules. Rather you can be more human in your interactions. Use discretion to affirm the authenticity of your willingness to work through even the minor problems and your customer will certainly gain trust in your organization.
5) Trust works both ways.
Nascent businesses must be more careful than well established companies in trusting their counterparts. The start up nature means that problems normally routine for a better-established firm may bring about the end of a startup. Therefore, a startup may wish to forgo its first sale in favor of finding a customer that will deal more honestly and ensure that a solid relationship can be established.
