Trust is important to our relationships with friends, family, and acquaintances. Less understood, though, is the role trust can play in business relationships. When businesses deal with each other, their first impulse often is to summon their lawyers. But I have found in my research that there are many situations in which trust can be an effective replacement for costly and time-consuming contract negotiations.
To understand the role of trust in business, I and two colleagues, Ozalp Ozer of the University of Texas at Dallas and Kay-Yut Chen of Hewlett-Packard Laboratories, conducted a series of computer laboratory experiments that simulated one of the most vexing problems in supply chain management: The tendency for manufacturers to issue overly optimistic forecasts.
Businesses often spend a lot of money trying to retain customers. Many direct their retention activities toward all of their customers and hope that enough respond for the effort to pay off. But some customers leave anyway. A more effective approach recognizes that customers are different and their likelihood of departing—a phenomenon known as churn in the business world—varies among individuals and over time.
Some customers churn for reasons a business can control. These customers may be unhappy with the price or product, or they may prefer a competitor. Others churn because they move away or die or go bankrupt—matters a business can’t control. An efficient strategy targets those customers likely to churn for controllable reasons and does not overspend on customers likely to leave for uncontrollable reasons. And when evaluating the success or failure of retention marketing activities, managers should take the incidence of uncontrollable churn into account.