The age-old saying is “honesty is the best policy.” Does it make business sense to be honest and transparent with your customers? Will honesty bring business success?

In this video, I explore two companies and how differently they manage the issues of honesty and transparency in business, and how this divergence led to two distinctly different outcomes.

Does it make sense to be honest and transparent with your customers? The more important question to ask, perhaps, is why is important to be transparent and honest in business? Why should businesses tell the truth all of the time?

Allow me to answer this with one example: Volkswagen.

Why is it bad business to lie to your customers?

In 2015, Volkswagen became the center of world attention when they were caught lying about what they claimed was the world’s most environmentally safe diesel engine. The media called it “Dieselgate.”

From 2008 to 2015, Volkswagen claimed that it manufactured and sold vehicles that ran on “groundbreaking clean diesel” engines. These engines supposedly met the USA’s “stringent tailpipe emissions standards.” The company marketed it as the safest diesel engine in the world.

The problem is that this is not entirely true. In fact, it was a complete lie.

The company intentionally programmed their turbocharged direct injection (TDI) diesel engines to activate their emissions controls only during laboratory emissions testing, which allowed them to mask true emissions scores to meet the safety standards. In 2015, reports confirmed that some five million Volkswagen-branded cars, 2.1 million Audi vehicles, 1.2 million Skoda automobiles and 700,000 Seat cars, as well as 1.8 million VW commercial vehicles were fitted with a defeat device in their engines.

What has Volkswagen lost by cheating?

Dieselgate was ruinous for the company. Volkswagen paid close to an estimated US$30 billion in penalties and fines. In 2015 alone, the company suffered a US$4.6 billion loss. Its share prices lost 40% immediately after the scandal.

Volkswagen lost its reputation. There was widespread distrust—from customers to car dealers. Their workforce felt demoralised. In 2017, 2 high-ranking employees were sentenced to prison.

The cost of lying is that its reputation as a trusted and reliable brand was tarnished in the mind of consumers and businesses alike. It will take a lot of marketing dollars and resources to bring the brand back to where it was before Dieselgate began.

The Volkswagen story is an extreme example of what could happen when a company is caught cheating; it provides a good lesson on why businesses should NOT lie and cheat.

What Volkswagen teaches us is that getting caught lying can be very costly to a business. They lied about the emissions and initially did not get caught. This, in turn, emboldened them to continue lying about it.

This seems part of human nature—to continue lying when one is not caught. That does not mean that one should lie in the first place. If lying is bad, does it necessarily mean that being honest is good for business?

What do companies gain when they are deliberate in being honest and transparent with their customers? Does it make good business sense to be transparent?

Let’s take a look at Patagonia.

Why does it pay to be honest?

Patagonia, a global outdoor sports brand, is an example of how being honest and transparent can have a significant and positive impact on the bottom line and brand equity. Patagonia had established itself as an ethical company that advocates environmental sustainability, workplace safety, and employee well-being long before the 2013 Bangladesh building disaster that exposed the problems of those who work in the global clothing industry.

In the 1980s, they discovered that the materials used in their clothing caused some of their retail staff to fall ill. They immediately made efforts to improve workplace conditions and to source for safer materials.

In 1996, Patagonia decided to use organic clothing in all of their clothing lines, even when it initially ate into their profits. In 2014, Patagonia partnered with Fair Trade USA. To date, the company continues to work on making every item in their clothing line fair trade.

To help customers understand where the materials of their clothing comes from, Patagonia launched an interactive website that allows consumers to trace the footprint of every product they have—essentially providing transparency to Patagonia’s supply chain.

What has Patagonia gained from this strategy?

In 2017, Patagonia was said to have earned over US$1 billion in revenue. In the same year, Patagonia was recognised at the Annual Meeting of the World Economic Forum for producing quality clothing that doesn’t contribute to waste or the depletion of natural resources. In 2018, Patagonia was ranked No. 1 in the Social Good sector of Fast Company’s World’s Most Innovative Companies list.

Most importantly, because of its transparency strategy, Patagonia has nurtured consumer trust. In 2011, Patagonia ran their famous “Don’t Buy This Jacket” campaign, urging consumers to buy less and keep their old clothing off of landfills. Surprisingly, this campaign generated a 30% increase in their sales. Patagonia believes that this is a result of consumer trust. Their consumers trust that Patagonia jackets are well-made, ethically sourced, and made of environmentally-safe material—so they would rather buy one good jacket from Patagonia that they can keep for years to come instead of buying a new jacket every year.

Patagonia CEO Rose Marcario has this to say about the company’s philosophy:

“You can serve the interests of your employees and do what’s right for the planet and still make great margins.”

What does this all mean for small businesses?

Let’s consider what consumers have to say about honesty and trust. According to the Edelman Trust Barometer, only 52 percent of global respondents trust businesses today. In Australia, that number goes down to 48 percent, which means that many Australians don’t trust businesses in general.

Sprout Social, a US-based social media marketing company, calls it an era of distrust. What this means is that consumers do not believe that businesses genuinely care about their customers—and that they’re merely in it for the money. Consumers, these days, have been increasingly calling for businesses to work on transparency. In fact, Sprout Social’s study shows that almost nine out of 10 Americans believe transparency from businesses is more important than ever before.

So, to answer my initial question at the beginning of this video: does it make business sense, to be honest and transparent with your customers?

If we look at Volkswagen and Patagonia, it seems that it does pay to be honest and transparent—and that lying is a bad strategy.

Being honest and transparent nurtures trust.

In Patagonia’s case, the company communicated its strategy and followed through with their actions. To be truly honest and transparent requires words and actions to match. It’s not enough to tell customers that “We are honest!”—we, as business owners, need to show them how honest and transparent we can be.

Redeem yourself by admitting fault and rectifying mistakes.

We all make mistakes. For brands and companies, what is important is to admit fault and to communicate the steps that will be undertaken to rectify these mistakes. Many brand strategists even propose that mistakes and blunders can be opportunities to gain loyalty. Sprout Social’s study supports this: 89% of respondents said business can regain their trust if it admits to making a mistake and is transparent about the steps it will take to resolve the issue.

Transparency takes effort—but it also pays.

Communicating closely with your customers may require more effort, but think of it as investing in your relationship with them.

When your company suffers a service outage and which consumers suffer from, for example, take this as an opportunity to develop a better relationship with your customers. Closely communicate with them. Explain what caused the outage. Describe the steps that you intend to take. Frequently update them about where you are in the repair progress. Service outages cause a lot of inconvenience to customers—but their irritation intensifies further when you fail to communicate about what they can expect from you.

If you are interested to know more about what a business has to go through when facing exponential growth, you can download the first chapter of the book, ”$20K to $20 Million in 2 Years” absolutely free here. The chapter talks about the differences between a good and a great business and puts out questions that make you consider how you can turn your business from good to great.