What Is “Ethical Pricing” and Why Does It Matter?
Updated: May 10, 2021
In the quest for better pricing solutions to help companies maximize their profits using the latest, state-of-the-art pricing techniques, it’s important to not lose track of the moral duty to promote ethical pricing. This leads us to the first question…
What is Ethical Pricing?
It’s an important question, and it’s not easy to answer. I’ve asked the question to several people, and I’ve gotten many different answers, some of them conflicting with one another. That got me thinking… should pricing ethics really be something that’s “up for discussion?” Or is it one of those things that should be pretty black or white? What I’ve found is that, while most people agree on some general tenets of Ethical Pricing, there seems to exist some topics which seem to get a wide variety of answers.
I’ll give you an example: Is Price Discrimination Ethical or Unethical?
That is a question I expected to get fairly similar answers, but I didn’t. Some people felt very strongly that companies should have the right to charge whatever price they want to whomever they want to charge it to. Others felt that it was unethical to discriminate among customers as far as price offers were concerned. However, when I asked if it was unethical to charge different prices on the basis of sex, race, ethnicity, religion, etc., most people agreed that this type of discrimination was unethical. However, when I asked if was ethical for different customers to receive different prices based on the volume of business they did with the company, almost everyone said that type of price discrimination was generally ethical. The difference? Customer choice. If the customer has the choice to do something to earn more favorable prices, then that type of price discrimination is typically seen as ethical. But assigning customers different prices for something they can’t control, like race or gender, or something they should not be expected to change, like religion, is seen as largely unethical.
Another example: Price Gouging. Is it Ethical or Unethical?
Price gouging is generally defined as charging significantly higher prices as a limited supplier of something customers need to buy, especially in times of emergency or natural disaster. There are state price gouging laws that prohibit price increases by as little as 10-25% under certain conditions. And yet, if you ask people if it is ethical to raise prices by 10-25% under normal conditions, most people tend to say yes. That is a seller’s right. Even if you add “in a time of limited supply,” most people tend to agree that in free capitalism, sellers can charge whatever they want.
However, if you change the question and ask if it is ethical for a drug company to raise the price of a life-saving drug to the extent that it is not affordable for even a small percentage of patients, most people say no—it’s not ethical. Why? What is different?
If you ask: Is it unethical for a drug company to develop a drug that cures cancer and sell it for $250,000 per dose to justify the cost of research and production? Most people don’t consider that price gouging or unethical pricing. Why? What is the difference?
The difference tends to hinge on a couple of things:
Was the drug already available on the market at a lower price where people had already made decisions and become semi-dependent on it?
Is the price being increased out of necessity (due to costs) or out of greed (to produce more profits)? People tend to think greedy pricing is unethical.
The magnitude of the increase from the regular or expected price and the new price. Most people can understand price increases in the 5%, 10%, even 20% range, but once you get close to 50% or more, it just tends to seem excessive. Price increases of 100% or 1000% seem unnecessary and unethical.
In short, most people agree that Price Gouging is unethical, but people tend to have different definitions of what qualifies as “price gouging.” But there seems to be some consensus around unjustifiable price increases above 20%, when people have had expectations and made decisions based on a much lower price.
Last Example: Is it unethical to raise a price without communicating it to your customers?
This is an interesting question because most people tend to think that companies have freedom to change prices any time they want to, and they have no obligation to let customers know of every price change.
However, when I ask the question a different way, I seem to get mixed answers. For example: If a customer has been buying your product at a certain price over several months, and you decide to increase the price by 10%, do you have an ethical obligation to let the customer know about the price change before the customer places their next order? Positioned this way, although the responses were mixed, most people felt that not notifying the customer of the new price seems a little shady and on the side of unethical. They felt that it seemed too close to a “bait and switch approach.”
And further, when I frame an example of companies who change prices and even notify the customers “in small print” without calling attention to the change, many people even thought that was unethical. For example, a family subscribes to a satellite TV subscription at a price of $149 per month, but with taxes and fees, it comes out to $168 per month. After six months the company sends out a notice at the bottom of the monthly invoice “in fine print” that the price will be going up by 10%. Since the bill is on autopay, the family doesn’t really read the invoices or the fine print. Ten months after the price change the family realizes they have been paying $185 per month instead of $168 per month, and they wonder how the price got so high? Did the satellite TV company behave ethically? Again, responses have been mixed, but a significant proportion of responses have said that practice is not ethical.
In general, most people tend to think “bait and switch” practices are unethical. And most people tend to believe it is more ethical to make customers aware of the prices they will be paying if a price for a product or service is going to change. That means price communication is part of ethical pricing practices.
Why does any of this matter?
Most people seem to value companies that adhere to high standards of ethical pricing and overall ethical business practices. It takes away a burden to have to always “watch your back” to ensure that you’re not getting “screwed” by companies you buy from. Companies that have more ethical pricing practices can actually charge a little more for their products and services because they offer the customer more value in terms of reduced risk and more good will. That’s the big reason.
In addition, many unethical pricing practices are simply against the law. Behaving ethically will generally keep you out of legal trouble.
But lastly, I envision a world where people look out for one another—not take advantage of each other. Ethical pricing practices help make the world a better place.
What are your thoughts on Ethical Pricing Practices?
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About the Author: Jeff Robinson brings the perspective of two-decades working with companies across industries to help them improve their pricing practices and results. He has designed, marketed, and implemented pricing solutions used by hundreds of companies, whose combined revenues total more than one trillion dollars. Having earned a bachelor’s degree in economics, combined with an MBA in marketing and finance, he has brought new perspectives to the world of pricing, often challenging prevailing notions or widely accepted strategies. Combining his formal education with over 20 years’ experience, he has recently authored the up-coming book, Price for Growth, A Step-by-Step Approach to Massively Impact the Value of Your Company by Leveraging Focused Pricing Strategies, expected to be release in 2021. Today, he is leading the development of a new company, Revolution Pricing, focused on helping companies create and select appropriate pricing strategies for maximizing the value of their own companies.
About Revolution Pricing: Revolution Pricing is a company founded to help companies create and select appropriate pricing strategies for maximizing the value of their company value by focusing on the right metrics, building goodwill with their customers, and reducing the risk of future profits. Unlike most companies that offer pricing solutions, Revolution Pricing focuses on longer term benefits largely driven by metric other than near-term profit dollars. We believe the path to success requires education and understanding prior to implementing “optimization” tools to insure any such tools accomplish the right desired objectives. For more information, visit RevolutionPricing.com