7-minute read
Ethical pricing strategies weigh the impacts of pricing on consumers, producers, and the overall market. Ethical pricing strategies should help to limit a company’s pursuit of market share and profit.
Ethics is about being fair. Pricing is about capturing as much value from your buyer as possible. When sellers balance fairness and value, they use ethical pricing strategies. Let’s explore the difference between ethical and unethical pricing strategies and identify the hallmarks of each.
Let’s explore common pricing strategies and provide examples of ethical issues in pricing decisions.
What is ethical pricing?
Ethical pricing is a pricing strategy that weighs the price’s equality, integrity, and influence across all relevant players. These players include producers, consumers, suppliers, and workers. Ethical pricing strategies help understand and limit a single company’s pursuit of market share and revenue when those goals conflict with the well-being of the other relevant players.
Why are pricing ethics important?
Pricing ethics and the implementation of ethical pricing strategies are important because they keep companies accountable to moral and community standards. With ethical pricing, these companies must balance financial and growth goals with the well-being of their customers, workers, and the broader market.
What is an example of ethical pricing?
In defense of the pricing profession, most pricing is ethical, and most pricers act ethically. In an average transaction, both parties enter it willingly and are better off after the transaction. That seems ethical.
For example, say a company makes a product that costs $100 to build. It will only sell its product at a price over $100. A buyer has a problem that the product solves, costing her $500. She will only buy at a price below $500. At any price between $100 and $500, both parties are better off if the transaction occurs.
The example above illustrates fair and ethical pricing. However, there are many instances of unethical pricing.
Pricing Strategy Ethics
However, there are many unethical pricing tactics and strategies. Figure 1 plots those tactics on a chart to show how common they are compared to how ethical they seem.
Common, Ethical
- Implicit collusion
- Price segmentation
- Pricing psychology
- VBP for software
Common, Unethical
- Lying while negotiating
Uncommon, Ethical
- VBP for hardware
Uncommon, Unethical
- Explicit collusion
- Segmentation based on race
- Gouging during catastrophes
- Predatory Pricing
Other
- Segmentation based on gender
- Loss leader
Now, let’s explore some elements of ethical and unethical pricing strategies.
Pricing Strategy: Segmentation
Price segmentation is a common practice defined as charging customers different prices for the same product. For example, charging variable prices for adjacent airplane seats or couponing is price segmentation.
Price segmentation aims to raise prices for customers with a higher willingness to pay. In some cases, price segmentation can be beneficial. For example, U.S. markets pay more for prescription medications sold at a lower price in other countries. With pricing segmentation, this may be because consumers in the U.S. have greater need or willingness to pay. Additionally, when specific market segments pay a higher price, that can subsidize the production and distribution of the product to consumers who pay lower prices. While it seems unfair on its face, in some cases, some medications may not be available if the U.S. market were not paying the price that it does.
However, segmenting prices based on race, gender, disability status, religion, or nationality can be unethical. Furthermore, pricing segmentation can even be illegal. Charging different customer groups different prices for identical products is unethical and may violate federal policy in the U.S.
It is legal to charge different prices for similar products and market those products to different customer segments. For example, gender-based pricing, known as the “pink tax,” occurs when companies charge a higher price for a product stereotypically marketed toward women, such as a pink razor (compared to a blue razor marketed to men). While this is technically legal, many consider it an unethical pricing segmentation strategy.
Pricing Strategy: Psychology
In pricing strategies, psychology takes advantage of the cognitive biases and mental shortcuts we use to make decisions quickly. For example, pricing strategists commonly assume that consumers tend to round down prices that end in .99 (such as $20.99). Ultimately, this pricing tactic has a relatively small impact on buyer behavior compared to other thought processes that lead to a purchase (weighing needs and wants, pricing and resources, marketing over time, and other factors). However, recent research has demonstrated that customers who struggle to process and understand numbers perceive .99 prices differently than customers who can process numbers easily. Customers who struggle with math might perceive $18.99 as a better deal than another customer. Considering that this pricing might capitalize on customers’ cognitive abilities or educational backgrounds, this pricing strategy might veer into an ethical gray area.
Pricing Strategy: Collusion
Different types of collusion can be ethical or ethical.
Explicit collusion occurs when competitors talk and conspire to keep their prices high. In this case, all companies involved profit at the expense of buyers.
Implicit collusion occurs when one company could increase its prices and gain short-term market share. Lower prices would incite competitors to lower their prices to regain lost market share, and all companies involved would make less money. With good business sense, both companies should know how this will play out. Neither may lower their prices, even if they don’t explicitly agree to that pricing strategy. This outcome is both ethical and common. Furthermore, this is a legal pricing strategy as long as they don’t break the rules of free-market competition.
Pricing Strategy: Predatory Pricing
Predatory pricing occurs when a company uses its dominant position in the market to price its product below cost to drive competitors out of business. Once competitors are gone, the predator is free to raise prices. In theory, if a company raised prices to monopolistic levels, new competitors would enter the market with lower prices, stabilizing prices overall. In some instances, predatory pricing could violate antitrust laws.
Pricing Strategy: Gouging
Price gouging may be consumers’ most hated pricing behavior. It occurs when a seller spikes the prices of goods, services, or commodities to an exploitative level higher than is considered reasonable or fair. For example, during the early days of the COVID-19 pandemic, when consumers were desperate for protection against the new virus, bottles of hand sanitizer were sold for as much as $250.
Price gouging can be challenging to identify in the pharmaceutical industry. Let’s take a life-saving new drug as an example. If this drug saves 1,000 people and costs $1,000,000 to develop and produce, essentially, that drug costs $1,000 per person. (If this sounds harsh, please bear with me.) However, that $1,000 per person does not cover research and development, trials, and marketing costs. To cover additional costs and generate a profit, the company charges $2,000 per person. This type of price increase to generate profit is common and can be considered ethical within reason.
Conversely, consider the EpiPen. The price of an EpiPen went from $100 in 2007 to over $600 in 2016. Mylan, the maker of EpiPen, had increased the consumer price without experiencing an increased cost for its production and sale. Indeed, Mylan was ordered to pay $264 million to settle a lawsuit regarding this alleged price gouging. Radically increasing prices for a life-saving treatment simply to increase profits was perceived as unethical.
Conclusion
Considering the millions of transactions that happen daily, it can be argued that most benefit both the buyer and the seller. Following that logic, the majority of pricing decisions are ethical. Identifying the hallmarks of unethical pricing strategies and understanding their impacts can ensure ethical pricing in the future.
