Is your company home to ethical or unethical pricing strategies? We all would like to say that our business is ethical and upstanding, but unfortunately, there are a lot of grey areas in between.
It’s hard to implement perfect, 100-percent ethical prices across your entire assortment, especially if you’re not sure what is ethical or unethical pricing, anyway.
Here is what you need to know to stay ahead of any ethical issues with your pricing strategies.
Why Ethics in Pricing is Important
For starters, ethics is a critical issue in pricing because ethics and legality are not synonyms. An unethical price is not always an illegal price. In many cases, it’s up to you to decide where the line is—is this price strategy or that one too far over the line? Are we pricing our products to best serve our customers? Where are the risks?
As we said, there’s a lot of grey. You need to decide what constitutes predatory and which practice is a concern for your business, not just legally, but ethically.
You can begin by watching out for these five unethical pricing strategies.
Ethics is a critical issue in pricing because ethics and legality are not synonyms; an unethical price is not always an illegal price.
1. Price Fixing
According to the U.S. Federal Trade Commission, price fixing is defined as “an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms.”
From a legal perspective, price fixing often runs afoul of antitrust laws. Your business is supposed to set prices independently from your competitors—you shouldn’t agree to certain prices with your competitors as a way to control the market. The goal here is to protect consumers and ensure that prices are based on a free market, not a fixed one.
In simple terms, price fixing can be when your business and one or more competitors agree to:
- Raise prices on a specific product
- Keep prices on a specific product steady
- Not allow retailers to discount products
- And other examples
One possible sign of price fixing is collusion. Have two or more companies worked together to price the same product in a way that is beneficial for just those businesses? If you’re setting prices based on supply and demand, you’re likely safe from price fixing.
Price fixing is also about reducing competition. It removes the ability for consumers to go to a competitor to find a better deal on a specific product, as those competitors have colluded to fix the price.
2. Price Discrimination
Another common unethical pricing strategy is price discrimination. Price discrimination is when a retailer sells the exact same product or service at different prices to different people. Instead of the same price across all markets, retailers adjust prices based on what they think the consumer will pay.
Price discrimination can be ethical or unethical, depending on how it is used. For example, many goods cost more in Hawaii due to the costs of shipping and selling on islands isolated from common supply lines. It’s typically fine—legally and ethically—to price products higher depending on the manufacturing and distribution costs for serving a particular market.
Where price discrimination gets unethical is in how it is deployed. It is a public relations nightmare if your business hides price discrimination from consumers. It can’t be seen as a ploy or a trick to get unsuspecting shoppers to pay more. Price discrimination can be ethical and legal if marketing and sales make it clear why—and to whom—prices are different.
3. False Advertising
Speaking of marketing and sales, false advertising is a similar pitfall for unethical prices. False advertising can take many forms when it comes to pricing, including:
- Labeling a price as a “discount” when it’s actually the normal price
- Running a promotion when there was never any intention to sell the product at full price
- Or, running a promotion where it’s actually more cost-effective to buy the product in a different bundle
- Advertising a sale or discount when the product has never been in stock
False advertising is pretty easy to spot internally. You should know if your company is misleading shoppers. Again, not all of these are illegal. They’re just unethical.
4. Yo-Yo Pricing
What is yo-yo pricing? Yo-yo pricing is when a business prices a product higher for a limited time—typically when supply is also low—then decreases prices and increases supply immediately after. It’s often a tactic to drive sales at that higher price.
However, it’s not always unethical. In many cases, yo-yo pricing is just dynamic pricing: adjusting prices automatically based on supply, demand, or other market conditions. Where it gets unethical is in how it is used.
Yo-yo pricing shouldn’t be used to trick shoppers into spending more money because they don’t know a better deal is right around the corner. It shouldn’t be done artificially, as in a high price simply to generate a higher margin when it’s already planned to roll out a lower, more steady price soon after.
Instead, it should be done if there’s high demand, like with a new product launch, or when supply is low, like with event tickets. For example, airplane ticket prices yo-yo all the time, typically lower the earlier you book and higher the closer to your flight.
Put yourself in your customers’ shoes if you’re ever in doubt whether a price is ethical or unethical.
5. Predatory Pricing
Last up is predatory pricing. Predatory pricing is pricing a product lower than the competition in the hopes of driving that competition out of business. Pricing strategies don’t usually rise to the level of predatory unless they are so low they are below the cost of manufacturing. Or, they are done with the goal to hurt the competition. Simply offering a slightly lower price or a good deal is not predatory pricing.
This form of pricing can also be illegal, again problematic for antitrust laws. The concept is that a business that engages in predatory pricing could force its competitors to close and thus create a monopoly. Either way, it’s unethical in part because it is pricing to hurt competitors, not to help consumers.
Another important note when deciding if pricing lower than the competition is predatory is to remember that it’s your costs to look at: are your prices so low that you’re losing money on that product? If not, you’re likely fine.
Say a competitor beats you on price. If you wanted to match, your manufacturing costs would be greater than the potential profits. This is not predatory if that competitor has a more cost-effective manufacturing process.
Price for Your Customers
Put yourself in your customers’ shoes if you’re ever in doubt whether a price is ethical or unethical. In most of these cases, unethical pricing occurs when you’re pricing for yourself—either to hurt the competition, skirt a law or regulation, or discriminate against or deceive consumers.
On the contrary, your prices are ethical when they are done with the customers’ best interests in mind or price decisions are made based on market conditions, specifically supply and demand. The best part? Ethical prices are a long-term solution—they set your business up for extended success. Unethical prices are a quick fix or a cheap win. They’re not worth the risk.