Can You Make a Profit While Doing Good?
This article, by Gabe Smith, was originally published on Forbes.com
As businesses strategize and execute on creative ways to segment customers and products, price dynamically and increase profit, some cross lines and spark moral and popular outrage. The recent headlines of price gouging of sanitizers, cleaning products and paper goods are good examples. In fact, they arrested a man a few blocks away from my house for selling these items on the street corner. He charged $5 a roll for toilet paper.
Though some economists argue that there is no such thing as price gouging because it’s a direct result of the market working, it is hard to say the market has time to work during a shock like COVID-19. Regardless of which side you take in that debate, there is a continuum of pricing and technology ethics, ranging from illegal to unethical, to emerging, mainstream and missionary pricing that gives back to the community.
Understand what’s illegal versus unethical.
Note that what is unethical is not always illegal. For example, price gouging is unethical but is not illegal in 15 states, and there is no federal law on it. There are a number of illegal and unethical pricing practices, and legality and acceptance varies by country and even by state. Other examples include anti-competitive pricing, price fixing (horizontal and vertical), price discrimination, price disinformation and monopolistic pricing. No matter the nuance between these terms, in general, you should not hinder competition either by colluding with your competition, partners or limiting choices for customers. Basically, do not interfere with the market working, and don’t be a jerk.
Recognize pricing practices in the gray area.
There are some questionable pricing practices like monetizing data, hotel and credit card fees. If you go to some hotel booking websites, for example, you see information presented in one way when looking at search results and quite a different way after you select a property. The fees are not optional and do not provide extra value in most cases, since there is no alternative. In this case, this can be seen as disinformation; most consider this unethical.
There are emerging practices like dynamic pricing, which are gaining traction and acceptance in an increasing number of industries and use cases. While dynamic pricing of airline tickets has been around for decades, 10 years ago, dynamic pricing of event tickets would have been questioned, but today it is becoming the new normal.
In 1999, Coca-Cola tried dynamic pricing based on the temperature outside but learned that the psychological perception of the consumer is very important in whether or not they would accept such a change. This was one of the first internet uproars around price gouging. This would not actually fit the legal definition of price gouging unless there was an emergency and would not be considered ethically questionable unless there was no viable alternative, like a water fountain. The main issue was that consumers have a perceived value of a can of soda. When it is different situations like a concert, hotel or airport, people are willing to pay more for convenience. However, it is perceived as predatory to charge more because it’s hot and people are thirsty.
Be aware of shifting perceptions.
Even practices that are in the safety zone — widely accepted now — were, at some point, emerging. For example, price tags were not used until 1870 when Wanamaker’s and Macy’s began using them. Until then, there was haggling for price after some rough segmentation in the store operator’s mind. Ironically, with dynamic pricing and customer-centric omnichannel pricing becoming more popular, I believe the days of the physical price tag are numbered.
Mission-driven companies are different than most companies because they forego a significant portion, or even all of their profit, to further their mission. This means the tools and techniques we ascribe to as pricing professionals must be adapted. Value perception of the customers of these companies can be impacted by the mission. For example, if I look at a pair of Vans or Puma shoes, I am looking at style, comfort and durability. If I am looking at a pair of Toms, I am also thinking of the good feeling I’ll get knowing that I bought a pair of shoes to help someone in need. The question for a mission-driven company like Toms is not how much a customer is willing to pay, it’s what the right price is to charge to give shoes to as many people as possible, factoring in the impact of value perception.
The success of companies like Toms and the move toward sustainability and conscious capitalism makes it easier and more appealing for mission-driven companies to survive and thrive today than it ever has been. We now see fewer trade-offs required to be mission-driven in this environment.
Learn from players of the past and present.
As many businesses right now navigate and ultimately forge a new economy, many may experiment with new pricing strategies, or find new avenues for revenue and profits. Ask yourself these questions when devising a new strategy.
Have you checked with legal? A lot varies by country and even state.
To determine if it’s ethical, it comes down to a few key concepts. Is there good rationale behind my pricing? Are there viable alternatives? Am I creating losers that have nowhere to turn? Is my pricing hindering competition? Am I using misinformation to mislead people? Am I using data for AI-driven pricing that could have biases in it, leading to unethical outcomes?
If your business goal is to be mission-driven, consider these questions. How much of my profit am I willing to forego to further the mission? Does my mission impact the value perception of my offer? What is the right price to charge to advance my mission the furthest I can?
And lastly, how will this move be perceived by my customers and partners? Will it damage my brand?