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Pricing Matters: Navigating the Ethical Minefield of Pricing and Technology

May 26, 2020

Pricing Matters Podcast S01E03: How to Navigate the Ethical Minefield

This episode of Pricing Matters was recorded during a Professional Pricing Society webinar. Gabe and Ian walk listeners through the ethical continuum and take questions on how to apply ethical pricing practices to real-world problems.

You can listen to the full podcast here or on any other podcast streaming podcast of your choice, read along, or watch the full webinar from PPS here. 

If you want to take the discussion offline, then tweet at me (@SwEvangelist) or Dr. Ian Tidswell (@itidswell) with the hashtag #pricingmatterscast. 

Enjoy! 

Meagan Ford 

My name is  Meagan  Ford  with  Professional  Pricing  Society  and  welcome  everyone to  today’s  The  Ethics  of  Pricing  and  Technology. 

Gabe  

And Ian, thanks for joining.  

So, basically, what we’re going to do today is walk from left to right on the continuum here, through from starting off with the illegal and unethical side than talking about more questionable and emerging practices.  

We’re not going to spend a huge amount of time on the accepted or mainstream practices and then finish off with some mission-based pricing and kind of how that’s different. And then some questions to help you gauge where you fall on this continuum, and make sure that you’re avoiding, obviously, the left-hand side here. So let’s go ahead and get into it.  

So the mercenary pricing practices here that we’ve outlined can be illegal or unethical.  

A lot of these are actually just unethical. We would argue payday loans because they’re targeting a disadvantaged group of people that don’t have a viable alternative. For example, credit card profiling and interest rates similarly, or redlining some of the practices around consumer collection, data collection and monetization without a clear understanding that people are actually the product when they think they’re the users, so to speak. Collusion, predatory pricing.  

These are just some different examples, but what we’re gonna do from here it is actually have a pretty structured approach to talking about illegal on and or unethical pricing practices in terms of like what they all have in common. Generally, it’s exploiting, less informed groups that are vulnerable. And in some cases you’re generalizing based on where you live or something like this. So these are pretty nasty practices, And just a smattering of examples and Ian, do you have anything you want to add to that? 

Ian 

No, I think maybe you can go to the next slide, and we can start sorting our way through this. As we were thinking about this. We were coming up with basically six categories of pricing that are problematic. So the first one is anticompetitive. Then we got price gouging. When you have some kind of disruption, you’ve got a price-fixing, monopoly pricing. When you got a dominant position. Then pricing disinformation or not being very clear about everything and finally, price discrimination. So let’s walk through these and I think the first one is around anti-competitive behavior. If you wanna have a go at that one? 

Gabe 

Yeah, and a lot of the illegal pricing practices and to an extent unethical pricing practices, really come down to the fact that they’re undermining the market working and therefore fall under some of these antitrust laws. So there are a few laws, at least in the U. S. that are key to understanding.  

The first is the Sherman Act that just kind of broadly outlines and prohibits contracts, combinations or conspiracies in restraint of trade or any monopolization, attempted monopolization or conspiracy or combination to monopolize. So, really, it’s about protecting the market and allowing the free market to operate. The Clayton Act, then comes in and has some specific provisions that weren’t necessarily prohibited by the Sherman Act. And it makes those specifically illegal, like some thing’s around mergers and interlocking directorates. I’m kind of putting a finer point on some of the spirit of this Shermon Act and then the Robinson Patman Act from a pricing perspective is probably the most poignant because it actually has specific language about pricing and services allowances and that kind of thing. I know, Ian, that you put in this link down here that the rules for Europe are obviously different.  

We have a global audience here. It’s important to note that neither Ian nor I are lawyers, we’re not giving legal advice here. The laws do differ by different countries and even by different states in the US have some different laws around some of these things. Ian, anything you’d like to add here? 

Ian 

Yeah, you say the rules are different in different places in Europe, many of the same spirit of the rules is a similar, but there’s a bigger emphasis on dominant companies exerting their power to keep prices higher. So you’ve probably seen some of the press things where they get very excited about some of the U. S. Companies having too much power. 

Gabe 

Yeah, indeed. So definitely more scrutiny there. And speaking of scrutiny, we wanted also to highlight some of the activities that, as pricing professionals, you may be exposed to or have questions about. And, you know, whether you’re at a conference or trade show, are talking to someone that you know at another company, these are the things that you want to avoid, right? So you, especially with competitors and particularly behind closed doors. Although even in public. Some of these could be issues they’re discussing present or future prices, anything about your pricing policies or what goes into those, obviously, actual discounts given to certain customers or promotions that you’re running or planning to run, terms and conditions attached to a sale.  

So if you have extended payment terms or you have some discounts for freight or something like this that are going on or for pickups. Bids that you’re getting in, obviously, the identity of customers that should be protected not just from a pricing perspective, but also from a privacy and GDPR perspective. Production capacity, production quotas, customer allocation. So how much of your volume are you allocating any given customer, what your costs are. Really, it’s anything that has to do with your cost or your profit that could go into your pricing or, obviously, your actual pricing policies or prices should be avoided to discuss with competitors. In the US, you can make public statements about pricing, and that’s OK in some cases, where you’re saying, OK, I’m planning to increase the price by 3% because of my raw material increases or supply chain disruption or what have you. Although, I think in Europe, there’s some finer points or a little bit more sensitivity to even public statements. Is that right, Ian? 

Ian 

They’re definitely more sensitive in the UK, sorry, in Europe to various types of communication. But it’s a very interesting field. I geeked out on a 38-page document for the German government control office on this yesterday in the grocery business. So there’s a lot of subtlety. 

Gabe 

Yeah, and we have a question about price discrimination in the chat window. We’ll get to that in kind of going forward here, but yeah, that’s a good point. That’s one that there’s a little bit of gray area around price discrimination, and we do have a slide on that we’ll talk through we thought probably the most topical is price gouging. You hear a lot about it in the news today, obviously, with the pandemic, there’s an ongoing debate with economists on whether or not price gouging is bad or whether or not it’s even a thing. The basic idea is that there’s some kind of shop or a state of emergency. The market doesn’t have time to adjust to it.  

So there’s a gap in terms of willingness to pay and what the normal prices are because there might be supply disruption or just an increase in demand. You could argue that in the long term, the free market should equalize and figure it out. But it’s hard to argue that in the short term that markets have the chance to operate efficiently. You know when something just happened almost overnight, right? So in the US, at least there is no federal law on price gouging. But there are 34 laws by in different states. So there’s 15 or 16 states that actually don’t have price gouging laws. They do vary. I put a link here to a pretty good summation of what those different state laws are. So typically it’s about 10 to 15% is kind of a common trigger.  

Where I live here in California, it’s penal code 396 which is basically it’s when there’s a declared state of emergency. If you’re selling more than 10% over the cost of these items immediately preceding the declaration, right? So it’s actually pretty tight. That’s one of the more strict interpretations of price gouging. In other areas, it might be 15 or even 25%. And in some states, there are no numbers that are outlined. So what I would say is, if you’re pricing by state, you really have to understand what those different laws are. And that’s why I put that link in there.  

But generally, 10 to 15% is the most common. If you look at a couple of examples that we highlight here, these are directly from Amazon and from a site called Camel Camel Camel that tracks Amazon prices. You could see, obviously, that the price of Purell’s skyrocketed. I mean, so you’ve got two examples at the top here of one third-party seller selling for $350 for two bottles that are 33-ounce bottles. You can see that the price of an eight-ounce bottle going up to $60, and then Amazon trying to real that in.  

But the Amazon pricing itself is up 55% from the pre-COVIDE-19 average, right? So it’s kind of interesting that they’ve said we’re gonna take third party sellers off or prohibit them from price gouging. But at least according to the California law, they are price gouging as well. So although I’m not a lawyer, so you take that with a nickel. But anything you want to add here to this, Ian? 

Ian 

Well, I think there’s both short term and long term. So I mean, there’s clearly some stuff that’s illegal, and you can sail close to the illegal side of you want to on these things. But then there’s your perception of how you are considered in the market, right? I think you can really get a nasty brand if you consider to be price gouging. I see these kinds of situations we’re in now as an opportunity to figure out who your best customers and then be really nice to them so that they will remember this and be loyal and down the road. We put together a little checklist, right?  

So I think you’re fairly safe on avoiding price gouging if customers have a viable alternative, if the product is not a necessity, if it’s a necessity that you’re sailing closer to the wind and thinking through which customers will be negatively impacted and what the societal impact of some of these things will be. I think both of our senses is that in the kind of situation we’re in now, if you’re buying up and hoarding masks or hand sanitizers and then selling at a high price is hard to argue that you’re making markets more efficient, so markets can’t react that first anyway. Governments should be doing something to help get the right product to the right people. They obviously need to be careful because you can have side effects of these things as well. 

Gabe 

And long term brand perception is important as well to consider. There was this experiment that Coca Cola talked about with regards to pricing in vending machines, according to the heat outside. And it was one of the first online discussions about price gouging, even though it wasn’t technically price gouging, but it just felt kind of predatory or like it was taking advantage of people. And it’s kind of funny because the psychological impact here is important and that brand perception being kind of labeled as that is something that you want to avoid. And that’s why you’ve seen Amazon take the actions that they’ve taken, although quietly. 

Ian 

I think Coca Cola doesn’t pass the sniff test here because no one needs to have a diet coke when the temperature gets above, 80 degrees, right? It doesn’t pass the sniff test that that was more in execution issue in introducing some innovative pricing, let me do the next one. Somebody asked a question about predatory pricing. And so, you know, this is where a large company with a dominant market position uses its power to try and force someone out of the market. What happens is they will lower prices to drive out the company. When they’re out, then they raise prices. Courtesy pricing leads to market leadership, it is done in a way that leads to less competition in the long run. In Europe in particular, it’s illegal to sell below cost. So you’ve got to actually be careful with that. Sometimes their reasons to sell the low cost.  

Gabe 

France and Spain, for example, it is illegal. And yeah, the example that I had done some research around was actually Bromine. Where there was this this cartel of Bromine producing companies in Germany that had kept the price of Bromine at a price of about I think it’s 49 cents per pound. And Dow actually had a technology advantage. It can produce profitably and distribute for about 36 cents a pound. So what the cartel attempted to do was to sell below cost and undermined the cost-advantaged player. It was a bit shortsighted, though, because what Dow was able to do is actually just buy it and resell it at 25 cents a pound.  

So it was a cartel trying to maintain control over this market that they had monopoly pricing power on for a while, but it was undermined by the market dynamics. And obviously, if you’re in that position where you have a true technology-based cost advantage, you’re gonna end up coming out on top, regardless of what the games that cartel might be trying to play. The market is gonna come out and work at the end of a year. Okay, so let’s move on to price-fixing. We wanted to kind of bring up this example of DRAM, where you’ve got three players that control about 96% of the world market. They’ve gotten into trouble multiple times for price-fixing and increased prices dramatically, as you can see in 2017 up by 46%, in 2006 they paid a $300 million settlement for price-fixing.  

You can obviously make a lot of money doing this if you’re able to kind of have the market cornered and control most of the supply. And if you were to collude with your competitors, you could make a lot more money. But the problem is it’s very obvious, and obviously it’s illegal. So in companies pretty much always get caught for. We have a few considerations here, just in terms of, you know, you are in the US, at least allowed to signal it publicly. Generally speaking in press releases and things like that. There is transparency of pricing and a lot of cases, like in airlines and hotels. You can obviously see what your competitors air charging, and there’s free exchange of information. So that is more ethical in that it’s transparent. And then, obviously, there are government based cartels like OPEC that can fix prices and try to control pricing. Although there’s been some pretty horrific. 

Ian 

They’ve not had a good week of that. 

Gabe 

Yeah, they haven’t had a good week with a negative price per barrel of oil. So there’s some market dynamics that still play like whether it’s emerging producers like Russia and the United States not playing nice. Or now what’s happening where they just don’t have the capacity to store, and they don’t have the demand for it. So there’s only so much that you can do. Even when you do have the ability to act as a cartel, and so it usually ends up badly. Because of legal action or because you don’t have to hold on the market that you thought or there’s an emerging threat that ends up reverting back to the market economics.

Ian 

I think it always ends up badly and people go to jail for this. So I mean, of all the no-nos, this is probably the top of the list. 

Gabe 

This is also known as what we would think of its horizontal price-fixing across multiple brands for a similar product in a category, right? But we also want to talk about vertical price-fixing. Why don’t you take us through that? 

Ian 

Yes, vertical price-fixing is where you align your prices with your distributors that are downstream from you. And so this is where there is a clear difference in the rules between the US and Europe. So in all places, it’s okay to have a recommended retail price, so you could recommend to, but not coerce a price downstream through your distribution network. In the U. S., you can have a minimum advertised price, that’s illegal in Europe. You can have agreed maximum prices but not minimum prices. And digital commerce makes this very tricky. I think it also gets very tricky when you get into the world off having online sales where they go around the world. So I mean, you got a couple of examples of that Gbe. I guess you wanted to say a couple of words about those. 

Gabe 

I won’t mention any names, but there’s some manufacturers out there that have gotten pretty good at playing this game and kind of, as you mentioned, sailing close to the legal boundaries right and what they typically do is their sale price into their trade partner, distributor or retailer will be very close to the actual recommended selling price. There was a question here about whether or not it’s legal to fix the end price in the U. S. It’s not legal, actually, for a manufacturer to fix the end price, it is legal for them to have what they call a minimum advertised price, which means that if your advertising on circular or on TV or whatever, you can have an agreement that says you’re not allowed to advertise, but you can actually fix the price that they sell for.  

Manufacturers that are good at doing this, what they do is that they sell at such a slim margin, and then they have some incentive programs that are basically like rebates that incentivize certain behaviors, right? And so they’re monitoring minimum advertised price. They’re monitoring other behaviors they’re trying to incentivize, and a lot of the profit comes in based on those incentives. And again, it’s something that I’m sure these companies are investing a lot in terms of talking to lawyers and making sure they’re doing the right things, is it does get a little bit gray in some of those practices and you start sailing too close to that boundary. So but that’s typically how some manufacturers are able to kind of get by with very tight controls over the end pricing without actually mandating the end prices. 

Ian 

A lot of my clients have had them tell me recommended prices are not allowed and  I don’t know of anywhere where they are, not allowed, they’re always allowed. 

Gabe 

Obviously, you can’t mandate it. And the whole thing that we’re pointing out about minimum advertised pricing is it’s legal in the US, not in Europe but even in the U. S. it’s hard to say when you’re in a digital commerce channel that distinction between what’s advertised and what it sold for becomes less clear, right? So that’s where it becomes a little bit trickier to discern what is actually the right practice. And so talk to the lawyers about that one. Neither of us are. But, uh, hopefully, that gives you some food for thought.  

Monopoly Pricing 

 

So moving onto monopoly pricing. This is an example, a famous, one of the EpiPen right. The U. S market for epinephrine is almost a 1,000,000,000 about 750 million. They basically had a hold on this market with, like, 90% market share. They got sued by the U. S. Government for overcharging, and they had to pay out about $465 million in 2017. And they introduced a generic version under their same manufacturer in 2018. And so the orange line is the EpiPen pricing and see just going up and up and up over time. And then you can see here the generic version that they introduced in blue. And then you got the generic EpiPen here so you can see the corresponding market share position. So it’s really in this case, you can clearly see the impact of pricing on competition on the market share. And you could see some of the issues that have occurred as a result of monopoly pricing behavior and using the pricing power that they add about abusing it to the point at which, you know, the government stepped in and actually held them accountable for it to the tune of about $465 million, which is no small number. Although some of the numbers in Europe are a lot bigger, right? 

Ian 

Well, it’s interesting with this is the patterns are there to help companies innovate, and then it gives them monopoly power. And it’s basically in agreement that they can make outsized profits for a while, cause it spurs no innovation. In the health care market, though, this gets very easy to abuse, you can either admire them for doing a great job of capturing a lot of value or you can say there’s a whole bunch of people can’t afford this, therefore suffer. But it’s fairly distasteful pricing right. This is limiting access to needed medical devices and drugs through pricing, which is, I don’t like it. 

Gabe 

Yeah, indeed. And I know you have some exposure to that market. And there’s a lot of stark examples of pricing, ethics and unethical pricing. And it really it’s because we’re talking about the competing interest of the pharmaceutical companies or medical device companies and the insurance companies and the hospitals or doctors and the people receiving them. This is where the examples are most stark right when you’re talking about human lives or the availability of something like this, that is an absolute necessity for people that need it. It really becomes stark, and you really see it clearly illustrated in a way that you don’t maybe in some other industries. All right, so let’s move on to pricing disinformation. So this is one where actually something that we would say is unethical but not necessarily illegal in all cases.  

There’s been some statements made by some governing bodies recently about credit card fees and hotel fees that they are looking into it more. But there hasn’t been a lot of action on this, so we kind of highlighted this example. Both of us travel a fair amount. If you look on hotels.com, for example, and you look at a set of hotels like if you just type in hotels in Las Vegas, when the list comes up, it’ll show something like this.  

So it’s so Caesars Palace, $99, then when you click on choose rooms. So that’s where you’re comparing all the potential hotel vendors, and you’re kind of making potentially going into a purchasing decision. But then when you click on that, choose room button, what you see at that $99 quickly turns into $163 right? And so they’re putting $64 in fees on top of this, and it’s taxes and fees, and then the resort fee, the infamous resort fee that’s becoming more and more common. So this is clearly bundling these services that can’t be unbundled and presenting information in a way that’s leading to a pricing decision. That is where you’re selecting a potential vendor and then you’re hit with this after the fact. I would say this is pretty clearly unethical. Would you agree with that Ian? 

Ian 

Yeah, I would. At least in this case, you are aware of the charges before you pushed the button to make the final payment and commitment yourself. My friends at Ryanair here in Europe are renowned for unbundling and charging for everything and it’s hard to navigate and, frankly, they end up taking advantage of people who are unfamiliar with the rules and don’t travel so much. So you get charged for everything. You know, Ryanair’s reputation has suffered because of this, so they’re still pretty popular. But, I would say the average frequent traveler avoids them like the plague because they just built themselves a reputation. 

Gabe 

Yeah. 

Ian 

It’s a classic case of many cases, you can get away with this, but do you really want to? You can short term win and long term loss I think is the way these things can work. 

Gabe 

Yeah, I flew on a similar airline in Italy, and I think they charged me something like 30 or 40 euros to print out my, you know, I didn’t have a printer cause I was staying at an Airbnb place, and they charged me something like 30 or 40 euros just to print out my ticket at the airport on a 60 euro ticket.  

Ian 

For me, that’s taking advantage. 

Gabe 

All right, so we had a question on price discrimination. This one is an interesting one, right? You could almost say one person’s value pricing is another person’s price discrimination, in a way. Right? What our point here is that you really have to be careful about this. There are some things that are okay to use. It’s really about how you’re doing your segmentation, and that’s the best practice to make sure that one, you understand what’s driving willingness to pay. Two, you understand what’s legal and what’s not or what’s ethical and what’s not here. There are many ways to discriminate pricing that’s legal. Coupons, senior discounts at movies, early-bird discounts commonly practiced and accepted.  

So we put in this traffic light indicator here to talk about some of the things that are okay like, for example, the size of the customer, how much they purchase with you or what their purchase patterns are. You can use that data to incentivize or promote or offer discounts, the end-use application in the customer’s industry. If you’re selling something like polyethylene, you might have someone that’s using it to make latex gloves. You might have someone else that’s using it to make on an artificial heart. Those are gonna have different willingness to pay. And there might be certain attributes of those products that you can also differentiate on based on things like the time of day or the locations.  

Right. So surge pricing is kind of an example of that. That’s generally OK, but daypart pricing is becoming something that more restaurants are looking into are running promotions like if you go into Starbucks in the morning, they’ll print out something that says, if you come back and at 2 p.m., you can get a 1/2 price Frappuccino or whatever it is, right? So things like that, and obviously understanding, willingness to pay as it exists in the data. As long as you avoid some of these yellow and red flags here with regards to the attributes that you’re using, you can indeed differentiate. But you want to take us, Ian, through maybe some of the yellow and red areas here? 

Ian 

As you point out, that pricing segmentation and price discrimination a kind of the same thing. And it’s okay if it’s legal and is accepted and people go along with it. I worked in the seeds industry for a while and farmers are okay with the concept that a seed sold in one area with one climate, we’ll have a higher crop than it will in another. And so they buy exactly the same seed, and where they plant it will cause them to pay a different price. So a lot of people wouldn’t be okay with that. But they are. 

Gabe 

Because it’s value-based, right? 

Ian 

Yeah, yeah. But you know the cost of the manufacturer is the same in both cases. So it’s a training thing, right? It’s people. The market has got used to it. Hotels used to have two prices winter and summer, and now they have pricing depend on which day of the week and exactly what the demand is. And they just got used to it. When you get into this middle category, right, this is things like: gender is interesting when you get to female products and male products, hair care and this kind of stuff and age is interesting. If you have age discrimination, then income and demographics is clearly, some of that’s gonna happen. And when you get into the ”no” area when it’s clearly discriminatory and we’ve decided as a society we don’t like that’s things. And the last one, you get in trouble if your factors are arbitrary or perceived as arbitrary. So I’ve worked with clients who started their pricing project because their customers were unhappy about the fact that their pricing didn’t seem to rely on any differences between who the customers are. So that’s a big signal that you need to get your pricing house in order so that you’re doing things in a well-motivated way. 

Gabe 

Yeah, I would say that is generally true for most pricing practices, right? If you have a good rationale behind it, you’re being transparent and it’s understandable and it makes sense to people, they’re much more willing to accept it then if you can’t do that. We had a question come in about using big data, and does that increase discrimination? I’m actually gonna address that here on the next slide, so but that’s kind of a case in point where the more sophisticated you get with pricing and the more cutting edge or leading-edge you are with regards to the use of technology, the more that you have to be careful about avoiding these areas and making sure that what the algorithms are doing is not institutionalizing some of these things or using the data that’s existed in the past, where there may have been some discrimination happening that was illegal or unethical. So you really have to tightly manage that, and I think transparency is key in doing that. So let’s move to the next one, which is talking about emerging pricing practices. Some of the kind of things that we’re seeing and we’re gonna talk more about is obviously dynamic pricing. It’s emerging in some industries. It’s more accepted in offers now.  

So I would say it’s mainstream in ticketing in hospitality and for event ticketing. Now it’s becoming very common. Ticketmaster will charge different prices depending on when you come in or for sporting events or concerts or things like that. We have a customer called Ticket Corner in Switzerland. That’s dynamic pricing ski tickets online, and that’s been very successful for them. Surge and daypart pricing. Obviously, surge pricing for Uber and Lyft is where it started becoming kind of a commonly used term. But the idea of having different prices by different parts of the day, depending on how busy certain things are, is also something that’s been done for a long time. Like if you go to a movie in the daytime, there’s a price for a matinee. There’s another price during prime time. Like we said, there’s discounts, in some cases, if you’re a senior or a student. I think this is concept of restaurant tickets or these prepaid reservations.  

Where our U.S. headquarters is in Chicago, you’re seeing higher-end restaurants that have always struggled with no-shows basically guaranteeing at someone’s gonna show up or at least pay the same price because they’re actually prepaying. So it’s like having a ticket. And car subscriptions is another one that’s kind of emerging. So yeah, to go back to the earlier point, algorithms can easily go to unethical pricing if they’re not managed well. So this is something where using big data and using AI and machine learning and pricing is becoming more and more common across different industries. Having the transparency, understanding of what those algorithms are doing, and how they’re using that data and setting some guard rails into them is part of the way that you can avoid this from happening. But the more sophisticated that you get, the more careful that you have to be about what that data is and what the biases that might exist in that are.  

So it’s something that when we’re developing these types of things, we always feel like it’s got really got to be a combination of the insight of the management team and our pricing scientists coming together with the algorithms to outline what we see in the data, what we want to keep doing, based on what we see, what we might not want to keep doing, things that we want to do in the future that we have done in the past and vice versa. So that’s really the way that we see it coming together and where you can leverage the technology without falling victim to decisions that are getting made that may be into these areas. There’s a really interesting paper on dynamic pricing and personalized pricing that I linked to over here, so hopefully, that answers the question fairly well. We are going to come back for more questions at the end here, so we’ll go through questions then. Well, anything that you want to add here, Ian? 

Ian 

I think of these types of techniques as potentially very powerful. If you’ve got your ducks in a row for being ready to do them, but also the same way it’s easy to kill yourself in a sports car than a family sedan. It’s easier to do something illegal or undesirable with these types of tools. So don’t push your foot to the floor without knowing where the brake pedal is. 

Gabe 

Good analogy. I like that. Just coming back to some of the emerging pricing models and we wanted to make a couple of points on this one. So this is the example of a linear. And you can see down here that you’re actually booking a reservation, right? And you’re basically buying a ticket here for a certain number of people, and you’re paying for it ahead of time. Now when I go make a reservation at a restaurant, sometimes previously they would hold a credit card and have a no-show fee. But until this, I’d never seen someone actually charging the entire and including even the service charge upfront for the meal. And then it’s actually created a secondary market for this.  

So people are actually, if they can’t show up there, they’re selling their tickets sometimes even for a profit, right? If it’s a hot enough seat and Alinea generally is falling in that category. But that thing to be careful about here is because it’s an emerging practice, people don’t have that innate understanding of what that transaction entails, right? So I could go in here and click on this and think, oh, I’m just reserving this, but if I can’t show up, I can cancel it. Yeah, they’re gonna outline it. But if I’m not paying a lot of attention, I got four people at 285 bucks, I might be out over $1000 without even realizing what I just signed up for, right? So if you’re thinking about something that’s an emerging practice that’s not yet mainstream and widely accepted and understood, that is something that you have to be careful about.   

Same thing happened with surge pricing. When it started emerging and people were getting hit with these massive charges. In some cases, it was because the algorithms had gone haywire because they didn’t have the right checks and balances. In other cases, it was all up front and explained to them. But they just clicked on okay and didn’t realize it was going to result in a $400 cab ride for 12 miles or whatever it is. So that’s just kind of something that highlight here is, when there are some cool emerging things that are happening, but you have the extra caution, whether it’s with dynamic pricing like we were talking about before or with other emergent pricing models. Similarly, this idea of car subscriptions is one that’s emerged over the last few years. We’re seeing a lot of OEM, so Porsche, Audi, GM, BMW have the ability now to do a subscription. So it’s not a lease, it’s not a rental, it’s kind of somewhere in between, and you can change out the car. There’s different levels that they offer. This is not an OEM. It’s actually a 1/3 party that provides the subscription service, but similarly, there are some terms and conditions that are associated with these. So when you click on this, you might say, OK, I just pay this and that’s it. Well, there’s more to it than that. You’re signing terms and conditions, and it’s particularly with these emerging things, I think, that’s where companies sometimes get into trouble because they bury that the actual terms and conditions in this long document that no one really reads on and they don’t know actually what they’re signing up for. They present the information very simply on the website.  

Someone makes a purchasing decision and then realizes, oh, wait, I’m actually tied in this for three months or a month or whatever it is where I didn’t know that or there’s these other terms and conditions that are associated with the maintenance or the return or whatever it is, right? So just some words of caution there, but also some food for thought in terms of some of the emerging pricing practices here. Ian, is there anything that you wanted to kind of add to that? 

Ian 

I think the next slide has this pape that’s interesting for anyone who wants to learn more about these topics, right? 

Gabe 

Yeah. Yes. So this was a pretty long and insightful paper that’s consolidated a lot of the research and studies around dynamic and personalized pricing, and we’re not gonna get into this in-depth today. Obviously we don’t have time, but I did want to highlight it. We do link to it and it’s definitely worth a read to understand what’s accepted, why it’s accepted what is commonly accepted practices here. What are some of the emerging practices and kind of where some of these ethical boundaries are and how to understand it better. So definitely worth the read there, I would encourage everyone. And we we linked to this at the end of the presentation here. Let’s go on to mission-driven. So, Ian, I know this is a particular area of interest for you in an area where you have some experience. So why don’t you take us through this one? 

Ian 

Yeah. So this is on the continuum that Gabe introduced at the beginning now on the right-hand side. And so I think of mission-driven companies as those that are not all about maximizing profit. So they have some vision of something they want to do other than making profit or maximizing profit – in some cases, make no profit at all. Now, a lot of companies talk about doing good things in the world and there’s, to be honest, quite a lot of marketing fluff involved there. To me, you’re really a mission-driven company. If you do something that clearly means you make less money than you otherwise would in the long haul. So, easyJet has recently claimed to be the first carbon-neutral airline. I guess they’re pretty neutral at the moment because they’re not actually flying. That’s not what they had in mind. You know, you could argue, is that to sustain their long term cash flow? Or is that something that’s really driven by their mission?  

So, leave that as an exercise for the listener. If you’re doing mission-driven pricing, however, then it makes pricing a bit more complicated and interesting from my perspective, because now we’re not just trying to figure out where the peak of the profit curve is with price. We’re actually going to figure where the peak of the impact curve is with what you’re trying to do, and if there’s profit in there as well, and it gets complicated, so you need a different mindset, you need some different tools. It’s an area that I’m very interested in, trying to explore a bit more and figure out because my sense is that while there’s a lot of talk about caring capitalism and the like, conscious capitalism. These things are not very well thought through, and pricing needs to be a big part of where we think about these things. Conversation as opposed to trying not to do harm on the ethical site. 

Gabe 

Yeah, yeah, for sure. And I think there’s definitely some interesting things to explore there, and it’s an area where hopefully that will be more research. One of the areas I find interesting is the value perception of the product is can be influenced by the mission, right, So your customers’ perception of your product is actually influenced by what that mission is. So and then we just have some examples hereof, you know, obviously not for profits or generally, mission-driven and then for-profits, companies like TOMS or Grounds and Hounds, which does coffee and donates a large portion of their proceeds towards no-kill animal shelters. Frost methane is one startup that I’ve been talking a bit about. They actually do methane sequestration and sell carbon credits.   

As a result, there’s more and more of these companies that are trying and I think millennials, in general, are aligned with this idea of conscious capitalism and sustainability, and there are indices and firms that are doing research and scoring around this, and I think it becomes more and more easy to move towards mission-based pricing or mission-based companies as a result of that. And I think that’s encouraging in general. So you don’t have to make its many trade-offs is as what you might have had to do 10 years ago now because people actually want to purchase products from sustainable companies, people want to invest in sustainable companies and long term, the idea is that those will benefit not only society, but it’ll benefit the shareholders as well. So but it’s this idea of like looking at it more broadly and considering all the stakeholders and not just the shareholders that kind of defines sustainability and conscious capitalism.  

All right, so some key takeaways then we’ll get into questions and answers. We wanted to kind of outline just a few questions that you can ask yourself if you want to know if it’s legal, if it’s ethical and if its mission-based. So why don’t I take the ethical you want to take the legal one first Ian, and the mission-based one, I’ll do the second one here. 

Key Takeaways 

Ian 

Oh, I think legal is pretty simple, don’t do illegal stuff and it’s complicated. The rules are complicated, and then you need lawyers who have the right mindset, which there are things that you just do not do. And there are things where you are taking a chance on it and it’s probably technically illegal, but it’s practically not going to do anything about it. You know, if you are Amazon, then you’re going to get more scrutiny then if you are a mom and pop store  somewhere.  

Gabe 

Then in terms of ethical like we alluded to earlier, is there a good rationale behind your pricing? And that’s actually even beyond when you’re thinking about how it’s gonna impact your brand and your company, you need to have good, rational, good transparency. You also want to ask yourself, are there viable alternatives out there in the market? And if so, what are those and how am I comparing to those? If there’s not, you’re gonna be potentially veering more into the unethical side of things. Are you creating losers that have nowhere to turn? So a lot of this comes down to the winners and losers.  

Even if societally you say that the impact is positive. If there’s a disadvantaged group that suffers as a result of it, and they have no viable alternatives, then that’s a problem, right? And that’s something that you need to be considering and hopefully avoiding it. Are you reducing competition, or are you entering the free market from working in any way? Or are you relying on incomplete or missing information or misleading people? Right. So having people make decisions based on either lack of information or disinformation, right? Those are the things to obviously aboard here on the mission side. Do you want to take us through that, Ian?  

Ian 

Yeah, mission value is about basically saying profit is not everything. We want to do something to make the world a better place, whatever your mission is, and it’s a willingness to give up some profit for that. So how do we align our pricing with the mission? And I think that’s exactly right on this is an area where I personally I’m very interested and think there’s a lot of thinking yet to be done because it’s not that clear. As indeed, I think in this conscious-capitalism space basically needs a bit of work, but it maybe this is the thing to do and we’re stuck at home for a few weeks.  

Gabe 

That wraps up our presentation here, and what we wanted to do was just open it up for questions and answers. Now we have quite a few that have come in. We tried to address a few of them as they as we saw them. But there’s, some others that we haven’t gotten to. 

Questions from the Audience 

 

Meagan Ford 

Everyone reading? Ian and Gabe, are you all ready? All right here we go. Please expand the concept of price discrimination as illegal. 

Gabe 

Hopefully, we captured that in that price discrimination slide there. But if there’s any additional questions on that, we’d be happy to answer them. Is there anything you want to add Ian or maybe a recap of what we discussed? 

Ian 

I think it’s illegal if you’re discriminating for illegal reasons. It’s unethical if it feels wrong. In both cases, it could be a moving target and a bit slippery. So maybe a non-answer. But there you go. 

Gabe 

Okay. Cool! 

Meagan Ford 

All right. Next question. How to manage pricing in the era of tariffs? And how do you communicate price increase as a result of trade tariffs to customers? 

Gabe 

That’s a good one. I actually wrote an article on this, and I can send you the link to it. And so, basically, what I outlined there is: One, you have to have the right visibility and processing to be able to flag cost changes and understand the implication of those cost changes from your suppliers into either your cost of goods as a manufacturer, your acquisition costs as a distributor and then be able to have hopefully systems and processes that flow into your actual price setting. So you understand the implication of those on your profitability. And you also understand willingness to pay on the other side so you can understand how best to pass those through to remain whole and avoid margin compression. At a very high level, happy to talk more about it. But that’s certainly something that  we help a lot of our customers do. Ian, anything you want to add to that? 

Ian 

Well, I don’t see this is an ethical issue, really. This is basically a cost issue. This is the cost of goods goes up when you need to try and deal with that. 

Gabe 

With regards to how to communicate this, right? I mean, I think again, I’ve seen some cases of suppliers using this as maybe more of a tactic than actual. But if you’re if you actually are increasing supply chain disruption or increased costs, and you can show that clearly. And you can explain why you’re doing what you’re doing. People generally are accepting of it. You know, if your costs go up by 2x, then that makes sense. And the other thing is with tariffs or with COVID, there’s the new reality. And then there’s gonna be the reality in six months and the reality in a year, and those may be very different, right? So you need to be cognisant of that both from how you’re managing pricing and how you might be changing things today, but also what you’re doing with regards to your perception of your brand and your company. You don’t want to be seen as taking advantage of the current situation, but as long as you have good, rational and have transparency around what you’re doing, I think you’re OK. 

Meagan Ford 

Thank you. Next question. How to control price gouging when the problem is the origin manufacturer, or that they may be located outside of the jurisdiction, i.e., China. I believe that’s the question. Is that clear?  

Gabe 

Yeah. I mean, basically, you’re saying your acquisition cost is going up, right? And as a distributor, you have to raise your pricing. That’s a good question, and I don’t actually know, and it probably varies by state or by region in terms of what the right thing to do there. Obviously, if you’re selling at $4 and your acquisition cost goes up to five, you have to raise your price. Otherwise, you’re losing money and you might be in violation of other laws, right? So, there’s obviously some rationale and justification behind that. And I don’t think you would probably find yourself in legal trouble if you’re trying to maintain your same margin level, for example, in the face of supply chain disruption or increased acquisition costs. So that’s what I would generally say. But again, I’m not a lawyer, so I don’t wanna go too far down that road because there’s probably a lot of nuance there that you have to consider. Ian, is there anything that you’d like to say, maybe from a European perspective there? 

Ian 

No, no, not really. It could be a cost problem if you’re downstream of it. And then it’s a communication problem, the other end. But if you’re not doing the gouging than, you’re not doing anything unethical, right. 

Gabe 

Right. 

Meagan Ford 

How do you see transparency interacting with price ethics? You may have answered this one. And can you be fair without being transparent?  

Ian 

Let me say a couple of words here, right? I think you can be fair without being transparent. If the purchase is something where you have a choice, then it can be a take it or leave it. It’s okay because you don’t really suffer if you don’t have it right. If I don’t have the latest iPhone because I think it’s too high and it’s not transparent, then I think that’s fine. It’s when you are bundled in or effectively locked in and don’t have a choice. I think that’s when it becomes unfair. 

Meagan Ford 

Next question. How would selling below cost work and wouldn’t that mean a negative margin? 

Gabe 

Yeah, it would. And I think that’s the only reason why you would do that is short term. I mean there might be a few different reasons, but the point that we were making before is generally, if you were to do that, it’s in order to impact the market dynamics in some way or undermine the market working generally. If you’re losing money, the reason why you’d be doing that is to try to drive a competitor out of business, for example, like in the couple of examples that we gave, and so it’s not viable long term, right? It might be nonprofit companies. I don’t think there are many companies whose mission is to lose money.  

Ian 

Short term loss for long term gain, right? That’s why it’s done. 

Gabe 

And companies do that to acquire new customers or to get into new markets. And so you can do it and not have it be predatory. There’s this idea of penetration pricing versus skim pricing and that I’m not gonna get all that. There could be good reasons to do it that aren’t necessarily predatory, but they’re all short term. 

Ian 

In Europe, anyways, it’s considered predatory if you’ re trying to ultimately result in a market with less competition. You are trying to drive people out of the market than it’s predatory. Otherwise, it’s fine. 

Meagan Ford 

All right. Our next question is, how would you handle a situation where a company held prices for the past couple of years but now needs to increase or, parentheses,  have planned an increase prior to COVID-19.   

Ian 

Yeah, that’s tough. I think it depends a bit on what you’re selling, So if there’s lots of alternatives out there, then it turns into a commercial question, not an ethical question. So how do you just get it into the market, and will the market accept it and sustain it? If you are selling something that is directly related to the pandemic, then I think you’re very high risk of being considered unfair whether you are or not right. And perception becomes reality at some point in these things. 

Gabe 

Yeah, I would say, though, if there’s good rationale behind it, right and you could be transparent as we talked about before, and you can point out the fact that we haven’t increased prices in X number of years. We had planned this increase before. And here’s why. Because our costs have gone up by 12%. And, you know, meanwhile, you held your prices steady. That’s good reasoning. That’s good rational. That is transparent. And it should be received better than if you just push it through without that kind of reasoning. So hopefully, that gives you some insight and some ideas.  

Ian 

Yeah, that’s right. Justifying why you’re increasing the price is very important and people are much more willing to accept some explanations than others. So our costs have gone up is considered a good reason. We wanted to make more profit is considered a bad reason. 

Gabe 

There’s also in the past where I’ve looked at that, you might consider some alternatives that you can offer your customers that are advantageous to you that aren’t seen as a price increase, right. So can you, for example, get them to pay annually or reduce their extended payment terms in some way to help with your cash flow? Are there other things that you can do to reduce your cost to serve or cost of sales that aren’t necessarily seen as a price increase, but actually are an advantage to your business? So you can come in and say, you know what, we had planned this price increase, but in the spirit of partnership, I can offer these alternatives. Are any of these more acceptable as opposed to this? So that’s a way that you kind of partner with your customers and help them through these times that are trying, really for everyone except in a handful of industries.  

Meagan Ford 

What about some commercial practices between seller and distributors, where commercial agreements and rebates and price discrimination among different distributors. 

Gabe 

Yeah. I know and the laws in Europe are definitely stricter than in the US, but even in the US I mean, it’s okay to discriminate pricing for distributors, but there has to be a reason behind it. Right? So, at Cisco, we would have different levels of partners and different levels of distributors that added different amounts of value to the sale and they would have certain bars they would have to cross in order to become a gold-silver type of partner versa Premier partner. Those things are very transparent and very outlined and rational. They make sense. So that’s OK to discriminate pricing according to those whether it’s value out of reseller or distributor.  

So you might have things like volume incentives or incentives around how many categories of distributor purchases, or how much they’re growing in each category, or certain other, more advanced types of behaviors that you’re trying to incentivize. And that’s all OK. But what you shouldn’t be doing is saying, hey, I like this distributor better than this one, so I’m gonna give them a better price, and that’s the only reason. So that’s where you need to be careful and you need to have clear processes and systems, ideally to flag what’s being done when. Who’s making those decisions? Who’s signing off on them? Because that’s an area where people have gotten into trouble and ended up in the orange jumpsuit. So you definitely want to be careful there. 

Ian 

It boils down to if you can explain it in a way that sounds sensible and people accept then you are generally fine. 

Meagan Ford 

Most of the time price innovations bring concerns about gray zones being ethical or unethical. How can the pricing manager assure if the decision is within the illegal or ethical side? 

Ian 

Talk to your lawyers on, then talk about it and bounce it around – at the end of the day right there? There’s a lot of trusting your sense of smell, but taking risks that are managed risks. 

Gabe 

If someone would do that to you, would it feel wrong? And if so, then you probably should investigate it further, right? There are some things, obviously, that are mainstream and are fine that you don’t even have to think twice about. And there are others that as you get into some of these emerging practices, you do need to think about what the buyer experience is, how the information is presented, how it’s different than what they might be used to. And I would say that the ethical side is a higher bar than the legal side. So you do need to talk to the lawyers to make sure. But honestly, if you stick to that kind of golden rule and you understand that hopefully there are viable alternatives, that you’re not creating a disadvantaged group, that you’re not using any of the clear attributes that you shouldn’t be used to discriminate, presenting misinformation, you generally are gonna be in in the safety zone. But at the same time, you always want to be running it by the experts because this stuff does very by region and state. 

Ian 

Having a sense of who the winners and losers are with the change and how you would explain it to them, and are they really harmed? I think if you can have that, do that analysis, you should have a pretty good idea about what you are. 

 

Meagan Ford 

What are your thoughts on price scraping regards to competitors and, in parentheses, visible web pricing in order to use it in the pricing strategy? 

Ian 

I think it’s fine. It’s a competitive pricing strategy is not really value pricing, it is not cost-plus. It’s a competitive pricing strategy, on the whole. I mean, it could end up with some interesting effects, right? If you don’t do it well, you can end up in a funny place. So it’s a tool that should be used as a tool. It’s not inherently unethical, that’s my sense. 

Gabe 

We have a lot of customers that are using competitive data in industries like B2C industries. But even in some B2B, where there is some more transparency around pricing out there, we don’t actually collect the data ourselves. There is a bit of a cat and mouse game, and I think there are a few challenging ethical dilemmas that you might get into and trying to collect that data. And that’s one of the reasons why we stay away from it personally at Pricefx, but we do have a lot of customers that use it. And I think in so far as it’s gathered in an ethical manner. Obviously, you know, using it in a market-based or a competitive-based pricing strategy is pretty much par for the course in a lot of different categories, especially in B2C, but even more so in B2B. It’s merging where there’s more data that’s coming out. There’s more digital commerce being done, and there are more places to get that type of data and feed it into your price-setting strategies and tactics.  

Meagan Ford 

Awesome job. Thanks, guys! 

Gabe 

Pleasure, thank you! 

Ian 

Thanks! 

Gabriel Smith / Chief Evangelist

Pricefx

Gabriel Smith is the Chief Evangelist at Pricefx and has over 19 years of experience in Quote to Cash, CPQ, and pricing.

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