Ethical Pricing- Pool Autumn 2004

Editor's comment: Pricing is an issue that often generates intense debate. The Ethical Pricing Project is looking to quantify some of the issues in this area and Pool readers are invited to contribute to this major new research study.

A recent poll by the Tax Payers’ Alliance / ICM raises the possibility of a “fat tax” on some foods, linked directly to dissuading a particular behaviour, raises interesting ethical issues. There is a clear precedence with the issue of smoking, especially since the dangers of passive smoking have become clear. The ethical argument is that one person’s actions should not be detrimental to another’s well being.

Governments have other methods of seeking to change behaviour. There are the imposition of fines to dissuade crime and pollution, and taxes to encourage recycling and better use of road space. By using pricing mechanisms governments are seeking to change behaviour in many areas of life.

Using pricing to change customer behaviour is nothing new to businesses. As consumers we are inundated with “two for one” offers, discounts, free gifts and seasonal promotions. However, in the case of business the ultimate aim is usually maximising market share and profits rather than changing behaviour for some greater, ethical good. But are the pricing tactics used by business actually ethical in themselves?

The study and application of ethics covers a wide ground. Many professional bodies are spending many hours defining the expected ethical behaviour of its members and disciplining those who transgress. These ethics have been codified over time and in some cases are embracing different countries and cultures. Similarly, governments have developed statutes to curb the excesses of monopolies and cartels. Other ethics are less formalised. Some surface in media indignation, for example where shops hike the price of plywood in a hurricane or cold drinks in hot weather (as one famous cola company proposed with its vending machines). Now new ethical pricing issues are being surfaced due to the application of new technology or new business models, for example, through globalisation and the internet.

Yield Management

A good example is the increasing use of Yield Management (YM) initially within the travel industry, particularly air flights, and now with coach and rail travel, cinemas, hotels, internet cafes, and take-away pizzas. (Many readers will know that the EasyGroup led by Stelios Haji-Ioannou is the main proponent of such YM-driven businesses). When airline monopolies existed the pricing points were few: initially only one class for the rich, then first and economy, and in modern times first, club and economy overlaid by advanced apex fares. All of which were openly published in adverts and brochures. Today, led by pioneers such as Southwest and JetBlue in the US, Ryanair and EasyJet in Europe and AirAsia in Asia, YM is rapidly becoming the norm. Prices are advertised “From £x” but only the first few customer bookings will obtain that price. As more people book the price will rise. YM is underpinned by computer systems with sophisticated algorithms taking into account factors such as date and time of flight, rate of bookings, and current load utilisation. Rumours are that some airlines are factoring in who is flying: is it a businessperson or a student? – with frequent flyer programmes providing a wealth of social-economic data.

Initially, the fares on low cost airlines were advertised lower than reality as they factored out airport and security charges. In the UK, government intervention forced companies to show prices inclusive of all tax. However, the unwary passenger can still get caught for a surcharge for telephone bookings and credit card bookings (try making an internet booking in cash!), and once on-board, £5 for a sandwich. One airline actually wanted to charge a disabled flyer £20 for use of a wheelchair, another insisted that disabled flyers are accompanied, and a third insisted that obese people book two seats.

Imagine YM techniques being applied in your local supermarket. Prices’ varying according to how full the shop is or whether it’s raining or sunny outside. Imagine no price labels on the shelves. Instead they are on the trolley or a hand-held that you collect on entering the store, where you have swiped your loyalty card. Now the prices are tailored to every individual. Sound far-fetched? Already some supermarkets have self-checkout using hand scanners carried by the shopper as they shop. And Tesco has 10 million customers in it loyalty card scheme, each of them receiving personalised discounts, either with their statement or on their till receipt.

Unethical Practices Abound

Within financial services we have the wide spread practice of insurance companies heavily discounting first time customers but upping the premiums for renewals, relying on inertia. Similarly, banks and building societies (thrifts) rapidly introducing headline grabbing new accounts with high interest rates, whilst established accounts and their customers languish with 0.2% interest rates.

Again, there are rumours that financial service companies are setting extremely high pricing or onerous conditions and penalties to “get rid of” non-profitable customers. Meanwhile, the government is withdrawing payment of social benefits in cash (mainly to poorer persons) and telling them to open a bank account for direct credit payments!

Technology is providing wonderful opportunities for streamlining operations and implementing new business models. But it is also providing opportunities for unethical pricing practices. Just recently Hilton International and InterContinental Hotels both threaten to withdraw their services from on-line travel companies. They assert that such companies have programmed their computer systems to inform customers that all rooms in a chosen hotel are taken, when they are not. The customer is then offered a high price, high margin room from a competitor as an alternative. InterContinental has already withdrawn from Expedia and hotels.com (The Independent, 29 September 2004).

Are Lower Prices Ethical?

Globalisation is also opening up a new set of pricing challenges and dilemmas. If a company switches production overseas does it:

Maintain the same price and pocket higher profits for shareholders?
Maintain the same price and give higher wages or better conditions to workers?
Maintain the same price and invest in new products and services?
Reduce prices so customers benefit but the competition and their workers suffer?
Reduce prices with the consequence that the government takes less value-added tax and therefore has less to spend on health and social services.

In reality, a company’s choices are not made entirely within their four walls, but take into account external factors, especially competitors' prior moves or likely moves. But do they ever take into account consumers' views? Do they presume that so long as consumers get quality, availability, convenience and low prices they are happy? The pricing practices of companies like Wal-Mart in the USA would suggest this is so, but are their consumers able to exert real choice? Western societies are polarising with increasing numbers in the poorer layer at the bottom. These people may need to buy cheaply to simply live. Local shops may have been forced out of business by the giants (or as in the UK, the giants may have bought out the small convenience shops) and consumers may be too poor to own a car to drive elsewhere. Suppliers have been squeezed such that farmers receive pennies for produce sold for pounds and they a still expected to wash, grade and pack. Unhappy customers and suppliers can lead to tremendous resentment over time.

Pricing Transparency?

But most consumers, with time and/or money, do have choice. So do they wish to exercise that choice and are ethical pricing practices a significant factor in the decision mix? And when they do buy some of the new ethical products are they really making a real difference or are they simply fooling themselves and their conscience? For example, is fair-trade coffee really helping the peasant farmer or simply lining the pockets of the retailer and the mainly western owned companies in the supply chain? Can customers expect transparent pricing or does the cloak of competition prohibit this? And is pricing transparency a help to consumers or does it make a shopping even more complex? Many will rely on brands and the inherent trust within those brands, developed over years if not decades. So how can companies be sure they do not undermine their brands by non-ethical pricing practices?

New Research

The Ethical Pricing Project is embarking on new research to identify buyers' ethical stance in regards to price and pricing tactics. The Project is a joint research initiative between Managing Change in the UK and Sans Prix in Australia. We are undertaking a survey where ethical scenarios are presented to participants who can then respond as to the acceptability of the pricing tactic illustrated. We have over 100 scenarios already, though only 10 feature in our initial survey. They are based on real situations; often highlighting new situations brought about by technology or globalisation. We invite readers to participate at http://opinion.ethicalpricing.info

We believe that businesses need to go beyond the plain monetary transaction. They need to understand how consumers link prices to the actions taken by the business and the outcomes of their purchasing. Only by knowing how consumers make these links can businesses confidently assert that their business practices, as well as their products and services, are truly good, beneficial, value for money and ethical. Likewise for governments and taxes.


	*Number 28: Autumn 2004*
	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
About Alan Cooper Other Features Index Web Links The Ethical Pricing Project	*Ethical Pricing* *By Alan Cooper* Editor's comment: Pricing is an issue that often generates intense debate. The Ethical Pricing Project is looking to quantify some of the issues in this area and Pool readers are invited to contribute to this major new research study. A recent poll by the Tax Payers’ Alliance / ICM raises the possibility of a “fat tax” on some foods, linked directly to dissuading a particular behaviour, raises interesting ethical issues. There is a clear precedence with the issue of smoking, especially since the dangers of passive smoking have become clear. The ethical argument is that one person’s actions should not be detrimental to another’s well being. Governments have other methods of seeking to change behaviour. There are the imposition of fines to dissuade crime and pollution, and taxes to encourage recycling and better use of road space. By using pricing mechanisms governments are seeking to change behaviour in many areas of life. Using pricing to change customer behaviour is nothing new to businesses. As consumers we are inundated with “two for one” offers, discounts, free gifts and seasonal promotions. However, in the case of business the ultimate aim is usually maximising market share and profits rather than changing behaviour for some greater, ethical good. But are the pricing tactics used by business actually ethical in themselves? The study and application of ethics covers a wide ground. Many professional bodies are spending many hours defining the expected ethical behaviour of its members and disciplining those who transgress. These ethics have been codified over time and in some cases are embracing different countries and cultures. Similarly, governments have developed statutes to curb the excesses of monopolies and cartels. Other ethics are less formalised. Some surface in media indignation, for example where shops hike the price of plywood in a hurricane or cold drinks in hot weather (as one famous cola company proposed with its vending machines). Now new ethical pricing issues are being surfaced due to the application of new technology or new business models, for example, through globalisation and the internet. Yield Management A good example is the increasing use of Yield Management (YM) initially within the travel industry, particularly air flights, and now with coach and rail travel, cinemas, hotels, internet cafes, and take-away pizzas. (Many readers will know that the EasyGroup led by Stelios Haji-Ioannou is the main proponent of such YM-driven businesses). When airline monopolies existed the pricing points were few: initially only one class for the rich, then first and economy, and in modern times first, club and economy overlaid by advanced apex fares. All of which were openly published in adverts and brochures. Today, led by pioneers such as Southwest and JetBlue in the US, Ryanair and EasyJet in Europe and AirAsia in Asia, YM is rapidly becoming the norm. Prices are advertised “From £x” but only the first few customer bookings will obtain that price. As more people book the price will rise. YM is underpinned by computer systems with sophisticated algorithms taking into account factors such as date and time of flight, rate of bookings, and current load utilisation. Rumours are that some airlines are factoring in who is flying: is it a businessperson or a student? – with frequent flyer programmes providing a wealth of social-economic data. Initially, the fares on low cost airlines were advertised lower than reality as they factored out airport and security charges. In the UK, government intervention forced companies to show prices inclusive of all tax. However, the unwary passenger can still get caught for a surcharge for telephone bookings and credit card bookings (try making an internet booking in cash!), and once on-board, £5 for a sandwich. One airline actually wanted to charge a disabled flyer £20 for use of a wheelchair, another insisted that disabled flyers are accompanied, and a third insisted that obese people book two seats. Imagine YM techniques being applied in your local supermarket. Prices’ varying according to how full the shop is or whether it’s raining or sunny outside. Imagine no price labels on the shelves. Instead they are on the trolley or a hand-held that you collect on entering the store, where you have swiped your loyalty card. Now the prices are tailored to every individual. Sound far-fetched? Already some supermarkets have self-checkout using hand scanners carried by the shopper as they shop. And Tesco has 10 million customers in it loyalty card scheme, each of them receiving personalised discounts, either with their statement or on their till receipt. Unethical Practices Abound Within financial services we have the wide spread practice of insurance companies heavily discounting first time customers but upping the premiums for renewals, relying on inertia. Similarly, banks and building societies (thrifts) rapidly introducing headline grabbing new accounts with high interest rates, whilst established accounts and their customers languish with 0.2% interest rates. Again, there are rumours that financial service companies are setting extremely high pricing or onerous conditions and penalties to “get rid of” non-profitable customers. Meanwhile, the government is withdrawing payment of social benefits in cash (mainly to poorer persons) and telling them to open a bank account for direct credit payments! Technology is providing wonderful opportunities for streamlining operations and implementing new business models. But it is also providing opportunities for unethical pricing practices. Just recently Hilton International and InterContinental Hotels both threaten to withdraw their services from on-line travel companies. They assert that such companies have programmed their computer systems to inform customers that all rooms in a chosen hotel are taken, when they are not. The customer is then offered a high price, high margin room from a competitor as an alternative. InterContinental has already withdrawn from Expedia and hotels.com (The Independent, 29 September 2004). Are Lower Prices Ethical? Globalisation is also opening up a new set of pricing challenges and dilemmas. If a company switches production overseas does it: Maintain the same price and pocket higher profits for shareholders? Maintain the same price and give higher wages or better conditions to workers? Maintain the same price and invest in new products and services? Reduce prices so customers benefit but the competition and their workers suffer? Reduce prices with the consequence that the government takes less value-added tax and therefore has less to spend on health and social services. In reality, a company’s choices are not made entirely within their four walls, but take into account external factors, especially competitors' prior moves or likely moves. But do they ever take into account consumers' views? Do they presume that so long as consumers get quality, availability, convenience and low prices they are happy? The pricing practices of companies like Wal-Mart in the USA would suggest this is so, but are their consumers able to exert real choice? Western societies are polarising with increasing numbers in the poorer layer at the bottom. These people may need to buy cheaply to simply live. Local shops may have been forced out of business by the giants (or as in the UK, the giants may have bought out the small convenience shops) and consumers may be too poor to own a car to drive elsewhere. Suppliers have been squeezed such that farmers receive pennies for produce sold for pounds and they a still expected to wash, grade and pack. Unhappy customers and suppliers can lead to tremendous resentment over time. Pricing Transparency? But most consumers, with time and/or money, do have choice. So do they wish to exercise that choice and are ethical pricing practices a significant factor in the decision mix? And when they do buy some of the new ethical products are they really making a real difference or are they simply fooling themselves and their conscience? For example, is fair-trade coffee really helping the peasant farmer or simply lining the pockets of the retailer and the mainly western owned companies in the supply chain? Can customers expect transparent pricing or does the cloak of competition prohibit this? And is pricing transparency a help to consumers or does it make a shopping even more complex? Many will rely on brands and the inherent trust within those brands, developed over years if not decades. So how can companies be sure they do not undermine their brands by non-ethical pricing practices? New Research The Ethical Pricing Project is embarking on new research to identify buyers' ethical stance in regards to price and pricing tactics. The Project is a joint research initiative between Managing Change in the UK and Sans Prix in Australia. We are undertaking a survey where ethical scenarios are presented to participants who can then respond as to the acceptability of the pricing tactic illustrated. We have over 100 scenarios already, though only 10 feature in our initial survey. They are based on real situations; often highlighting new situations brought about by technology or globalisation. We invite readers to participate at http://opinion.ethicalpricing.info We believe that businesses need to go beyond the plain monetary transaction. They need to understand how consumers link prices to the actions taken by the business and the outcomes of their purchasing. Only by knowing how consumers make these links can businesses confidently assert that their business practices, as well as their products and services, are truly good, beneficial, value for money and ethical. Likewise for governments and taxes.
Disclaimer Contact Webmaster Pool Version 2.0 © Alan Cooper / Through the Loop Consulting Ltd 1998-2004