An Ethical—and Effective—Approach to Pricing
Tuesday, November 17, 2020
Shortly after COVID-19 made its way to the U.S., a pair of related events unfolded. First, anxious consumers stocked up on everything from hand sanitizer and protective masks to toilet paper, rubbing alcohol, cold medicines, and the like. And in response, more than a few entrepreneurs saw the resulting shortages as a prime opportunity for quick profits.
You might remember the headlines. Some Amazon sellers began selling boxes of disinfectant wipes—which typically cost between $4 to $5—for $40 or more. Others put six-packs of paper towels on sale for close to $60, nearly five times their pre-pandemic price. And in one high-profile example, a pair of opportunistic Tennessee brothers bought more than 17,000 bottles of hand sanitizer and hawked them online at up to $70 per bottle.
On one hand, you could view this as a classic example of pricing driven by limited supply and extraordinarily high demand. But the results often didn’t work out as planned. Once news of the price hikes got loose on traditional and social media channels, it generated massive public outrage. And Carlson School Professor Mark Bergen has a concise explanation for that reaction: “The pricing strategy didn’t account for the social structure of market exchange.”
In other words, the sellers didn’t consider the broader societal impact of their efforts. And while that seemed particularly galling in the midst of a public health crisis, it’s nothing new and not uncommon. “Many economists believe pricing should be completely agnostic from societal concerns, which stems in part from Milton Friedman’s influential 1970 claim that a business’ 'sole purpose is to generate profit for the shareholders,’” he says. “Many business schools still teach that. It’s what I learned and what I taught for the first 10 to 15 years of my career.”
The approach can certainly generate robust profits, particularly given the rise of AI and machine learning tools that allow companies to dynamically calibrate pricing based on market conditions and even individual consumer behavior. But Bergen says it’s not necessarily a sound long-term strategy. Those two Tennessee brothers offer a telling case in point. Once their story hit the airwaves, the state’s attorney general launched a price-gouging investigation. They were mocked and even threatened across social media. And they eventually lost thousands of dollars—but avoided the attorney general’s charges when they donated their stockpile to area emergency responders.
So is there a more effective way to approach pricing, one that factors in societal considerations and helps create enduring success? Bergen believes so, and his research outlines an elegant three-part framework—actually a set of questions—to guide companies in their pricing calculus:
1. What am I selling—and can my prices block access to essential products?
2. Who am I selling to—and can my prices harm vulnerable populations?
3. How am I selling—can these prices manipulate or take advantage of customers?
“If you answer no to all three questions,” he explains, “you can be confident your pricing will work for your customers and also protect your company’s brand over the long term.”
But if you answer yes to one or more of them? “Then it’s time to rethink matters,” he says.“Consider the tradeoff between short-term profit and potential negative social consequences and damage to your reputation.”
Bergen acknowledges the latter step can be challenging, particularly with stakeholders who focus on solely on profitability. “You may need to compromise and work to find a middle ground,” he says. “But it’s possible. For example, Amazon has capped prices on essential items over the course of the pandemic. And Uber—which faced widespread criticism over its surge pricing model—now alerts customers about price hikes before they take rides.”
His final recommendation: Get creative. As an example, Bergen cites Meny, a Norwegian retailer with an imaginative approach to hand sanitizer pricing. “You can buy the first bottle at the normal price, but subsequent bottles will cost around $100 apiece,” he says. “That allows general accessibility, but it also prevents the type of aggressive hoarding and reselling we saw in the early days of COVID-19.”
This article appeared in the Fall 2020 Discovery magazine
When the COVID-19 pandemic hit, Carlson School faculty experts researched a myriad of aspects of the pandemic in real time. In this edition, you'll see how state and local governments dealt with the economic downturn, how that economic anxiety was worse for some individuals and groups than others, and how the Supply Chain and Operations Department shifted its research agendas and curriculum to help educate policymakers, media, and the public on how to address these issues.