leadership Mark and Shantanu

The N95 Mask for Pricing: Making Pricing Safer for Customers, Companies and Society

Wednesday, June 24, 2020

By Mark Bergen and Shantanu Dutta

 

During these very challenging times, companies are focused on how to make a profit as well as manage costs. You might be making critical decisions for the survival of your businesses. However, these decisions often have social consequences that are just as important to consider.

To put that in perspective, let’s take a look at pricing during crisis. Our goal is to help companies make pricing decisions that not only ensure their survival, but are safe for customers, and safe for society. And for our metaphor, we've chosen to describe this as an N95 mask for pricing. Why N95 mask? Because it’s a powerful symbol of how we can all be safer during these difficult pandemic times.

Pricing and society: looking at the demand for hand sanitizer

Companies from all industries are seeing backlash from the social implications of their pricing decisions. One of the most vivid example of it has been the market for hand sanitizer during the pandemic. Resellers price-gouged customers, who were desperate for this essential item as Covid-19 spread. Not all companies chose to price that way. The CEO of Purell made strong statements that the company’s focus is on access, not price increases. And Amazon has made a point to limit price increase in these kinds of settings as well.

How to consider society in your pricing decisions

Like doctors, nurses, and medical practitioners under the Hippocratic Oath, pricing should bring no harm.  Expanding on the framework of bioethics will help you guide your ethical pricing decisions. Consider three central elements:

  • Social impact. This is the idea of doing no harm, or doing good
  • Justice. In the pricing realm, this means focusing on groups that are vulnerable or often discriminated against and fairness for all involved
  • Empowerment. Ensuring transparency and dignity with your actions

Why do we need bioethics in pricing?

What happens when businesses don’t consider the ethical implications of their pricing decisions? Recently, state governors have had to compete against each other in the race to bid on and acquire ventilators for Covid-19 treatment. In this powerful example, pricing and process prevented a just distribution of a life-saving device. The ability to pay, not need, dictated the game and people’s lives are the consequence. This is the situation companies can help avoid, by applying these principles in their pricing practices.

Questions to ask when building your own N95 pricing framework:

To help you price better, we suggest following what we call our N95 mask for pricing framework. Asking these questions will help you make pricing safer for your company, the customer, and for society.

  • Can your prices block access to essential needs?

Answering this question requires examining what you are selling. Food, water, shelter, medicine and many other products and services are essential at all times. During moments of crisis, such as Covid-19, it can be important to reexamine products and services that will be essential during certain circumstances or to certain groups of people.    

  • Can your prices inadvertently harm vulnerable groups?

Answering this question requires examining who you are selling to. Pricing teams should be asking: Are you selling to people with low incomes? Are you selling to people who are chronically ill? Does your price discriminate based on race or gender? Companies who use AI and analytics have complex ways of assigning price to customer groups. However, if price discrimination reinforces social discrimination, your prices are reinforcing social harm.

  • Do prices take advantage of customers?

Could your pricing be considered deceptive in any way? Are you withholding information for any reason? Ethical companies provide information to help empower customers to make the best decisions.


Interested in learning more about building your own N95 pricing framework? Watch Professor Bergen and Professor Dutta discuss ethical pricing strategies and examples. 


Understanding the framework in context 

The famous economist Arthur Okun once noted that we should treat luxuries and necessities differently. Luxuries are perfect for free markets, but necessities require considering social implications. The hand sanitizer price increase is a great example of a pricing decision that blocks an essential need.  In normal times it's a mundane product, but during a pandemic it turns into a necessity. We saw this play out with face masks and toilet paper—two poster children for bad pricing practice during the early days of the pandemic.

Many companies deploy pricing tactics that harm or discriminate against groups. There are so many examples and they’re not limited to pandemic-pricing. For example the “pink tax” where women’s products are more expensive across many markets and many product categories, simply based on gender. Geico used its AI algorithms to create the most profitable pricing for its insurance products. As a result, they sold working class people the same products at higher prices than wealthier people. The result was social outrage and lawsuits.

On the flip side, many companies have actively chosen to bring these social consequences into their pricing decisions.  For example, Uber offering millions of free rides to healthcare workers, and companies such as Microsoft or Google thinking about ways to price and subsidize prices internet and computer access for children in poor countries.

The pandemic has prompted many opportunities where companies have to choose to either empower their customers, or take advantage of them. For example, with an eye on their bottom line, many hotels refused refunds to their customers, even though customers couldn’t travel. And many homeowners are not getting mortgage relief from their lenders even though the government said they should be given such relief. Uber has used gamification and behavioral nudges to save costs by getting their drivers to drive longer distances to places that are less profitable for those drivers. Amazon uses analytics in AI to target to better understand third party sellers who doing a blockbuster job in selling their products and then goes and competes with those third party sellers by offering lower prices. Companies do not have to make these types of choices. Others are taking action to empower customers such as lowering rents during the pandemic, or reducing insurance premiums. Expedia has revealed hidden fees so that customers can make more informed decisions.

How to start making safer pricing decisions

Asking these questions is the first step. If the answer to the three questions is no then you can know you’ve taking steps to ensure that your pricing will be safer for customers, safer for your company and also safer for society - giving you greater confidence and courage in your pricing decisions.

If the answer is no – we suggest stepping back and considering ways to price more creatively, considering compromise, and improving communication.

It's often quite possible to find other ways of pricing that maintain profitability, but have much more desirable social outcomes. For example, Meny, a Norwegian retail chain, was experiencing difficulty with hand sanitizer pricing. When the price was too low, people would horde. But if they priced too high, they would limit access. Most retailers have approached this common problem by limiting access to one, but that has led to hassles with customers. However, this retailer took a different approach. The first bottle of hand sanitizer was marked as a normal price. For every subsequent hand sanitizer bottle, they charged an exorbitant price.  This solution helped maintain access to an essential item, but allowed customers to choose what would work for them.  Creative approaches like these offer multiple benefits for businesses who want to price socially and make a profit.

And consider compromise - you may have to give some profitability for major reductions in social consequences, and customers may have to endure some social consequences for major gains in the company’s financial survival. Take Uber’s surge pricing as an example. They kept surge pricing, and also worked with regulators to create and communicate surge price limits. They also announced that any commission they earned during crises would be donated to the American Red Cross. They also changed the app so they would let consumers know how much more they would pay ahead of time and take customers’ permission. Uber revised surge pricing strategy and communications strikes a balance between company goals and social consequences.

Finally, we suggest that applying this N95 price filter into your long term pricing strategy and capability development processes and plans is beneficial for your long term reputation, the credibility of your brand and your ability to compete effectively in the market. Companies that are able to successfully incorporate the social consequences into their pricing strategy can be at a competitive advantage, particularly in times of crises.

Increase the sophistication of your pricing strategy.
Join us for Carlson Executive Education’s Pricing for Profitable Decision-Making program. 

Mark Bergen Circle Photo

Mark Bergen

Professor
James D. Watkins Chair in Marketing

Mark Bergen is the James D. Watkins Chair in Marketing at the Carlson School of Management. Professor Bergen's research focuses on pricing and channels of distribution, where he has studied issues such as pricing as a strategic capability, price wars, pricing as truces, pass-through, branded variants, dual distribution, gray markets, co-op advertising, and quick response.

 


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Shantanu Dutta

Shantanu Dutta

Dave and Jeanne Tappan Chair and Professor of Marketing
Marshall School of Business, University of Southern California.

Shantanu Dutta is the Dave and Jeanne Tappan Chair and Professor of Marketing at Marshall School of Business, University of Southern California. Professor Dutta received his PhD from Carlson School, in 1990. Professor Dutta’s research focuses on strategic marketing issues, specifically how firms can use distribution, strategic partnerships and value pricing to build competitive advantage.

 


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