Perceived Fairness

The concept of a “fair price” has bedeviled marketers for centuries. In the Dark Ages, merchants were put to death for exceeding public norms regarding the “just price.” Even in modern market economies, putative “price gougers” often face press criticism, regulatory hassles, and public boycotts. Consequently, marketers should understand and attempt to manage perceptions of fairness. But what is fair? The concept of fairness appears to be totally unrelated to issues of supply and demand. Naturally assumptions about the seller's profitability influence perceived fairness, but not entirely. Oil companies have often been accused of gouging, even when their profits were below average. When Hurricane Katrina disrupted gasoline supplies in the American south, gas station owners who raised prices were soundly criticized as “price gougers” even though they had only enough supply to serve those who wanted the product at that price. In contrast to the situation faced by oil companies, popular forms of entertainment (Disney World, for example, or state lotteries) are very profitable and expensive, yet their pricing escapes widespread criticism.

As these examples illustrate, research shows that perceptions of fairness are more subjective, and therefore, more manageable, than one might otherwise think. Buyers apparently start by comparing what they think is the seller's likely margin now to what the seller earned in the past, or to what others earn in similar purchase contexts. In a famous experiment, people imagined that they were lying on a beach, thirsty for a favorite brand of beer, and that a friend was walking to a nearby location and would bring back beer if the price was not too high. Researchers asked the subjects to specify the maximum amount that they would pay. Subjects did not know that half of them had been told that the friend would patronize a “fancy resort hotel” while the other half had been told that the friend would buy from “a small grocery store.” Although these individuals would not themselves visit or enjoy the amenities of the purchase location, the median acceptable price of those who expected the beer to come from the hotel — $2.65 — was dramatically higher than the median acceptable price given by those who expected it to come from the grocery store — $1.50.

Presumptions about the seller's motive influence customers' perceived fairness judgments. A seller justifying a higher price with a “good” motive (for example, funding employee health insurance, improving service levels) makes the price more acceptable than does a “bad” motive (for example, exploiting a market shortage to increase stockholder profits). Research suggests that companies with good reputations, such as Disney, are much more likely to get the benefit of the doubt about their motives. Those with unpopular reputations (for example, oil companies) are likely to find their motives suspect.

Finally, perceptions of fairness seem to be related to whether the price is paid to maintain a standard of living, or is paid to improve a standard of living. People consider products that maintain a standard to be “necessities,” although humanity has probably survived without them for most of its history. Charging a high price for a necessity is generally considered unfair. For example, people object to what they perceive as high prices for life-saving drugs because they feel that they shouldn't have to pay to be healthy. After all, they were healthy last year without having to buy prescriptions and medical advice. People react similarly to rent increases. Yet, the same individuals might buy a new car, jewelry, or a vacation without objecting to equally high prices or price increases.

Fortunately, perceptions of fairness can be managed. Companies that frequently adjust prices to reflect supply and demand or to segment buyers with different price sensitivities are careful to set the “regular” price at the highest possible level, rather than at the average or most common price. This enables them to “discount” when necessary to move product during slow times (a “good” motive), rather than have to increase prices when demand is strong (a “bad” motive). Similarly, because buyers believe that companies should not have to lose money, it's often best to blame price increases on rising costs to serve customers. Buyers believe that is fair, such as when petroleum prices increase. Landlords who raise rents should announce property improvements at the same time. Innovative companies raise prices more successfully when they are launching a new product and say that they are recovering development costs.

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