Fairness in pricing

August 2019

Fairness is about relative treatment

Therefore the fairness of a company's pricing practices needs to evaluated along two dimensions

Fairness of pricing of customers compared with each other: Fairness vs. Peers
Fairness of how the value is shared between the seller and the buyer: Value Sharing Fairness

With the BCG, we conducted a global survey to assess how consumers perceive the fairness of various pricing practices in different industries.

Countries surveyed included: US, China, India, Brazil, Japan, Germany, France, Sweden
Product categories included: Banking, Electronics, Groceries, Hospitality, Movie Theaters, Pharmacy, Internet, Gas stations, University
Customers categories included: Seniors discounts, Student discounts, Geographic price differences, Time of purchase, Channel of purchase, Relative income of purchaser etc.

People across the world think it is fair

to increase prices for high cost-to-serve customers
charge more for better products
charge different prices in different countries
vary price to drive customer behavior e.g. lower prices for loyal customers, happy hours etc.

Alternatively customers feels cheated when

customer similar to them get lower prices
- Companies beware of random discounts
use their private data to change prices
- "we saw you were rich, so we charge more
a company has monopoly power

Social norms and values drive different perceptions of

whether students deserve discounts
- conservatives disagree especially when older
whether it's fair to increase gas prices at rush hour
- people familiar with the practice say it's fine
whether airlines are right to price seats differently
- Students majoring in economics think it's OK
- but others tend to be suspicious

Fairness vs. peers

Fairness as a function of share of value

The value created by a transaction between a buyer and a seller can defined as:

Customer value - Variable cost

That value is shared between parties

How that value is shared affects peoples behavior

customer would rather not buy than rewarding a company who takes a too high proportion of value
They are ready to suffer in order to avoid encouraging a company that does not share enough

By default people perceive a fair split is 50/50 but this varies depending on level of economic development

Developed country consumers think they should get at least 50% of the value but
- they will accept up to 70% before not buying
In developed countries consumers think it is fair for companies to get most of the value

Value Sharing Fairness

Two trends, based in consumer perception of fair Pricing, tend to reinforce growing inequalities

Consumer are not in favor of pricing practices that would lower prices for lower income customers
- Flat pricing tends to favor "high value" customers who are often wealthier
Consumers accept transactions even when they know companies get a higher share of the value
- That higher share of value tends to flow to shareholders who are disproportionately wealthier