Are pricing experiments unethical?

Since joining LeanConvert I've been leading a weekly discussion with the team where we delve deep into the philosophical layers of experimentation and analytics - we call this session AB Wisdom. This week we discussed the ethics of pricing experiments. I've seen a few posts on this on LinkedIn over the past few weeks so I thought it would be a good topic to discuss with the team. Below are my views on this topic.

In general, I don't think pricing experiments are unethical. Is it fair that one customer pays more than another customer? No of course not, but we're not trying to determine the fairness of pricing experiments. We're trying to find optimal price points that maximise revenue for a company, and we're trying to do it as quickly as possible - you can't do that without cracking a few eggs.

Companies change prices all the time for example when they need to compete with their competitors or due to rising costs, so it's very likely that you've paid more for a product than someone else. Most of the time we don't even notice. Other times we do notice but don't end up in a moral discussion about the ethics of the situation. For example, why do we pay more for petrol on the motorway when we know there is someone paying significantly less just 10 minutes away? I mean, we know we are being exploited at this point in time because petrol for us has gone from being a luxury to a necessity without which we can't get home. Is it fair that we have to pay more because we need it more? No. Is it unethical? No. That's the reality of a free market economy.

The reality is that testing prices via an AB Test is the most efficient way of understanding impact while controlling for everything else. Running quasi-experiments or geo-location tests can be effective but they take longer as you have to account for confounding variables and even then you never really know if there was something else at play. One might argue that exposing everyone to different prices for longer periods is wasteful and far more unethical.

Let's consider the alternative. Would a customer who paid less than someone else find it unethical that they paid less while someone else paid more? Probably not. We're probably going to be annoyed if something we've just purchased goes down in price during a Black Friday sale, but we're unlikely to call the ethics police right. They have actual ethical issues to deal with.

Ultimately, we live in a free market economy and that means that we are at the mercy of supply, demand and perceived value. If a customer feels like the amount they are paying for a product or service is worth more than the value they are receiving, they won't buy it. That's their right. But it's also the right of a company to find that upper limit. That's not an ethical conundrum.

Where it does start to cross the boundaries of ethics in my opinion is when there is obvious discrimination happening. Someone who needs a life saving drug should not have to pay more than someone who does not- even if they can afford it. Nutritious food should not only be available to the wealthy. Granted you wouldn't necessarily experiment on these things but people definitely aren't paying the same amount for them. This is where my support on free market economy breaks. The basic needs (healthy food, water, shelter, healthcare and education) should not need to be optimised to maximise revenue. These should be offered as basic human rights for everyone. Everything else, optimise away.

Note: pricing experiments are not the same as black-hat pricing techniques such as price manipulation, price gauging, predatory pricing etc... I'll write a follow up post on this as I believe that is highly unethical.