Strategic Fair Pricing: Guiding Revenue Management Towards Long-Term Profit

In revenue management, the adage 'not leaving money on the table' often guides pricing decisions. However, insights from the book "Game Changer" by Jean-Manuel Izaret and Arnab Sinha and the associated LinkedIn newsletter prompted me to reconsider this maxim (I highly recommend both!). These resources suggest that the fairest price in customers' eyes is also the one that maximizes profit.

Practically, this means customers should feel they're getting value. Solely maximizing company profits at the customer's expense risks future patronage. According to the 'theory of dual entitlement' by Daniel Kahneman, Jack Knetsch, and Richard Thaler (KKT), consumers understand businesses need to profit but also expect value from their purchases.? A disproportionate tilt towards the company breeds perceived unfairness.

Fairness is critical. Studies by KKT, among others, have found that perceived unfairness leads to lost future business. Extreme cases may be labelled as price gouging.

For instance, KKT's research indicated that a hardware store raising prices from $15 to $20 after a snowstorm would be accused of price gouging by 80% of respondents, who would then boycott the store. Natural disasters provide stark examples: after Hurricane Odette in Cebu, the price of LPG cannisters soared by over 60%, and in the aftermath of Hurricane Irma in Puerto Rico, cases of water were sold for $99.

Companies can, and should, charge higher prices for additional value. This is evident in segment-based pricing—airlines charging extra for more legroom or hotels for better views. Instacart's higher fees for faster delivery also fit this model. The common thread is customer choice; they'll pay more if they perceive the value justifies the cost. Conversely, a hotel chain's failed attempt to sell 'gold seal' rooms with minimal extra benefits illustrates the absence of perceived value.

High-demand events like Taylor Swift concerts or the World Cup often see companies avoiding exorbitant price increases to prevent a backlash. However, this restraint can lead to inflated resell prices in secondary markets. For one-off events like prize fights, direct high prices are less controversial, given the limited scope for ongoing customer relationships.

During major events, governments sometimes cap hotel prices to protect the locale's reputation, highlighting the role of fairness and value in pricing.

Businesses should remember that while higher prices for certain segments are acceptable, they must reflect added value. The challenge lies in how value is communicated and perceived. Ethically balanced pricing that considers long-term relationships is crucial.

In conclusion, effective pricing isn't solely about immediate profits—it's about a balance that cultivates long-term loyalty and a reputation for fairness, necessitating a deep understanding of customer perceptions and a dedication to providing real value.

How do you balance the pressure for short-term revenue targets with the long-term profit considerations of fair pricing, especially in times of high demand or scarcity?? I would love to hear about what you’ve been doing and what challenges you may have faced.