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How consumers perceive “fair” price hikes

Published 29 March 2022 in Brain circuits • 2 min read

Inflation pressures are hitting businesses across the globe, which may mean your company is reviewing its pricing strategies. While this makes sense, it is equally important to review your understanding of your customer base.

Remember, inflation pressures are hitting households as well, and customers are becoming very vocal when they are unhappy, so it’s important to know what your customers perceive as “fair”.

There are three principles involved in perceived price fairness (Urbany, Madden, Dickson, 1989):

  1. Maintaining profits: consumers believe it is fair for companies to raise prices to maintain profits.

If your company is feeling the squeeze of inflation, perhaps figure out a way to communicate that to your customer base.

  1. Increasing profits: Consumers think it is unfair to raise prices to increase profits.

If your company has been reporting record profits, you may want to tread lightly if you are considering hiking prices. Consumers are paying attention.

  1. Costs: maintaining prices even if costs go down is perceived as fair, because customers are comfortable paying a price they have already settled on.

If inflation and prices of inputs dial back, you are likely to reap the benefits in the future, so it’s worth keeping this in mind when crafting your pricing strategy.

The practical implications are straightforward. When you increase prices, the best justification is by highlighting cost increases (although never lie). Note also that customers are more likely to accept a discount reduction than a price increase. Economically, it’s the same. But psychological perceptions are different. Loss aversion dominates. 

 

Further reading: 

How to raise prices in times of inflation by Stefan Michel

Authors

Stefan Michel

Stefan Michel

Professor of Marketing and Strategy, IMD

Professor Michel‘s major research interests are in customer-focused marketing strategy, service innovation, and pricing. At IMD, he was Dean of the Executive MBA program from 2014 until 2022 and is currently Director of the Marketing Management course. He also teaches in the Digital Marketing Strategies (DMS) and High Performance Boards (HPB) programs, as well as on the EMBA program, as well as in many partnership programs for world-leading companies. He is Director of the Marketing Management Course.

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