[Pricing Nugget #029] Increase Fairness of Price Increases

We find ourselves in extraordinary times - times of unusually high levels of inflation and frequent price increases.

The question could come up: When do consumers perceive price increases as more or less fair? Not only in times of inflation but in general when companies increase prices.

We will find out today.

Researchers conducted a meta-analysis. In a meta-analysis, researchers take all studies that have been done on a specific topic and investigate what we can learn across all studies.

The papers they included look into the relationship between price changes and price fairness perception. They analyzed 33 articles, including 54 independent samples or studies. 

What did they find out?

First, they found that various factors have been investigated across these studies. 

Second, they quantified the impact of each of these factors by standardizing the price fairness outcome variable to a value between 0 and 100.

The results focus on price increases, as price decreases do not statistically improve price fairness perception (“(…) a positive price change of up to 50% reduces price fairness (b = −.342, SE= .081, t = 4.220, p < .001), but the negative price change magnitude of up to 50% does not reveal a significant effect (p = .343) (…)” (p. 202)).

What was the impact of each factor on price fairness perception?

Starting with the most obvious factor: The researchers found that for a price increase of 1%, the price fairness perception drops by -0.256 (on a scale vom 0 to 100).

Okay, what about the other factors? The researchers have found that a cost-justified motive increases the price founder's perception by 8.077. This means if you have a starting point in your price fairness perception, and you provide a cost-justified motive, you could increase – technically speaking – the price by 32%, and you would end up at the same price fairness perception as before. You divide 8.077 by 0.256, and you receive the (negative) compensating price change that offsets the positive effect of the cost-justified motive.

What else did we learn? An unjustified motive is probably the worst thing that you can make your customers conclude from your price change. If your customers conclude that the price change is due to a profit increase, the price finance perception drops by -14%. If you increase a price – let us say by 10% – without leaving a clue on a motive, customers' fairness perception decreases by -2.56 points. As soon as they infer an unjustified motive, the price fairness perception plummets by another -14.226 points, which generates the same feeling of price unfairness as an additional price increase of 56% (without inferring a motive).

If you change prices for a service compared to a product, you have more leeway. Customers, generally speaking, perceived price changes for services as fairer than for products.

The timing, by the way, does not impact price fairness perception (it is not statistically significant). So if you have a different price for customers booking a hotel or flight six weeks earlier compared to one week earlier and they see a different price, they do not think it is unfair.

Different prices across sellers are generally perceived as fairer, so you do not have to match all your competitors' prices 😉.

And lastly, from a customer perspective, what is really bad is changing prices for each customer or customer group. If you change prices for each individual customer, this reduces the price fairness perception by minus 9.131 points. And this means if a customer thinks prices are changed on a customer level compared to across the board, changing a price across the board by 36% leads to the same price unfairness perception compared to discriminating prices across customers by a negligible amount.

What is the takeaway? 

Essentially, what matters is what your customer thinks about why you are doing something. If they believe you increase prices to make more money, that is probably the worst conclusion you want your customers to draw.

But if you have a story to tell that increasing costs explain why you have to raise prices, customers usually find this price increase much fairer.

What else? The research has also looked into the impact of distributive versus procedural justice. Distributive justice means giving customers a fair price in relation to the value you create. Procedural justice means the way you set prices is perceived as fair. The researchers found that distributive justice is more important than procedural justice: customers place more weight on the fair price in the end. They do not care so much about the way you create this price.

The final price matters, but interestingly, the cost-induced motive delivers a higher perceived fairness (+8.077) than a perceived as fairly set, final price (+5.899).

Providing a cost-induced motive is probably the best way to explain why you have to increase prices to your customers.