Customers See a Price Increase for Profit as Less Fair Than One That Covers Higher Costs

ConversionTarrahi, F.; Eisend, M.; Dost, F. · 2016International Journal of Research in Marketing
Topicsprice fairness·dual entitlement·price change motive·pricing·meta-analysis·price discrimination

A long-standing pricing principle holds that customers accept a price increase that covers higher costs but resent one that only adds profit. Imagine your leadership team must raise prices on a household goods line after supplier costs climb, and you are drafting the announcement. Will telling customers the reason change how fair they judge the increase, and by how much?

Customers judge a price increase partly by its reason, and see one that adds profit as less fair than one that covers higher costs.

Data chart

Customers rate an increase fairer with a cost reason and less fair with a profit reason

Change in how fair customers rate a price, in points on a 0 to 100 scale, with a cost or profit reason compared with studies giving neither reason, allowing for price change size and other study differences.

+8 pointsCost reason given-14 pointsProfit reason given
  • Customers penalize profit reasons more than they reward cost reasons.

Customers mark an increase down nearly twice as much for a profit reason as they mark it up for a cost reason.

Estimated differences across 261 study means from 33 published papers, allowing for price change size and other study differences; 14 means gave a cost reason and 12 a profit reason (paper Table 1, p. 200; Table 3, Model 3, p. 201). Exact differences: +8.077 and -14.226 points, respectively.

Data chart

Customers rate bigger price increases as less fair, up to a point

How fair customers rate a price, in points on a 0 to 100 scale where 100 is each study's maximum, by the percent price change from the comparison price; negative changes are cuts.

67 pointsPrice cut of60 percent57 points50 points42 points40 points50 pointsPrice increaseof 100 percent
  • Customers do not reliably rate deeper cuts fairer.
  • Customers do not reliably rate larger changes differently above fifty percent.

Customers rate small and moderate increases less fair; larger changes show no reliable relationship between size and fairness.

Approximate readings of the fitted curve in paper Figure 1 (p. 202), not observed averages or forecasts: about 67, 57, 50, 42, 40 and 50 fairness points in the listed order. At no change, Table 3's Model 1 constant is 56.873, consistent with the figure's roughly 57 to 58; exact curve coordinates are not published. The separate test found no reliable size effect for cuts up to 50% or any changes above 50%; only about a dozen plotted means lie above a 60% increase. If points are equally spaced, their horizontal spacing does not represent the distances between price changes.

Action guide

  1. Give your customers the real cost reason whenever costs drive an increase.Put the reason in the price announcement itself, because customers rate an increase fairer when higher costs explain it.
  2. Keep profit out of the stated reason for your price increases.Customers rate an increase that adds profit as less fair, and by about the same amount whether the increase is small or large.
  3. Check the size of your increase before you polish the wording.In the paper's own illustration, customers give back about as much fairness for a cost reason as they take away for a one-third price increase. So a cost reason alone does not offset a much larger increase.
  4. Forecast customers' fairness ratings for price increases and price cuts separately.Customers rate an increase of up to half the price as less fair, but they do not reliably rate a cut of the same size as fairer. One forecast will not serve both.
  5. Require a fairness check before you charge customer groups different prices.Have your pricing team test how customers judge a price beside another customer's price before you approve the prices. Across studies, that comparison is associated with lower fairness.

Evidence

  • Customers rate a price increase about 8 points fairer with a cost reason and about 14 points less fair with a profit reason. Both compare with studies that gave no reason, on a 0 to 100 fairness scale, after allowing for the size of the change and other study differences.
  • Customers mark an increase down nearly twice as much for a profit reason as they mark it up for a cost reason. Each effect is about the same for small and large increases.
  • Across studies, the reason for a price increase explains only about a fifth as much of the differences in fairness ratings as the size of the increase does.
  • Customers rate bigger price increases as less fair, but very large increases, such as doubling the price, seem to make little further difference. For changes above 50%, size shows no reliable relationship with fairness.
  • Customers rate a price as less fair after an increase of up to half the price. They do not reliably rate it fairer after a cut of the same size.
  • Across studies, customers rate a price about 9 points less fair, on a 0 to 100 scale, when they compare it with another customer's price. This allows for price change size, timing, seller differences and other study factors.

Key takeaway

Customers see a price increase for profit as less fair than one that covers higher costs.

Limitations

The studies, pooled from 33 published papers, measure how fair customers judge a price next to a comparison price, not what they buy or what you earn. The differences come from comparing separate studies, not from testing different reasons on the same customers.

Source

Tarrahi, F., Eisend, M., & Dost, F. (2016). A meta-analysis of price change fairness perceptions. International Journal of Research in Marketing, 33, 199-203. https://doi.org/10.1016/j.ijresmar.2015.10.004.

https://doi.org/10.1016/j.ijresmar.2015.10.004

Exact values behind the rounded figures: +8.077 (cost reason), -14.226 (profit reason) and -9.131 (comparison with another customer's price present versus absent, holding other model variables fixed) points on the 0 to 100 fairness scale; the reason variables add .042 of explained variation against .205 for the size of the price change; mean fairness 50.397 for increases and 61.690 for cuts of up to 50%; 56.873 for the no-change fit in Table 3, Model 1; the other Figure 1 ratings (about 67, 50, 42, 40 and 50 points at the listed price changes) are approximate visual readings without published exact coordinates.