Three pricing rules to keep it fair

By: Mark Stiving

Date: 4 July 2011

If you set pricing strategy and want to maximise profits (or at least increase them), then you must use some sort of price segmentation. After all, not all customers have the same willingness to pay. You make more money when you let people who are willing to pay more actually pay more.

But is this fair? Is it fair that we charge some people one price and other people a lower price? Do you like it when you pay a price, and find out that someone else bought it cheaper?

What is fair? It turns out that fair is in the mind of the beholder. Every individual determines whether or not he or she has been cheated. Every person has their own sense of fairness. However, there are many examples where it appears we have consensus on what is fair. Let's look at some examples:

  • Students getting into cinemas at a lower price - fair
  • Old-aged pensioners getting cheaper bus travel - fair
  • Holiday-makers paying less for flights than businessmen - fair
  • Paying more for cans of drinks on hot days than on cold days - unfair
  • Paying more to check your bags on an airline - unfair

As we think about these and other examples, there seem to be three criteria which make something "fair."

  1. The segmented price is a discount to one group, not a surcharge to the other group.
  2. The pricing rules are known to the customers. The customers have learned to play by them.
  3. The rules do not change. If they do change, they had better change in the customers' favour.

I'm still amazed that people are so upset when the airlines charge more to check a bag, but they do not complain when they now have to buy a meal. It is to your benefit to segment your customers and charge them different prices, but if you want to avoid customer protests, pay attention to these three rules.

Mark Stiving, Ph.D. is a pricing strategist, runs Pragmatic Pricing and is author of Impact Pricing (due out Autumn 2011).