How consumers perceive “fair” price hikes

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.

2. 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.

3. 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.