FacebookFacebook icon TwitterTwitter icon LinkedInLinkedIn icon Email

Brain circuits

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


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 is the Dean of the Executive MBA program and the faculty representative at the IMD foundation board. He teaches in the Executive MBA, Strategic Marketing Program, the Foundation for Business Leadership Program, the MBA program, the Orchestrating Winning Performance program as well as in many partnership programs for world-leading companies.


Learn Brain Circuits

Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on - they only take five minutes.
Read more 

Explore Leadership

What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Read more

Join Membership

Log in here to join in the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.
Sign up

You have 4 of 5 articles left to read.