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How Price Gouging Can Hurt Your Business

By Paul Johnson

"Price gouging" is an emotional, inflammatory term. Everyone is against it, but only buyers, angry over excessive profit-taking, proclaim it. As a seller, how can you reap the profit rewards you deserve without being accused of price gouging?

From a marketer’s perspective, attaching a price tag to a product or service is always an agonizing experience. What is the right price? This question is hotly debated in meeting rooms around the world every day. The search for the perfect price may be the Holy Grail of marketing.

Pricing is like sunblock.  No matter how you decide to apply it, the question always lingers; how much is enough? How can you avoid leaving money on the table without being burned by claims of price gouging?

While everyone certainly wants win-win relationships, the buyer and seller are adversaries where pricing is concerned. The seller wants to get the most money possible for their offering, because each additional dollar gained is pure profit. From the buyer’s perspective, less is better and free is best.

The List Price Obstacle

Most claims of price gouging are based on comparisons of asking price to published list price. From the buyer's perspective, list price is the ceiling, the most they should have to pay for a seller's offering. More importantly, list price becomes the basis from which discounts are taken.

The idea of establishing a list price for a product is actually a fairly new invention. As recent as the Middle Ages, prices were based on perceived ability to pay versus being tied to some intrinsic worth of the product itself. For example, when a nobleman was purchasing a commodity such as food, they would routinely pay several multiples over what a peasant farmer would pay for the same product. Why? Because they could. The seller would have no trouble asking the nobleman for the higher price, and the nobleman would have no problem paying. In those days, gouging only referred to activities having to do with battles and body parts.

For most of us, we believe prices can only go down from list price. When buying a car, for example, nobody expects to pay "sticker". In fact, many car buyers believe that list price shouldn’t be the basis of pricing discussions at all. Instead, they focus on working from the dealer’s invoice price. How shocked these same buyers are when they’re asked to pay over sticker! This has happened when anticipation for a new model creates high demand though the product is in short supply. Examples include the original releases of the Mazda Miata, Dodge Viper, Nissan Xterra, the reintroduced Volkswagen Beetle, and the 2005 Mustang.

When sellers ask for more than list price, buyers deem it "unfair", “outrageous” and -- of course --price gouging. Now it's time to play the blame game. We can blame manufacturing for not producing enough vehicles to meet demand. We can blame marketing for creating too much interest in a product they couldn't supply.  We can blame the greedy capitalists who are exploiting the citizens. Nobody seems to think to blame the use of a list price.

List prices are some of the best fiction ever written.

Should We Sell Over List?

Some routinely call the selling of a product at more than list price “gouging,” and consider it unethical and even immoral.

Buyers feel gouged when it appears that sellers are taking advantage of the buyer’s condition with a commodity product. I’ll loosely define commodity as any product or service that has a fairly consistent price in most selling environments. When the buyer sees an inflated price for the commodity and has no other competitive alternatives due to the situation they're in, the buyer feels gouged.

For example, I would expect a hot dog and a Coke at most locations to be 4 or 5 US dollars. When I was watching the Atlanta Braves play baseball at Turner Field and got hungry, the hot dog and Coke I found cost closer to $10. To find any food that I considered reasonably priced, I would have to leave the stadium environment. I felt gouged.

As a boater, I routinely pay 30-40% more at the dock for a gallon of gas than I would when I take my car to the pumps. Same gas, different environment. I feel gouged.

Price gouging occurs when no alternatives are available for purchase. In our free market society, that rarely happens. When it does, we need to be especially careful. Where there is demand, there is usually -- but not always -- competition.

A Controversial Solution

An opportunistic sales force that I once worked with faced a pricing dilemma. Buyers in this industry routinely expected a 15-20% discount, making it nearly impossible to hold list price. The solution came to be known as “New York Pricing” -- invented by the New York district office -- which simply involved marking up list price by 15% before presenting it to the prospective buyer. After ardent negotiations, the buyer might receive their 15-20% discount, resulting in a sale at or near list price for company. Because headquarters couldn’t come up with a better solution, “New York Pricing” was widely practiced by the sales team although not officially endorsed by management.

Gouging is in the Eye of the Beholder

While we might like the market to set the price, we can’t all engage in an auction environment. At some point during a buyer-seller interaction, the seller is going to offer a price. This is perceived by the buyer as list price, and we expect to go down from there.

Price gouging is not about charging more than list price. It’s about the seller taking advantage of the environment to require people to pay more than the offering is worth. Selling over list price is fine if the market is willing to bid up the price despite the presence of alternatives. That's what happens with hot new cars. If the buyer believes they are getting value well in excess of the list price, both parties can feel good about the transaction.

 

© 2005 Paul Johnson. All rights reserved.

 

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