Pricing and Ethics

Week 9 Journal Entry – Pricing and Ethics

Introduction

This week we discussed pricing and how it fits into the marketing mix, as well as how it relates to performance.  We also discussed many of the challenges and implications of ethical and unethical marketing.  One of the topics we discussed at length this week is the relationship between pricing and ethics.  

Content – Pricing and Ethics

As defined in our slides this week, price is the amount of money charged for a product or for a service.  It is one of the most important elements that determine a company’s profitability.  The price piece is the only element of the marketing mix that produces revenue for a company.  

There are three pricing strategies that we discussed this week: customer value-based pricing, cost-based pricing, and competition-based pricing.  Customer value-based pricing assesses the customer needs and value perceptions prior to setting a target price based upon those perceptions of value.  I discussed this week how Starbucks does this very well.  They send out surveys after visiting their many different store locations to receive consumer feedback on how cleanly the store was, the customer service received from the baristas, the taste of the food/coffee and most importantly, was your Starbucks purchase worth the price you paid.  (Survey Monkey)  If everyone began answering the last question as “no” it was not worth the price I paid, I believe over time we would begin to see a decline in the cost of the items, or at the very least a stable price over the next few years.  (Price Intelligently)  Starbucks analyzes the markets prior to implementing a price increase and tries to get ahead by informing their customers of the increase ahead and why the need for the increase.  This allows them to obtain the consumers buy-in by staying loyal to their brand image and were perceived as sensitive to social issues as Nina brought up.  This coupled with Starbucks strong loyalty program has kept many consumers loyal to their brand and continues to increase revenues and grow their business.  (TimeInc)

Cost-based pricing is driven by how much it costs to make the product.  After setting the price based upon the cost of the item, the company tries to convince buyers that the product is valued at the price sold.  Examples of the types of industries that utilize this are companies that produce food products or building materials.  Other examples are your local small businesses.  Because they cannot afford to overcharge and lose their consumer base, they strive to cover the costs of the item and any additional overhead with small profit margins.  (Small Business)

Competition-based pricing pertains to a company setting the prices based upon their competitors’ costs, prices, and marketing strategies.  There are advantages and disadvantages to this type of pricing strategy.  One advantage is that it avoids direct price competition that could potentially damage the company in the long run.  A disadvantage using this strategy is that businesses need to attract their consumers in other ways, since the price will be equal to their competitors.  Think about your cell phone plans…For the most part, costs are competitive, but each company: Verizon, Sprint, AT&T and T-Mobile use other methods to attract their customers.  For many years Verizon attracted a large consumer population by their unlimited data package, and then everyone had that.  AT&T allowed rollover minutes if you didn’t use them all from the month before so you didn’t go over your allotted minutes, then all companies had unlimited talking.  One of the perks to all of the competition in the cellphone industry is that you no longer need to commit to a two-year contract.  It used to be that unless you had a large sum of money to purchase the phone outright, you were locked into a two-year contract.  Many times, if you tried to exit that contract early, you were penalized with expensive cancellation fees.  Not only was this part difficult on your wallet, you also were faced with trying to understand all of the fees and upgrade requirements/eligibility.  T-Mobile led the charge to change the way that offering a variety of financing options for their consumers, and ultimately stealing many customers from their competitors handle these contracts.  This led the competition to also change their strategy so that they did not continue to lose their consumer base.  (Opportunity Lives)

We’ve learned this week that pricing strategies can be very closely tied to ethical and unethical decision making by corporate executives.  Jose brought up a great discussion regarding marketing and sales teams working together to develop attractive marketing and pricing strategies that the long-term goal is to have increased revenues.  Sometimes, pressure from senior management can lead employees to justifying unethical sales or marketing techniques to reach the established quotas.  I found many examples of this after reading Jose’s discussion post and a quote that resonated quite well:  “Managers routinely delegate unethical behaviors to others and not always consciously.”  The last part of that quote is what caught my attention.  In the business that I work in, I can sometimes see where this can happen.  A job needs to be completed and the manager delegates work tasks strictly thinking about the business needs and established quotas, but sometimes this is not ethical and they haven’t even crossed that thought path.  (HBR)

Contemporary Issue

A topic that has piqued my interest after this week’s lesson and the discussions is pharmaceutical pricing.  Jennifer brought up a great discussion regarding how pharmaceutical companies can charge the prices that they charge.  In her discussion we discussed how we learned in our undergraduate economics courses that companies should charge what the market will tolerate, however, at some point, those increased costs could be considered unethical.  Jennifer spoke about this weeks videos for Apple and Netflix and those examples led her to pharmaceutical companies.  She discussed how a drug for epilepsy sufferers is sold through another party and the price went up 2600%.  There were no other market alternatives for consumers to purchase and ultimately both companies were fined heavily to make a statement.  This immediately brought to mind what I’ve experienced with the drug for allergies, EpiPen.  Mylan was the only manufacturer of EpiPen and in 2008 the drug sold for $100.  In May 2016 the cost for 2 pens has increased to $600.  (CNBC)  In my mind, this is completely unethical.  As we are aware, people have many allergies that can be fatal, from peanuts, bee stings, etc. and these pens save many lives.  Food allergies affect 15 million people in the U.S. and the effects of food allergies on younger patients are much more severe. In September 2015, Mylan’s EpiPen sales were over $1 billion per year.  (IP Watchdog)  There are 43 million people who are at risk of a severe, life-threatening allergic reaction that the EpiPen is designed to counteract.  It looks as though Mylan is taking advantage of a monopoly situation and in the end the consumers are paying more for it.  (CNBC)