Since the time when we were all junior economists, we’ve been told that the world is driven by supply and demand. Our jobs in business were simple: create a form of value that fills a void that someone demanded. We even take this a step further through the world of marketing by creating hope, anxiety, peace of mind, or all three in order to sell our wares.
Yet, at what point should this predatory, business instinct be turned off? We’re a couple of weeks out of Hurricane Sandy, and thankfully the devastation has begun to subside in the wake of rebuilding. Yet, we’ve seen absolute outrage pour over several businesses that have dared to raise their prices on their own dwindling supply in the wake of the devastation. They’ve been labeled price gougers, full of predatory greed to profit on the suffering, and many of them have begun to receive lawsuits from the state of New Jersey. After all, raising prices during a state of emergency is a crime.
photo credit: Diego3336
Can you price gouge before a disaster?
What’s interesting though isn’t what happened after Hurricane Sandy, but rather what happened before. We’re located in Boston, MA, receiving next to no damage compared to what happened south of us. Yet, prior to Sandy you would have thought Boston was falling into nuclear winter, at least from the atmosphere at the local Whole Foods. Gallons of water were loaded into carts, some shoving and eye rolls occurred, and Whole Foods even took advantage of the situation with some very interesting signs reading, “Stock Up For Sandy.”
photo credit: NASA Goddard Photo and Video
Was Whole Foods breaking the law? Not technically, because the prices didn’t change. Were they taking advantage of a looming natural disaster? Sort of. The news and hype surrounding the storm were already causing troubling amounts of people to flock to the store, but clearly some thought was put into the signs. When I asked a Whole Foods employee why the signs existed, I was told, “...this is a lot of produce and meat that we’ll have to throw out if the power goes out, so we’d rather sell it quickly. Plus, people are already stocking up big, so we’d love to upsell them.” Interestingly enough, if the power went out, the food would go bad anyways, just in Whole Foods customers’ freezers.
Does allocative efficiency have a limit?
Neoliberal economists fight any price gouging laws out there, claiming that any artificial price floors or ceilings stifle the market and many of the fundamental teachings of this blog would echo those supply/demand sentiments. After all, your pricing strategy should center around what your customer's willingness to pay truly is for a product or service. In the case of those individuals in a disaster zone, the willingness to pay is quite high when fuel, power, water, and food are needed.
Yet, there’s a certain point where raising prices to an “efficient” level becomes distasteful (and of course, illegal in some states), and the PR and legal ramifications of raising your prices to that level become counterproductive to your business' success. Even utilizing fear in marketing has it’s limit, as Whole Foods found after numerous individuals questioned their signs, causing them to take them down. You always need to keep in mind not only the value perception, but the perception of your company in pricing.
Of course, most of our readers work in the software space, so there's not a lot of price gouging that takes place, because supply is only limited by cloud or disk space. Yet, keep this little anecdote in mind in your marketing, and always remember there's a point where you need to step back from the trees (data) to see the larger picture.
Is there a good litmus test for pricing or marketing that you use or is it something you push until you have a PR or legal backlash? Let us know in the comments!