Friday, April 25, 2014

Price, Savings, and the Ethics of Business Relationships

I find myself lately on the cusp of a moral quandary about the way that price and savings are presented to prospective customers.  Something just feels wrong, though I can't quite fathom the reason why - which signifies to me a need to jot down some notes in an attempt to sort it out.  

It's also worth noting that this simple issue spun up into a much larger consideration - so be prepared for a sharp turn about halfway through that leads into broader concerns.  (Such things happen in informal writing.)

The Situation

In a competitive environment, many suppliers offer exactly the same product.  For the purpose of argument, let's say there's a discount store and a department store who both buy shirts from the very same factory.   That is to say, the products are identical, no difference in quality.  The department store sells the shirt for $100 whereas the discount store sells it for $50.

The department store has a sales promotion in which loyal customers are offered a 40% discount on the shirt.   It sends out a promotion in which it is advertised "save $40" on this item - and even discloses the regular price, so that the customers are informed and aware that a shirt that normally sells for $100 can be had for $60 during this event.   It's right there in the copy.

The savvy consumer is well aware that the shirt can be had for less at the discount store - their regular price of $50 is still less than the promotional price of $60 being offered by the department store.   The department store marketer knows this, but believes that people like to feel like they are saving money, even though they are spending more.

To begin, the scenario above is not only plausible, but quite common - it happens so frequently in fact that marketing textbooks have a name for it (the "high-low" pricing strategy).   Just because "everyone does it" or "it's an industry standard practice" does not mean it is an ethical practice.

Clarification

Before tucking into this, I want to take a few distractions off of the table:

First, the department store promotion is not deceptive.   The shirt does in fact sell for $100 normally and is in fact discounted.   The promotion is not a lie because the customer will pay the "normal" price before and after the promotional event (the higher price is not falsely inflated).  So the promotion is entirely honest.

Second, a retailer bears no responsibility to promote its competition.   This may be subject to some debate - but it would be unreasonable to place upon a merchant the task of doing the research to find the best deals for a customer without compensation for the effort of doing so.  Some might argue this point, and they would be wrong for reasons that should be obvious.

The Moral Quandary

The moral quandary, as I see it, is that the department store is knowingly attempting to distract the customer from the high price by emphasizing the discount.  They are not concealing or misrepresenting the facts - but are attempting to draw attention away from something they do not wish the customer to consider:  no matter how much you are "saving" you are still paying $60 for the item.

Consider the stereotype of the person who returns from shopping with arms full of packages and announces to their spouse "I saved $500 at the store today" rather than saying "I spent $1000 at the store today."   The same principal applies: the shopper is being entirely honest, but attempting to get their spouse to ignore one fact (the amount spent) by presenting another (the amount saved).

This doesn't set well with me, and I'm not sure of the reasons it should be so.

Deliberation

I've mulled this over for some time, and the best way I've come up with is to consider the roles of the individuals (or organizations) involved.   Given the nature of the relationship, what does one party have the right to expect from the other - in a manner that is fair to both in the context of the relationship.

The role of a retailer (or any vendor) is to offer a product for a price, and in so doing to be honest about the nature of the product (such that the customer is not swindled into buying something that renders him no benefit) and the amount that he must give the retailer to take possession of the product (so that he is not told later he is obligated to pay more than he was led to expect to obtain the benefits he desired).

In this sense, the retailer has also disclosed all the facts germane to the transaction he is proposing to the customer.   The price of the item at another retailer is not related to the transaction he is proposing - that would be a different transaction, with a different vendor, and the responsibility cannot be assigned to the present vendor who would be a third party to that prospective transaction.   It is not his business, quite literally.

However, it seems to me that the ethics take a sinister turn when the same incident occurs in the situation of the shopper and their spouse - because their responsibility in the context of that relationship is to do what's in the best interest of the household in the long term, and this shopping incident is only one action in the context of an ongoing relationship in which there is, in fact, a duty to act in a way that ensures the resources (budget) of the household are used wisely.

But this can be spun back to the merchant-customer relationship if it is, in fact, perceived as a relationship and not an isolated transaction.   In the context of a one-time deal, the merchant accepts no responsibility for the welfare of a customer outside the context of the immediate transaction - but if it is a relationship, and if he portrays it as such, he must accept the moral obligation of considering the long-term welfare of his customer.   Ideally, he would offer fair pricing most of the time, but would be beholden to disclose when the customer can get a better price or a better product elsewhere - and also ideally, this qould be infrequent.

The Resolution

In the end, my sense is that much depends on the nature of the relationship between a retailer and a consumer - which can be very tricky in the present day, as some firms are evolving from being transactional companies (which view each sale as an isolated and independent event) to relationship companies (which view each sale as an event in the context of an ongoing relationship).

Simply stated, different ethical standards apply.

A transactional company can claim to be fulfilling the obligations of its role if it considers only the immediate transaction as an isolated event - but a relationship company cannot do so, particularly when it has attempted to convey to the customer that it considers their business to be a long-term relationship.  In doing so, it is obliged to consider the welfare of its customers in a broader sense and, on occasion, to send their customers to a different vendor - accepting that they will lose the profit of this transaction for the sake of maintaining a longer relationship.

Naturally, the problem is that a relationship company is a new concept for many retailers who are attempting to evolve from transactional models.   They may be unaware of the moral obligations they must accept to be regarded as a relationship company, and still doing business under the terms of a transactional company.   It is still a violation of moral obligations - but perhaps their ignorance makes the violation forgivable.

A more insidious moral problem is when a firm portrays itself as being interested in a relationship in order to get the customer to commit to giving them repeat business, but is not interested in doing what the customer expects (and has every right to expect) of a long-term partner in return.  That is clearly dishonest, deceptive, and morally reprehensible.

It may take quite some time for firms to fully make the transition, and fully embrace the moral and practical obligations of being a "relationship company" and putting to an end their transactional perspectives and the behaviors that were appropriate to the "old way" but inappropriate to the "new."

Epilogue

This note has meandered greatly from a simple consideration (the ethics of a pricing strategy) to a more complex one (the ethics of a relationship) - but my sense is that there is good value in this, and that there is likely a broader range of ethical differences between transactional firms and relationship firms ... which is grist for the mill.

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