The Ethics of Pricing

Elizabeth Pittelkow Kittner CFO, GigaOm
Exploring Ethics in Business & Finance Today

Whether it be toilet paper, chocolate, coffee, or toothpaste, consumer prices for everyday staples and commodities, and so many other goods, are increasing quicker than they have in 40 years. Additionally, these price increases are often coupled with decreases in product size and/or quantity—a widely known phenomenon called “shrinkflation.”

Although the term “shrinkflation” was officially coined in 2009 by British economist Dr. Pippa Malmgren, companies have been employing shrinkflation for decades. Whether due to rising costs for ingredients, packaging, labor, or logistics, most companies at some point have been faced with the decision to increase prices, shrink product and/or packaging sizes, or both. Since most consumers use price instead of weight and volume to make their purchasing decisions, companies often gravitate toward shrinkflation.

In general, shrinkflation is legal. Where the practice usually crosses a legal line is around a concept known as price gouging, in which a seller increases prices to a much higher level than is considered reasonable or fair. This instance may occur for certain goods or services deemed essential during a disaster or another emergency, such as in a pandemic. An online retailer is facing price gouging allegations from the state of Pennsylvania for increasing prices of hand sanitizer tenfold in the early part of the COVID-19 pandemic when such products were considered essential. One of the only defenses for significantly increasing prices in this scenario is if the seller can prove that the increased price directly relates to increases in the costs of product labor and/or product materials.

Despite shrinkflation being legal, some consumers find it a deceptive marketing tactic and feel taken advantage of by the companies and organizations doing it. Therefore, it raises a question: What are the ethics of shrinkflation?

Regarding ethics, shrinkflation brings to light two competing theories:

1. SHAREHOLDER THEORY

This theory matches teleological ethics or consequentialism, meaning, do the outcomes justify the means? Some companies are more than making up for their increased costs by increasing prices opportunistically, a concept some are terming “greedflation.” Greedflation examples cited early during the COVID-19 pandemic included increased webcam and ventilator prices. The defense for raising prices was protection of employees and shareholders by maintaining and, in several instances, growing profits. If consumers are content paying the same or slightly higher prices for less versus paying much higher for the same, then consequentialism says it is OK.

• Advocates of this theory say: The most overall good outcome is prioritized, and the philosophy can easily be applied to edge cases. Example: Lying may be wrong, but lying to save someone’s life would be justified under consequentialism.
• Opponents of this theory say: It is difficult to apply due to the research needed to ensure individuals know the consequences of the actions taken before making the choice that maximizes the most good. Additionally, people will lose trust in individual decision-makers and institutions who prioritize the outcome over the ways to get there. Example: A patient awaiting an organ transplant pays the hospital money to receive the next organ. While the most good may be done by saving the paying patient and receiving money for more research, the people on the waiting list ahead of the paying patient may die.

2. STAKEHOLDER THEORY

Tied to deontology or duty-based ethics, this theory focuses on the right versus the wrong of the actions instead of the outcomes.

• Advocates of this theory say: The value of the human being is prioritized, and humans are treated with equal respect; this philosophy also reviews intentions and motives—if intentions are bad, then the action should not take place. Example: In an organ transplant situation, hospitals would prioritize an organ transplant based on who needed it most versus who has the most money to pay for it.
• Opponents of this theory say: This philosophy does not focus on results, which could lead to less overall happiness; it is a philosophy of absolute right or wrong, which does not leave much room for edge cases. Example: Lying under any circumstance would be wrong, even if it could save someone’s life.

Despite the different theories of ethics, research suggests that keeping ethics at the forefront of business decisions is worth it. The London-based Institute of Business Ethics reports in “Does Business Ethics Pay?” that companies with codes of ethics produce higher than average profits than those without. Business leaders should consider short-term profit versus long-term profitability and reputation. Today’s consumers care about the companies and organizations they purchase from, and social media has further increased the accountability of brands and organizations.

While many accounting professionals may not provide tangible goods to their clients, the costs of providing services have changed over the years. Therefore, although shrinkflation generally applies to goods, the concept for services is similar and ethical considerations do apply. Ethically speaking, it seems reasonable to raise prices for services when you are adding value and can articulate that value to your clients.

Shrinkflation has become a common topic of conversation largely due to media coverage, and apps and websites designed to help consumers track shrinkflation will continue to build greater awareness and concern over pricing practices.

Whether you work with products, services, or both, consider the ethics of proposed price increases and be ready to discuss them within your organization and with those that will be impacted. Approached ethically, you should be able to avoid having shrinkflation shrink your client base.

Related Content:

• The Ethics of ESG Investing: As ESG investing grows in popularity, those looking to invest in purpose-driven organizations should think through the ethical considerations.
• Is Short Selling Ethical? The GameStop short squeeze put short selling stocks back in the headlines, raising questions about the morality of the strategy.
• The Ethics of Remote Work: Changes to the ways we work necessitate a new ethical perspective.