The Dark Side of Pricing: What It Is and How to Avoid It

In this second episode of Pricefx's new podcast series, Pricing Matters, regular host and Pricefx chief evangelist, Gabriel Smith, speaks with pricing influencer, Dr. Ian Tidswell, about the dark side of pricing, unethical and illegal pricing practices, examples of how it can happen and guidelines on how to avoid it.

Transcript

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Gabe Smith:   0:00
Hello everyone and welcome to episode two of pricing matters. This is the second in a series of discussions we plan for 2020 around various topics that we think are under-discussed in pricing and how it’s changing with technology. This time, we’re going to focus on the dark side of pricing, unethical and illegal pricing practices, examples of how it can happen and guidelines on how to avoid it. I’m again joined by my regular guests, Dr. Ian Tidswell. Hi Ian.

Ian Tidswell:   1:06
Hey Gabe. Thanks for having me again. It’s great to be back. Another interesting topic that I think is really complementary to what we did last time. For those who maybe didn’t join us last time, we talked about mission-driven pricing. So, some of the considerations by organizations that are mission-driven or in all or in part. And despite some complications around identifying when a company actually is a mission-driven company, lots of companies like to say they are, when in fact, it’s just a marketing spiel. A few things seem to make sense. So one of them is mission-driven. Organizations don’t care as much about profits as profit-driven organizations. They’re basically willing to accept no profit or lower profits in order to fulfill their mission. And it’s not just the marketing fluff. A second thing that I guess I took out of this was, to make it work, it’s important to be very clear about what the mission is and have some metrics amount around it and then there’s going to be the tone needed to think about things a little differently because of that. The whole pricing infrastructure we have is around maximizing profit, and this is much more around maximizing something else, i.e., the mission.

Gabe Smith:   2:11
One thing that I also wanted to note for this one is we’re doing this simultaneously as a podcast and webcast. So we will be referring to some URLs and some screenshots throughout. We’ll do our best to explain them for those folks following on the podcast. But I did want to make it clear upfront that was going to be the case here.

Ian Tidswell:   2:29
And those links are available. It will be available in the meeting notes so you can get access to them. I certainly know it was interesting dredging through the web and finding stuff. And then obviously we’re not showing you this stuff – the dead ends. We’re showing you the interesting stuff.

Gabe Smith:   2:46
Yup. So for those following on the webcast and to describe for those on the podcast, we showed last time and we’re showing now the pricing and technology ethics continuum, right? And so this is just something we came up with to help us talk about the different areas of pricing and technology usage going from illegal and unethical to questionable and emerging to accepted then mainstream… and then mission-driven. So last time we really started off on the mission-driven end of the spectrum. And we talked a lot about that. We’re not going to really cover that again here. But, just to recap, mission-driven organizations are trying to do some good, many companies are not very mission-driven, right? They may have a mission, but they’re not, the way that we’re defining mission-driven, they wouldn’t really fit that mold of giving some or all of their profit away in order to further their mission. Most companies are focused on profit generation and profit maximization for their shareholders. And the difference with some mission-driven or sustainable companies is a focus on a broader set of stakeholders and a mission that’s beyond that. But when you’re more focused on profit, you can tend to try out things that may be in this questionable or emerging area – or even some companies are going into the unethical and illegal. And that’s what we wanted to talk about today.

Ian Tidswell:   4:04
And I think we’re going to start off with trying to figure out what is unethical pricing. I think what is illegal is not always clear and what is ethical is also not clear. But I think we’ll, hopefully, we’ll shed a little light on that. Right. To my mind, ethical pricing is about, I mean you, to use the technical term, is about not being a jerk.You could use the golden rule, right? Like that’s one of the things that I always feel, like, if I could teach my kids just that one thing, right? If they can be confident and they understand the golden rule, then I’ve done a good job as a parent and it’s kind of the same in business.

Ian Tidswell:   4:38
Will I be perceived as a jerk if I do this, right? That’s the key to avoiding unethical pricing or only doing ethical pricing is to think about the potential negative aspects of what you’re doing or the impact of what you’re doing. And what part of the challenge is, what’s something that might make sense in a broader spectrum, maybe doesn’t make sense when it’s to one set of society.

Gabe Smith:   0:00
Total winners and losers. And the winners and losers debate, you have to think about, you’re not only for the good of society as a whole, if it really takes advantage or it’s at the expense of a lesser–advantaged group or any group really. And it really hits them and they don’t have a viable alternative, then that’s where you get into trouble. Right?

Ian Tidswell:   0:00
Yup. I totally agree.

Gabe Smith:   0:00
So, I think in this one, what we want to do is have a little bit of structure around how we talk about unethical pricing and really identify some of the boundaries and the different types of unethical and illegal pricing. I think we wanted to kind of walk through it in a more structured format than we did last time. So, does that make sense to you?

:   0:00


Ian Tidswell:   5:45
It does. So, as we were preparing for this, I think there are basically five different types of unethical pricing. And we’ll go through these, so I’ll just list them off and then we can start with the first one. So the first one is price-fixing and then there’s anti-competitive pricing, monopoly pricing, price discrimination, and pricing disinformation or price disinformation. So we’ll go through those in order. The first one, price-fixing. I think this in many ways, or at least half of this is the clearest case. The easiest to understand. This is when two or more companies who are normally competing for the same business, get together and agree on prices. Examples have covered vitamins, sorbates, citric acid, memory chips. Companies do this because you can make a ton of money. By doing this, you can really, really capture huge amounts of extra profit surplus this way.The flip side is they always seem to get caught and then the fines are even bigger. The fines are just enormous around this stuff. So, for those on the webcast, there’s a page up now from DRAM prices that was just a couple of years ago. These three leading producers have 98% of the market. It says here. So the three of them get together and because of that, they were able to make huge amounts of profit and they got huge fines thrown at them. And I think what’s clear is, this really is a problem in commodity markets. That’s when the most incentive to do it because you’ve got no price control. And you can get away with it because you really can’t get away with it. But it’s most clear because it’s a very apples to apples comparison.

Gabe Smith:   7:28
It’s not hard to see how that’s unethical. It’s basically doing an end around the free market. However, there are examples where the government does it like OPEC, where it’s legal and they have formed cartels and done the same exact thing, although, OPEC is struggling a bit of late. And that’s probably an interesting example here, right? So we’ve got this where they made some missteps here, but overall OPEC took control of oil pricing in the 70s. Um, But now actually with the reemergence of the US as one of the top oil producers. It’s introduced some of these market dynamics and they’re kind of struggling to deal with that. Because what can happen is as they increase prices, then the US or other top producers that are outside of OPEC can actually increase production, which can weaken their hold. So it’s basically an example where you can see an outside market influence on a cartel that’s trying to act as a monopoly and, therefore losing control of pricing and losing some of that pricing power. It’s legal when governments do it, it’s illegal when companies do it behind closed doors. It is legal to signal pricing, right? So, as a market leader, you can say, “Hey, I’m going to increase pricing by 5% next year.” And then kind of see what happens with the competition. It’s not okay to get in a room and decide, okay, we’re all gonna raise prices by 5% next year. Right?

Ian Tidswell:   8:49
That’s right. So, people think it’s strange when airlines all have exactly the same prices and one announces a fair increase. And then the other ones see it and they follow – that hasn’t been deemed illegal. And I guess I don’t think of it as that unethical, right? Because it’s such a commodity market. If you don’t stick to the same price as everybody else, you lose all your business.

Gabe Smith:   9:08
Right. And there’s no way to control that because it’s all transparent. You can go on any website and see it. So any travel website.

Ian Tidswell:   9:14
And I think that one’s pretty clear, unethical, illegal, done. What is more unclear is this notion of vertical price-fixing. So we were just talking about horizontal price-fixing. This is on the web, the Encyclopedia Britannica has a nice page on this. So, vertical price-fixing, this is when basically a supplier requires their channel partners to fix the price and only sell at one price. You can see how the suppliers would want this. I think it’s trickier for the authorities to prosecute. But, yes, it could definitely be a way to control pricing.

Gabe Smith:   9:49
Right. And it’s obvious why companies do this because to make more money. And governments tried to stop it because it hinders competition and harms consumers, which is generally where they start to step in.

Ian Tidswell:   9:59
Right. And a lot of the time I think it’s funny actually in a way because we try to help our clients manage their channel conflicts. I do some of the time, by making sure that price differences between channels make sense.

Gabe Smith:   10:13
Yeah. And we do too. I mean on the kind of technology side, to make sure that you have an omnichannel pricing structure that’s unified and that it does make sense, and it’s rational so you don’t get a call. I was doing a pricing project one time for a technology company that will remain nameless, but their CEO and founder of this company got a call from their largest client saying, “Hey, I just saw the price of a product that’s lower than our contracted price and we’re supposed to be the lowest–priced customer. What’s going on?” And that actually is what kicked off the entire project to get a better hold on all these different groups because they had different groups that were controlling the digital commerce side versus the contract side, and they weren’t referring to each other and they didn’t have a technology platform that could rationalize that.

Ian Tidswell:   10:58
Yeah. My very first project in the pricing technology space was for a company that had realized they needed to do something because they were being sued by their suppliers about price discrimination, which is coming a bit later in the talk, but basically, they didn’t have control over it. So, this is a case where you can break the law by accident if you just don’t have a very well-controlled process.

Gabe Smith:   11:19
I also was involved in a pricing project where they dealt a lot with government entities and they had specific contractual obligations around pricing and monitoring pricing that they weren’t able to meet and got themselves into trouble. And that kicked off the whole project as well. So, let’s get back to this idea of vertical price-fixing. Short of requiring a price, suppliers can influence channel partners, right? So you can’t, as a manufacturer or supplier, say you have to charge this price, but there are mechanisms that these suppliers use in order to control the pricing. There’s this idea of minimum advertised pricing and Apple and Bose, and some other companies that have really strong brands have gotten pretty good at this, and the way that they do it is their minimum advertised price. It’s not that much higher than what they’re actually selling it to the retailer for or to the distributor for, right, to the channel partner. And then what happens then is they have some incentives on the back end that say if you meet these incentives, then we’re going to give you some off invoice or rebates type of incentives as long as you play by our rules And you gotta be really careful about this, and it varies by geographic region, as does almost all of this stuff, and country and even states in the US sometimes have different laws about this, but and especially in a digital commerce environment, the idea of a minimum advertised price is usually what it’s selling at, anyway. When you’re talking about a brick and mortar store, you can say you can’t advertise in a circular or in a TV ad, or whatever, lower than this price. But you can sell it for whatever you want. But when you’re in a digital commerce setting, generally, those are going to be the same thing, right? It’s not like you’re advertising one price, then you’d go to the site and it’s another price – that wouldn’t make much sense. So, it’s starting to change a little bit. And I think the need for these omnichannel pricing strategies and tactics and tools are increasing as the nature of commerce changes and shifts more towards digital.

:   11:37


Ian Tidswell:   13:14
No, I totally agree. Especially with vertical price-fixing. I think there’s a huge amount of gray zone with this stuff. And what’s allowed and what’s not, as you said, varies by jurisdiction. So a lot of care is needed. And, maybe we should point out that neither of us is lawyers. So don’t rely on anything we say.

Gabe Smith:   13:34
A good idea in general or just on this topic, would you say?

Ian Tidswell:   13:38
Oh, I’ll leave that up to the audience to figure out that.

Gabe Smith:   13:42
Good point. We’re just talking here. We’re just talking about our opinions on our own. Right. Like you said, even if we were lawyers, our knowledge would only be specific to whatever region that we have passed the bar in and we know the laws around it. And the US there’s the Robinson–Patman act and the Sherman act that are kind of the bedrock for a lot of these concepts. But there are different laws in Europe. There are different laws by country. They have some very specific laws in France, for example, and other parts of the world.

Ian Tidswell:   14:13
Okay, we’ll cover one of those in a little bit.

Gabe Smith:   14:15
So, the second area that we talked about beyond the price-fixing one is around anti-competitive pricing. So that’s really where you’ve got the company that’s kind of limiting your choice. And so they’re designing, they’re strategically limiting the buyer’s choices. Oftentimes, it’s with lower prices so they can kind of make and establish themselves as the clear market leader and get people used to buying things and then change the market dynamics in some way. So there’s this example where a Norwegian air shuttle started flying from London to Oakland, right? And they undercut the British airways prices.

Ian Tidswell:   14:54
They undercut San Francisco and opened in Oakland.

Gabe Smith:   14:57
But Oakland in San Francisco for those that don’t live in the Bay area are 15, 20 minutes apart from each other. So really it’s pretty much the same route.

Ian Tidswell:   15:07
I agree, at 3 in the morning. They are. Yeah.

Gabe Smith:   15:09
Well, that’s true. But it depends on where you’re going. Not everyone’s going to San Francisco. So depending on where you’re going in the Bay area, it’s a viable alternative. Right? Let’s put it that way – to use our previous terminology.

Ian Tidswell:   15:22
British Airways announced they were going to fly the same route, even before Norwegian started, and they matched them on fairs. And they have some pretty crazy fairs here. Right. A thousand pounds for a business class seat. The San Francisco one, that is insane. All right. That one is insanely great. So clearly, they were trying to make the route, I mean, British Airways wasn’t making the money any money on that. They were trying to make it uneconomic for Norwegian. Really clear.

Gabe Smith:   0:00
Yeah. And then once Norwegian then said, “Okay, well then if we can’t make any money in this, we’re not going to do it.” Then what happened?

Ian Tidswell:   0:00
Then BA pulled out. So now Oakland has no service. What’s interesting here is you get this short–term win for the consumer, but it’s an ephemeral thing because they basically just tried to do it to drive them out of the market. So the whole area of predatory pricing is clearly, there’s an illegal core to this thing, but the range that is unethical is bigger than the range that it is legal. So, my main advice would be don’t be a jerk and don’t be a bully, cause perhaps there’s a lot of money at stake, then people who willfully ignore that. Another area where you can have anti-competitive behavior, and this one was a surprise to me when I first came across it a few years ago, is with rebates.

Ian Tidswell:   0:00
So, if you’re the dominant player in a market, you have the potential to use rebates to lock in customers. So one way to do this is you’ve got a monopoly product, you’ve got a product that’s really desired, and when you bundle it in with something else, which is much more competitive, right. And basically say you have to buy the second product if you’re going to buy this first one. A second one might be where a large player has a large rebate that can have the effect of locking in the volume. So if you buy a hundred pencils, if you get a great price on buying 90 and the last 10 of free because they’re included in the rebate, you basically locked out the last guy from selling, he’s lost 10 pencils. 

:   16:38


Gabe Smith:   17:26
But obviously, rebates are generally a best practice in pricing because it allows you to pay for performance and it allows you to make sure that companies aren’t taking advantage of the suppliers and saying and committing to these high volumes and getting better contractual pricing on-invoice and then not fulfilling their commitment. So it’s, yeah, so it’s a balancing act.

Ian Tidswell:   17:51
And I think the moral is: the more dominant you are. Dominant is a legal term that needs to be described because lawyers will spend lots of time arguing about how big the market is. Now you are dominant in it. And then the second red flag is if you have rebates that have big step thresholds. So if you have a rebate that is relatively small and progresses slowly, then you are generally okay. If you have big steps, sell-by 70% of your target and we’ll give you a 30% rebate, that’s the stuff where it’s starting to become a bigger risk of being considered illegal.

Gabe Smith:   18:27
It’s also how you structure rebates. So when I was at Cisco, we had a series of rebate programs for different incentive programs. And one of them was called the value incentive program. And the point of it was to encourage companies to invest in certain advanced technologies that we were bringing to market – emerging technologies, especially. And so by investing in getting people trained and certified and specialized in these areas, they would get additional off-invoice rebates, incentives. And so what would happen though is it was supposed to be designed in a way that those incentives were not going to impact the street price of our products. But so it was creating a bit of an anticompetitive environment to a degree because what we heard from our smaller resellers was, “Hey, they are actually using these incentives because their prices that they’re offering have to account for the fact that they’re going to get this incentive even if it’s not tied to this sale.” So you have to really think through the entire process here in the go-to-market. And the implications of some of these decisions on how your channel partners are competing and how your customers are benefiting or not.

Ian Tidswell:   19:35
And you need to talk to the lawyers. For those on the podcast, there is a judgment recently that said doing some things that maybe sounded like they were illegal, but that in Europe, they’re not illegal because they didn’t have the detrimental effect that would have said they were detrimental to competition. So, you know, good luck with that one. Right? It’s very complicated.

Gabe Smith:   19:57
So, let’s move on to the third area, and that’s around monopoly pricing. And obviously, this is a big one that’s wide open for jerkiness or bullying. Basically, anytime a company has in effect a monopoly, we kind of alluded to this when we were talking about the cartel and acting as a monopoly, but obviously, at any time you control a majority of the market, you have a lot of pricing power. Now, value pricing tells us as pricing professionals that we want to take advantage of pricing power where we have it. But obviously, you need to understand where that line is going into unethical and illegal behavior.

Ian Tidswell:   20:35
Yeah. And this touches on a topic we talked about last time, which is, I think, does the buyer have a reasonable alternative? They can choose. We might complain about the price of the latest iPhone. Apple has a monopoly on iPhones, but it was hard to argue that anyone needs the latest iPhone.

Gabe Smith:   20:50
There are viable alternatives out there with tons of different Android phones at lower price points that are just as capable. Now, there is the argument – that ecosystem lock – is kind of the argument, but that’s open for debate.

Ian Tidswell:   21:04
And I’d argue that’s we’re in a different space of anti-competitive behavior than pricing.

Gabe Smith:   21:10
Definitely, when we get into the medicine and we get into that area, that’s where things can get different. Right? And that’s where you can really see this more starkly in a lot of cases. So, let’s get into some of those examples. I know you have a background in this industry. So yeah, this is an interesting article. Basically, there was a 97,000% increase in the pricing of this AP Acthar gel, which is used to treat multiple sclerosis and arthritis. So this was a product that was Questor pharmaceuticals at the time, which was later bought by Mallinckrodt. And, basically, what happened here is they took the pricing from $40 a vial to almost $39,000 a vial in less than two decades. And not only that, which, obviously set off some alarm bells, but whistleblowers actually came forward and showed evidence of bribes and kickbacks to doctors to prescribe the medicine as the cost skyrocketed. This case was settled at the end of last year. They did agree to pay fines of over 15 million. But, well, I thought it was interesting that the whistleblowers actually received about a fifth of that. So they received about 3 million for bringing it to light. What do you think about that?

Ian Tidswell:   22:15
I think you need to do something to make these things come forward, right. We can get into an indictment of the legal system, but let’s not go there. But yeah, there needs to be some kind of incentive. But having said that, of course, I think a $15 million fine is kind of peanuts in this case.

Gabe Smith:   22:30
Yeah, you’re right. I mean, if you look at what the numbers are here, 15 million, about 400 vials at $39,000 a vial, and they’re bringing in over a billion dollars a year on the Acthar gel. So that’s one point. 5% of annual sales is hardly much of a penalty. It’s a bit of a slap on the wrist really.

Ian Tidswell:   22:48
It seems like, although it is interesting, maybe there’s karma in effect here. I don’t know if its pricing thing, but Mallinckrodt, the company that now owns that drug, is caught up in the opioids scandal. So they’re a stock price. They’ve got all sorts of lawsuits against them. So maybe that’s a case where the karma got them, I don’t think it’s pricing that got them at the end of the day.

Gabe Smith:   23:14
That’s right. But just bad business practices, unethical behavior in general.

Ian Tidswell:   23:18
This is part of the challenge with the medical market altogether, there is just so much money sloshing around and there’s a lot of people are attracted to that, and they’re some incentives and bad things.

Gabe Smith:   23:29
That’s maybe a topic for a larger discussion, but there certainly are perverse incentives in a lot of different areas of the life sciences and pharma, and medicine in general. And it’s challenging because it directly pits, a lot of times, the common good of the people versus the profits of corporations. And so it’s a very stark contrast when you start talking about these areas.

Ian Tidswell:   23:57
Yeah. I mean, more generally, I think this is also a case where there are big differences in the rules between different jurisdictions. So the EU is very aggressive on anti-competitive practices, not just pricing. Fines can go up to 10% of global revenues. So it’s none of this 15 million on a billion type stuff. Those on the webcast, again, Google was fined 5 billion into 2018 and 2.7 in 2017. And Intel 1.5 in 2009 and Qualcomm 1.2 in 2018. So, the EU really takes a dim view of anti-competitive practices of all kinds.

Gabe Smith:   24:37
And probably the most aggressive about both the definition of anti-competitive as well as the penalties, I’d say.

Ian Tidswell:   24:43
And I think the Wikipedia page on this is really super interesting. Again, you can see that in the notes and these fines are enormous.

Gabe Smith:   24:52
So, they’re certainly more lax about this in the US, a bit more laissez-faire, if you pardon the use of a French term in discussing US regulation. We are even seeing some governments and even local governments start to act in some cases. And this insulin pricing one is, I think, an interesting case, a lot of the rationale behind the pricing of US pharmaceuticals, which are generally much higher than other places in the world, ha to do with innovation. And there’s a good reason for that and that’s its whole own topic, right? We can get into a bit of it here, but probably not cover it effectively, but insulin, it seems like they’re being maybe a bit abusive of the regulation and of those definitions here. Just to give a little bit of history around this topic, right. Insulin was discovered in 1923 by this guy named Frederick Banting. He actually didn’t put his name on the patent. He had ethical issues with profiting from a drug that would save lives. So he actually sold the patent to the University of Toronto for a dollar, which is 72, sold to Cannaught Labs. They sold that lab to the candidate development corporation, which then sold it to a company called Sanofi, which is a pharmaceutical company. Insulin is generally a biological product, so getting a biosimilar to the market is almost as costly as a new drug, but it’s murkier about the patent infringement and the laws there. But basically, what’s happened over the last 90 years or so is that three companies really have become the leaders here controlling over 90% of the market. And they have a lot of pricing power as a result. And they haven’t been afraid to use it.

Ian Tidswell:   26:30
No, they haven’t. Right. And so they haven’t just been abusing the fact that they have an oligopoly, a triopoly, they have been innovating – they have slower and faster versions. They’re doing things on the production as well. So they’ve been a boon. I think some of these innovations have been a real boon for type one diabetes patients and it’s really helped them, but they’ve also increased the prices on the basic version. And that’s used by people with type–two diabetes, which is a growing group. It tends to put the lie on the story that they would have you believe that it’s all about innovation. Some of it is very clear. A lot of it is about using their monopoly power.

Gabe Smith:   27:09
Yeah. Especially in the way that they incentivize it and kind of encourage the doctors to always be prescribing the latest version when the older version would have worked just fine. That would’ve been a lot cheaper for people. And it’s getting to the point now that those people really can’t afford insulin in some cases, which is keeping them alive. And so it’s starting to get to the point where like we said that some of the local governments are starting to act. Colorado recently put a cap on insulin pricing. And the attorney general of Kentucky sued some of these companies. People are taking note and people are acting. It would be nice if there was more done at the federal level on this stuff. I would say.

Ian Tidswell:   27:46
Yeah. And, and I don’t want to be the smug European, but this is kind of oligopoly can exploit the mess that is the US healthcare system. The regulators are trying these bandaids like price controls that squeeze the bubble in one place. But oftentimes, that just means it pops out in another. And then now, all the market participants are pointing fingers at each other while walking away to the bank and being quite happy about it when the fundamental problem is a broken market – with consumers who have no reasonable next best alternative. So it can be an unholy mess. More often than not, the fix is just to move the pain around. So in the cases in Colorado and Kentucky, it sounds like what will happen is the costs will pass onto the insurance companies. So it will increase everyone’s cost to decrease the patient’s costs. And then it’s sort of leading into our next topic, I think. But you get the case where you have prices of drugs that are the same drug, but it’s different depending on the indication. It’s useful.

Gabe Smith:   28:38
This is an interesting one because as pricing professionals, we always talk about segmentation, right? And there are indeed some differences in the actual amount of the drug that is administered on a daily basis by these patches, right? Or the implants. And so, I think that’s the rationale that’s being used, but it’s such a huge difference in the pricing – eight times more. And what doctors are saying is: the difference in the amount that’s actually administered is not really that much of a factor. Then you get the insurance companies that are refusing to pay for the cheaper version for a child because that’s not what they’ve approved. So it really feels quite manipulative.

:   28:39


Ian Tidswell:   29:23
Yeah, that’s right. I mean, there are so many examples in the medical market just because it’s difficult to manage a market with pricing and those, whenever you have a monopoly, and there’s no viable next best alternative, which is the case for innovative drugs. And in addition, you’ve got the complexity of the buying process where you need experts, right? You and I go in and we need our doctors to help us and then the doctors have a set of incentives and the insurance companies have a set of incentives and the hospitals have a set of incentives, the drug companies have a set of incentives – it creates a mess.

Gabe Smith:   29:55
And so where you have competing incentives and you have, as I called them before, some perverse incentives that are out there where things aren’t aligned. That’s where I think this needs to be addressed through legislation and the alignment of those incentives and or the alignment of those incentives so it can be done like companies like I think Kaiser Permanente, for example, does a good job at aligning with,on the insurance side, the doctors and actually putting forward patient health as a KPI, right. There are, as you mentioned, so many parties involved that these have different competing incentives. And, unfortunately, a lot of times, the people that have the least voice or are the actual patients that need this stuff. In this case we’re talking about, it’s a hormone blocker, so it’s not life or death. And so probably there’s not going to be as much of public outrage as there is over something like an EpiPen or the insulin. But it is at the same time, a good example where there’s obviously competing incentives and there’s some rationale that’s being used, that probably isn’t really aligned with the public good.

Ian Tidswell:   30:56
So, let’s, let’s move away from healthcare. I mean, I do think this is a topic to come back to, and so the next one on our list of the ethical challenges of pricing was price discrimination, which we sort of just touched on, right? This is selling a product or service to different people at different prices.

Gabe Smith:   0:00
Yeah, it’s a very interesting topic and as, as we mentioned, it very much touches on value pricing. And you could even say one person’s price discrimination would be another person’s value pricing. Right. So, it almost depends on your perspective there, but, certainly, an interesting topic to explore.

Ian Tidswell:   0:00
No, that’s right. And, surprise, this is the thing with price discrimination. This is where it is technically illegal in Europe is price discrimination. Interestingly enough, although they recently said it’s not abusive per se. So you need to be careful. So, it’s tricky, right? So maybe an example of what is pricing discrimination. I think we’re all familiar with airline pricing where the person sat next to you may have paid half as much or twice as much as you did. And that’s legal because, in fact, the offer is a little different. If it’s really cheap, then you probably bought it well ahead or there was a sale on or you bought more restrictions or you didn’t get luggage or you didn’t get food or whatever it is. So, we’re all used to that and we all seem to accept that. That’s fine cause it’s sort of a different bundle. Right. But it is clearly price discrimination. It’s just ethical price discrimination because it’s based on value.

Gabe Smith:   33:09
Yeah. I mean obviously, there can be some grumbling, where you have alternatives and where it’s rational, right. And there is some additional value being provided. That’s where even though it can feel a bit predatory when they’re charging for certain things, and especially the amount I think that’s being charged as compared to the ticket is an important factor in this to consider here.

Ian Tidswell:   0:00
Well, they have an alternative.

Gabe Smith:   0:00
But if you have alternatives, it’s okay. When you don’t have alternatives, you start getting into price gouging and, for example, when there’s a hurricane in Florida or in New Orleans and you start to see some of the headlines that come out in the pricing practices that are coming out there, then the governments have a clear mandate to step in and fine these companies. I think you have some examples here that you’re going to discuss.

Ian Tidswell:   0:00
Delta Airlines’ algorithms are built so that when demand goes up, the fare goes up. And of course, a hurricane is a great way of increasing demand. So, then a lot of people got upset and now they caught this and they figured it out and then they basically said, “Okay fine, we’ll put a cap on it and we’ll fix it.” So that’s one example where I think it worked. I guess Uber and Lyft are close to your heart.

Gabe Smith:   33:32
Sure. Being from the Bay area but also traveling a lot and not being able to cycle all the time. Those are some good examples. So surge pricing on New Year’s Eve, I think people are generally accepting of that. There are generally alternatives there. You can take a taxi, you can take public transport in some cases, but when it’s an emergency, you let these algorithms, if they don’t have any of these kinds of common sense caps on them, they can really get pretty crazy. So in the fast-moving situations, it can get pretty crazy. There’s been plenty of examples where Uber’s charged ridiculous amounts of money. I had written one in the pricing horror stories article last year about where they charged, I think, around $14,000 for a fairly short ride, less than 10 miles I think. And at first, they refused to actually pay him back for it. But eventually, they did. So they’re kind of learning as they go, but you’ve got to keep things in a common-sense zone. The other thing that’s interesting with Uber and Lyft is that with this new gig economy law that they’ve passed in California, the way that they set pricing is making it a bit harder for them to argue that they’re not an employer because whereas originally it was more of a marketplace of supply and demand and then I’m just taking a percentage cut of it, now with the increased complexity of the way that they offer a ride shares and the different options, they’re not actually doing that all the time. So what they’re doing is dissociating the price that’s being paid from the consumer to the price that they’re paying the drivers. And by doing that, they’re acting as an employer right there. It’s a lot harder to argue that you’re just a marketplace that’s facilitating a transaction between two other parties when you’re doing that. So they’re now experimenting with some things like letting the driver set their pricing as a way of trying to counteract some of those arguments. We’ll see where that goes, but that’s all-new stuff as of the beginning of this year. That’s just starting to play out, really.

Ian Tidswell:   35:29
One thing that I’m struck by is there are a set of economists who basically say that price gouging isn’t a thing because you’re basically letting the market work. This particular website up here basically says, “Don’t worry about price gouging because it’s just the market working.” You know, I think that’s fine in a steady-state situation. I think when you have a shock to the system and there’s no time for the market to work, i.e., our hurricane rattles through, then why should the person who just happens to luckily have the resources in big demand get to make wild profits out of it, when in fact, the market isn’t going to respond because you can’t.

Gabe Smith:   36:10
And there’s a number of things to consider in that, right?

Ian Tidswell:   36:17
Well, you’ve got to have a bit of humanity in this, right? So, so yes, the market might work well, but then anyone who can’t afford water doesn’t get any water.

Gabe Smith:   36:24
So, they would make the case that having a hundred-dollar case of water is better than not having water there on the shelves when you need it. But if you don’t have $100 for a case of water, because you don’t make enough money to even have $100, then what are you going to do? And that’s where you don’t have a viable alternative and that’s where it becomes a problem. And so, that’s kind of coming back to what we were talking about before, around both viable alternatives. And taking advantage of certain groups of people. I don’t think you can use market economics as an excuse for doing people harm in order to profit, especially when you’re talking about necessities like food and water, right?

Ian Tidswell:   37:05
You’re getting into the fact that certain people’s lives are worth more than others. If you take that to its logical extreme.

Gabe Smith:   37:11
Value pricing is okay if the market’s functioning and you’re not in an emergency situation and you have alternatives, but if there’s no choice, that’s where you start getting into these problems that we’re just talking about.

Ian Tidswell:   37:22
There’s clearly an area of price discrimination where it’s unethical and illegal, and if you’re talking about racial discrimination or economic discrimination and insurance redlining, those are really clear. I do think though that different jurisdictions have different thresholds on this. So, the US is very sensitive about age discrimination. Europe doesn’t really care.

Gabe Smith:   37:44
I think the last area of unethical pricing was disinformation. So, what are your thoughts on that?

Ian Tidswell:   37:51
Well, I think there’s a real spectrum here of jerkiness – our word of the day. One end is out and out lying and not informing about required fees down to just annoying things like a bit of a bait and switch. So maybe showing a lower price but then that model is not available or really doesn’t work. So you get different practices here.

Gabe Smith:   38:12
Yeah. And some areas are particularly prone to this and attract regulators. So credit card fees are one that you’ve heard a lot about. And legislators stepped in and started to do something about the hotel resort fees. For those following on the webcast, we have this story about hotel amenity fees. And this is really one that’s pretty near and dear to me since I do travel quite a lot. I probably stay in a couple of hundred hotel nights a year. But you see this happening. So if you go to hotels.com, for example, and you do a search, when you apply the search criteria and you look at the list of results, then it presents one perspective. And it actually doesn’t include these resort fees. And then when you go to purchase it, then it adds these in. And you have this example up here for the Bellagio in Las Vegas, sorry, Bellagio to call you out like this.

Ian Tidswell:   39:03
In this case, when you search the price, it shows up as 609, and then they stick a hundred bucks of resort fees. And then, of course, one thing that you Americans like to do is have taxes be separate. And then it has the famous word “fees”, which is always an interesting one as well. What are those? In fact, the price of this hotel is 30% higher than the headline number that they stick on the page before.

:   39:22


Gabe Smith:   39:30
Yeah. There’s differences in what can be done and the way that things are presented between the US and in Europe, right?

Ian Tidswell:   39:37
Yeah. And it’s somewhat mitigated cause everyone knows in the US the tax is not included. So you add it on top, but it’s clearly aware of using a lower number.

Gabe Smith:   39:44
And even the FTC, the federal trade commission, has said that they harm consumers. So hopefully, they’re going to step in.

Ian Tidswell:   39:50
Well, we’ll see. Right. I mean, to me, it may not be illegal, but it’s unethical, especially this result type stuff on bundling feeds when they can’t be avoided. How is that in anyone’s interest? And as you know, taxes in Europe, VAT is included in the price since you can’t avoid it, you have to pay it. So I’m not going die on my sword on this stuff, but to me, this is a case where it would make more sense if fees that are really required are included and that will include sales tax.

Gabe Smith:   40:25
What about tips?

Ian Tidswell:   40:28
Well, that’s another one, right? Tips in the US, what’s the expected number? Like 20%?

Gabe Smith:   40:34
Well, 15 to 20.

Ian Tidswell:   40:37
I mean, in Europe, in Switzerland, you don’t need to yip much at all and 10% or over 10.

Gabe Smith:   40:48
For us, it’s not really an issue because everyone knows about it. And you just expect it. But yeah, when you come from another place that you’re not expecting it, then it can really take you by surprise, and maybe cause you to make some decisions you wouldn’t have otherwise. And I think that’s when it becomes a bit unethical. When you add all this stuff up. Like you said, it can be, 30 plus percent in San Francisco. Not only do they have tax and then the tip, then they have this health mandate thing. That’s another 5%. So it’s adding up to almost 30 plus percent, a third of the bill almost. And so then you see some practices like in places where they have a lot of foreign tourists, like in Miami, that gets a ton of European tourists where they actually just present the price on the menu that says $10 for this. And then they not only put the tax onto it afterward, which we’ve been talking about, but they put the tip onto it and they present it when they give you the bill. It actually includes both the tax and the tip. But on the menu, it didn’t include either of those things. So I can see how if you weren’t expecting this, it would certainly come as quite a surprise. They’re doing it because if they don’t do that, then the people don’t tip. And unfortunately what happens is the people working at the restaurant depend on those tips because the restaurants are allowed to pay them below minimum wage. So they really rely on that. So I agree there should be more transparency around it and that people should be more upfront. And if you can’t, as you said, fees, fine if it adds some value and if you have a choice of paying it or not, depending on that. That’s the one thing they do in Europe actually in Italy, right? They famously put the water bottle and put the bread on the table in Italy and Portugal and things like that. And that’s one thing that American tourists sometimes think, “Oh, it’s included.” And afterward, you get, you know, “here’s the $3 for your water and here’s the $2 for your bread.” And that takes us by surprise a little bit. So yeah.

Ian Tidswell:   42:46
Well, it’s normally a few Euro, but yes, it’s moving in the same direction. Sometimes it can get really silly. For those on the web, and I think this is our last one, but one of my favorite pricing comedy songs, if you will, who knew you had one of those, Fascinating Aida, it’s called ‘Flights for 50p’. And the idea is that they’re flying to Ireland, and it’s clearly on Ryanair. Then the fees just keep coming and coming and coming and they basically hate the experience by the end of it. There is a downside to your brand if your customers feel like they’re being nickeled and dimed all the time.

Gabe Smith:   43:28
Yeah, that’s a funny one. Yeah. You sent me that before and I chuckled about it and it’d be cool to do something about pricing humor if we could cover enough interesting things. That might be an interesting episode.

Ian Tidswell:   43:43
And if we’re funny enough, I’m not sure we can debate that topic. Yeah.

Gabe Smith:   43:48
All right, well, it’s probably about time to wrap up. I mean, I hope for the folks that are listening, this has been useful for people that wanted to learn more about pricing, and particularly what not to do. We tried to present the different topics that you would need in order to avoid the continuum as we’re showing here, but also the different areas that are clearly illegal and unethical. So, I’d like to thank you Ian for joining me again and I don’t know if there’s anything you’d like to say in conclusion here.

Ian Tidswell:   44:14
Well, just the one thing that I take took away from exploring the dark side is this realization that as we get more sophisticated about how we think about pricing, the more we need to think about the implications that it can have. If you’ve got dynamic pricing and you’re doing lots of price segmentation of value pricing, it’s very easy to have some effects where you would basically be doing unethical pricing. I think ride share companies and airlines have some of the most sophisticated pricing and sometimes you get in a world of hurt because of it.

Gabe Smith:   44:40
Yeah. Because, especially when you start using AI and algorithms to price, if you’re letting those operate without a lot of oversight and they’re unconstrained – they can start making bad decisions. And it’s only after the fact that you say, “Oh, well that didn’t make any sense but I didn’t know that I had to tell it to stay within the zone or it didn’t know about the fact that there’s a hurricane going on. It just knew that all these people are trying to book flights out of Miami that day.” So there is an element of common sense. There’s a whole other topic around AI and how you have to be careful, especially when you’re doing segmentation and optimization around pricing, but also other areas where if you’re not careful, you can end up doing things like institutionalizing discrimination or racism that’s been practiced in the past because that’s what’s in the data. So it has that bias. And I’d like to explore that topic in more depth at some point. And anyway, so, I’ve enjoyed the time as always.

Ian Tidswell:   45:34
Great talking about this and thanks Gabe.

Gabe Smith:   45:36
All right. Thank you. Alright, me too. Cheers.

:   45:36


Ian Tidswell:   45:36
Bye.

:   45:40