Boko Haram and Niger Delta Militants’ destructive activities have indicated that businesses providing essential services to consumers need to lower their prices. Here are suggestions based on US recent natural disaster.
During a time of crisis, should merchants raise or maintain prices when demand increases for essential products such as water, gas, and bread? Now, due to the influence of social media, a new alternative is emerging: Why not lower prices during these critical times?
Economists usually lobby against implementing price-gouging laws that restrict large price increases during natural disasters. Instead, they advocate raising prices to bring demand in line with supply. By allowing the market to work, economists argue, products will remain available and sold only to those who value them the most. High prices also mitigate hoarding — customers buy only what they need instead of making “It’s cheap, so let’s buy a few extra” purchases. Just as important, a higher profit potential incentivizes companies to proactively procure additional supply to satisfy demand. The glaring downside is that this policy unfairly discriminates against lower-income people, who are less able to afford higher prices.
In contrast, many policy makers believe that prices should be maintained or raised only slightly (for example, by 10%) during disaster situations. They view this as an egalitarian, first-come-first-served method to allocate scarce goods. Drawbacks of restricting market prices include the inverse of the benefits above: quick sellouts, hoarding, and lowering the financial carrot to boost supply.
Lessons from US Companies
The recent hurricanes have highlighted a new trend in disaster pricing. Instead of raising prices, some companies are actually dropping prices on essential goods or services in high demand. Many managers realize that, while economists may believe it appropriate to jack up prices during a crisis, real-world customers view this practice negatively, seeing it as price gouging. As a result, long-term profits can be jeopardized if a company is viewed as taking advantage of a tragedy.
Instead of raising prices, JetBlue capped the price of its flights leaving Florida at $99 (between nonstop cities) and $159 (for connecting flights) and added seat capacity to help people who were escaping Hurricane Irma. These prices are far below what the market would dictate, and even less than the company’s typical “few days in advance” fares. AT&T, Sprint, T-Mobile, and Verizon all waived text, phone, and data overage fees in Florida due to Irma. Airbnb created a disaster response program in Texas to help provide free lodging to those who were displaced by the wreckage caused by Hurricane Harvey.
Social media is part of the reason why companies are changing how they set prices during natural disasters. Today, the ramifications from boosting prices during a crisis — which can happen in an automated way, thanks to algorithms — have escalated. Last week one Twitter user called out Delta Air Lines for boosting its one-way fare out of Miami during the evacuation, from $547 to more than $3,200. The tweet has since been retweeted over 39,000 times, liked by over 58,000 users, and picked up by the media. Conversely, doing the humanitarian thing in a crisis can reap many reputational rewards. Houston retailer Jim “Mattress Mack” McIngvale reaped Super-Bowl-ad-like publicity for opening his showrooms to house hurricane refugees.
Your pricing strategy, and how your prices affect customers during their times of need, are integral components of your company’s brand. Tough times present opportunities for companies to reinforce the message that they care for their customers. This involves maintaining, or even reducing, prices, as well as hustling to increase the supply of essential products to better serve customers. Which company would you prefer to deal with on an ongoing basis: one that appeared to financially capitalize on your misfortune or one that helped you? Reducing prices during a crisis is a low-cost tactic to strengthen ties with customers and signal to new customers what your company stands for. So, did JetBlue and other companies lower prices for altruistic or long-term profit reasons? It’s difficult to say. Regardless of the motive, in the end they helped people, which is surely a win-win.