Honesty and Pricing

June 2018

Hello Pricers,

Summer is just around the corner! While everyone else is thinking about surf, sun, and drinks with little umbrellas in them, wouldn't it be fun to dust off your corporate strategy and rethink the way you're approaching your business?


Well you should probably do it anyway.

Pricing Question from a Reader

My company is selling a product that has a defect known to us. Is it ethical to avoid revealing the problem to our customers?

The question you're asking is an important one and makes me wonder about a great many things - not the least of which is why you're asking an economist like me for ethical advice.

Nevertheless, what a company reveals about its offerings can have a tremendous effect upon its pricing power. For that reason, I'm happy to take a crack at your question.

Disclaimer: I am not a lawyer, nothing herein constitutes legal advice, and, as usual: please don't sue me. If your defect could result in legal action, I would strongly suggest that you consult with a lawyer immediately.

Issues of litigation aside, should one operate under the "caveat emptor" (let the buyer beware) methodology and just hope for the best? Or would it be prudent to be completely honest?

As always, it depends.

I've come up with six factors that you should probably consider when thinking about your product's defect. Other variables may come into play, depending upon the particulars of your unique situation, but this list should prove useful as a starting point for your deliberations.

  • Visibility

    You know the old riddle, right? If a tree falls in the forest, and no one is around to hear it, does it make a sound? The question is as relevant in the world of business as it is in philosophical texts. If a problem is permanently invisible from buyers and users, what's the point of bringing it up? Readers of my blog probably remember that my car received a few cosmetic scratches during my trip up north. If I were to sell my car, would I reveal the damage? Probably not. Not to toot my own horn, but my handiwork with the paint brush was truly a thing of beauty. I've asked many people to examine my car, and not a single one was able to spot the location of the damage.

  • Severity

    Not every defect is a serious one. For instance, my software for editing audio recordings crashed today. Although I was briefly annoyed, I didn't lose any of my work, and I was able to restart the system in just a few seconds. As a result, my feelings about the software remain largely unchanged. Some defects lead to much more serious consequences including lost fortunes and even death.

  • Value of a strong reputation

    Some companies rely on their reputations. Tiffany & Co., for instance, can charge a lot of money for its jewelry because of its sterling reputation. Other firms couldn't care less about their brands. In some marketplaces, buyers may not even remember who manufactured the products that they purchased. Don't believe me? Ask a random person for the name of the manufacturer of the light bulbs in his bedroom. My bet is that the average respondent wouldn't have a clue.

  • Clarity of responsibility

    Even when a problem is discovered, the final recipient of the blame can be hard to predict. In many cases, firms are able to credibly foist the fault for an issue upon its users, pointing to issues such as improper maintenance procedures, handling techniques, or usage patterns. You might think that premium brands would never resort to such behavior, but who can forget when Apple told customers that they were holding their iPhones incorrectly?

  • Industry and marketplace norms

    Different levels of honesty are expected in different marketplaces and industries. Buyers in some locations may be shocked by anything less than full and complete transparency. Others have come to expect sellers to stretch the truth a bit. It's all well and good to hold oneself to the highest ethical standards, but doing so may lead to a significant disadvantage in certain markets.

  • Abundance of adversaries

    Some people, firms, and industries have collected a wide range of foes. As a result, they often find themselves working under extreme levels of scrutiny with each and every decision analyzed and second-guessed. Between ambitious reporters, aggressive competitors, angry protesters, and others who simply have an ax to grind, some firms will find it too risky to hide even the most insignificant defect in their products.

It can be difficult to know exactly where to draw the line when it comes to honesty about defects, but hopefully this list will prove useful as you arrive at your final decision.

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"What you have become is the price you paid to get what you used to want." -- Mignon McLaughlin

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