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The relationship between pricing and ethics in

two industrial service industries


Kostis Indounas
Department of Marketing and Communication, Athens University of Economics and Business, Athens, Greece
Abstract
Purpose The purpose of this paper is to investigate the relationship between pricing and ethics in two industrial service contexts. In particular the
pricing practices that lead to non-ethical pricing behavior along with the factors that could reduce such a behavior are examined. Moreover, the extent
is addressed to which companies that do perceive that pricing decisions entail ethical considerations are differentiated from those companies that do
not hold such a perception in terms of the pricing objectives that they pursue in order to set their prices.
Design/methodology/approach In order to achieve the studys research objectives, data were collected from 177 companies, operating in the
transportation and information technology industries through a mail survey. Moreover, 20 in-depth personal interviews were conducted in the initial
phase of the research.
Findings The main pricing practices that were perceived as being non-ethical by respondents are related to determination of prices that lead to
excessive prots, take advantage of a customers needs and are below cost. Regarding the factors that could reduce such a behavior, the study
concluded that a corporate culture that facilitates a customer orientation towards pricing decisions, the markets own mechanisms and the agreements
between companies are more effective than governmental intervention. Furthermore, companies that do perceive that pricing decisions are related to
ethical considerations tend to follow a more balanced approach when setting prices by pursuing both customer- and competition-oriented pricing
objectives, without, however, overlooking nancial objectives.
Research limitations/implications The practical implications of the ndings refer to the fact that managers might have a lot to gain by avoiding
pricing practices that raise ethical considerations and endeavoring to understand the potential ethical implications of these practices. The signicance of
these ndings notwithstanding, the context of the study is the most important caveat since it limits the ability to generalize the results in other sectors
and countries.
Originality/value The contribution of the paper lies in the fact that it presents the rst attempt to empirically examine the relationship between
pricing and ethics in an industrial service context.
Keywords Ethics, Pricing, Industrial services
Paper type Research paper
An executive summary for managers and executive
readers can be found at the end of this article.
Introduction
According to Brassington and Pettitt (2003, p. 391):
Price not only directly generates revenues that allow organizations to create
and retain customers at a prot, but can also be used as a communicator, as
a bargaining tool and as a competitive weapon.
Similarly, Shipley and Jobber (2001, p. 301) have suggested:
Price management is a critical element in marketing and competitive strategy
and a key determinant of performance. Price is the measure by which
industrial and commercial customers judge the value of an offering, and it
strongly impacts brand selection among competing alternatives.
Furthermore, pricing is the most exible element of the
marketing mix in that pricing decisions can be implemented
relatively quickly (e.g. price changes) and at a low cost
(Lowengart and Mizrahi, 2000).
This signicance of pricing notwithstanding, efforts to
examine industrial pricing from an empirical perspective are
still lacking:
Statements about the importance of price and pricing decisions for
contemporary rms are accompanied by calls for additional research into
how industrial pricing decisions are made by rms (Tzokas et al., 2000a,
p. 192).
The lack of empirical research in the eld of industrial pricing
is even more evident in the case of industrial services. Thus,
while pricing of industrial physical products has received
some empirical attention among marketing academics (e.g.
Abratt and Pitt, 1985; Baltas and Freeman, 2001; Thach and
Axian, 1991; Smith et al., 1999; Tzokas et al., 2000a, b), less
emphasis has been given on how industrial services in
particular are priced. As Hoffman et al. (2002, p. 1015) have
argued:
Today, price remains one of the least researched and mastered areas of
marketing . . . Marketers have only recently begun to focus on effective
pricing . . . Although the need for effective pricing is frequently voiced at
conference sessions focusing on services marketing strategy, an overview of
specic topics of potential interest has yet to be developed.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0885-8624.htm
Journal of Business & Industrial Marketing
23/3 (2008) 161169
q Emerald Group Publishing Limited [ISSN 0885-8624]
[DOI 10.1108/08858620810858427]
Received: 26 February 2006
Revised: 28 June 2006
Accepted: 30 October 2006
161
However, the distinctive characteristics of services (i.e.
intangibility, heterogeneity, perishability, inseparability, the
critical role of employees in customer contact, the need for a
more extended marketing mix) necessitate a closer look at
how they are priced, if an adequate body of empirical based
theory is to be developed (Docters et al., 2004).
The present paper tries to contribute to this neglected eld
by examining the pricing behaviour of industrial service rms.
Moreover, an effort will be made to examine the ethical
consequences of this behaviour. According to Crane and
Matten (2004, p. 12):
Business ethics is currently a very important business topic and the debates
and dilemmas surrounding business ethics have tended to attract an
enormous amount of attention from various quarters . . . Consumers and
pressure groups appear to be increasingly demanding that rms should seek
out more ethical and ecologically sounder ways of doing business.
This emerging interest on ethical issues is also reected by the
empirical studies, which have been conducted by a number of
different academics and have focused on the ethicalness of
specic marketing practices such as gift giving (Fisher, 2005),
direct mail (Neese et al., 2005) and retailing (Nicholls and
Cullen, 2004). However, there seems to be a lack of relevant
studies regarding the ethical aspects of pricing decisions,
despite recent calls regarding the need to address in more
detail the relationship between pricing and ethics (Cox,
2001). Thus, issues such as the pricing practices that lead to
non-ethical behaviour and the potential factors that could
reduce or even eliminate such a behaviour remain under-
researched and have been examined from a normative
perspective within the existing literature on pricing.
The current research aims to shed some light on these
issues. Moreover, it investigates the differences between those
companies that believe that pricing decisions entail ethical
considerations and those companies that do not perceive such
considerations by focusing on the pricing objectives that they
set in order to set their prices. To the best of our knowledge,
there has been no previous attempt to empirically examine
this issue.
Thus, the objectives of the current study are the following:
.
To investigate the pricing practices that lead to non-ethical
behavior and the factors that could reduce such a
behavior.
.
To examine the differences between those industrial
service companies that do perceive that pricing decisions
entail ethical considerations and those ones that do not
hold such a perception in terms of the pricing objectives
that they formulate in order to levy their prices.
Figure 1 presents graphically the research constructs and their
relationships.
The rst part of the paper describes the relevant literature
on the ethical aspects of pricing decisions and the pricing
objectives pursued. The second part focuses on the
methodology used, while the last part analyzes the research
ndings along with the managerial implications, the
limitations and the directions for future research.
Literature review
Ethical aspects of pricing behavior
A review of the literature on the ethical aspects of pricing
behavior reveals the lack of any typology of pricing practices
that might be characterized as non-ethical. Thus, different
authors tend to refer to different such practices. For instance,
Cox (2001) examined the extent to which differentiated
pricing may raise ethical considerations concluding, charging
customers different prices for the same product is not
automatically going to create a situation of price unfairness
(p. 272). Kimes and Wirtz (2002) have also examined the
perceived fairness of differentiated pricing in the case of
restaurants suggesting that with the exception of table-
location pricing, other forms of the policy in question are not
regarded as unfair by customers.
Furthermore, Kimes and Wirtz (2002), regarding the
perceived fairness of the pricing policy of yield management
pointed out that the adoption of this policy is not generally
associated with any ethical constraints. Moreover, Spinello
(1998) endeavored to shed some light on the relationship
between pricing and ethics in the case of the pharmaceutical
industry, suggesting that the social character of
pharmaceutical products necessitates a careful attention on
how prices are determined, since practices such as prices that
lead to excessive prots may raise ethical issues. Apart from
the aforementioned practices, Nagle and Holden (1995) have
argued that pricing below cost and price collusions among
existing competitors might also be regarded as non-ethical.
Based on the above arguments, the following list presents
those pricing practices that might lead to non-ethical
behavior:
.
differentiated pricing;
.
prices that lead to excessive prots;
.
pricing below cost; and
.
price collusions among existing competitors
Regarding the reasons that lead to non-ethical pricing
behavior, Nagle and Holden (1995) have stated that a
companys culture and philosophy, which place an over-
emphasis on excessive prots is perhaps the main reason for
such a behavior. Thus, reducing this behavior seems to be
facilitated by both the corporate culture and the imposition of
specic laws, which aim at avoiding pricing practices that
might be characterized as non-ethical. Moreover, some kind
of gentlemens agreements between competitors or even the
effort to develop a customer orientation when setting prices
could also contribute to this direction. Based on these
suggestions, the following list presents those factors that could
reduce a non-ethical pricing behavior:
.
the corporate culture and philosophy;
.
the imposition of specic laws;
.
gentlemens agreements between existing competitors;
and
.
a customer orientation towards pricing decisions.
Pricing objectives
Pricing objectives provide directions for action when setting
prices. Empirical research has indicated that the objective
functions of companies are multifaceted in that the former are
based on a combination of different pricing objectives (Tzokas
et al., 2000a). Moreover, these objectives are exible and
change over time due to environmental or organizational
conditions (Shipley and Jobber, 2001). According to Myers
et al. (2002), pricing objectives may be either supportive or
conictual. Thus, there are objectives that are compatible
with each other (e.g. market share increase and sales increase)
and objectives that are in contrast with each other (e.g. sales
maximizations vs prot maximization).
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
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In terms of their nature, pricing objectives can be either
quantitative or qualitative ones. The former can be measured
more directly and are related to prots, market share, sales or
other nancial indices such as liquidity or ROA. They are
expressed in money terms or through the form of a ratio (e.g.
return on assets). The latter are hardly operational and
describe the relationship of the company with its customers
(e.g. determination of fair prices for them), competition (e.g.
price stability in the market), distributors (e.g. determination
of prices that appeal to their needs) or even the market itself
(e.g. market development). Although these two categories of
pricing objectives might seem to be mutually exclusive,
previous authors have suggested that there is a hierarchy of
pricing objectives in that achieving qualitative objectives (e.g.
customers needs satisfaction) may further lead to the
achievement of quantitative ones (e.g. achievement of
satisfactory prots).
Avlonitis and Indounas (2005) studied the pricing
objectives of 170 service companies (both business-to-
business and business-to-consumer). Table I presents in
descending order of importance each one of the 28 pricing
objectives in total that the companies in their sample were
pursuing in order to set their prices. What can be seen from
this table is that these companies are mainly interested in
qualitative objectives and especially the ones related to
customers.
Research methodology
Denition of the population and sampling frames
The population of the study wad dened as all the
transportation (offering cargo services by air, sea or road)
and information technology (offering software solutions)
companies operating in Greece. The importance of the rst
sector is reected on its contribution to the countrys gross
domestic product (around 8 percent) given the high imports
characterizing the Greek economy, while the second sector is
one of the fastest growing ones over the last years. Based on
ICAPs directory (Gallups subsidiary), which was used as the
sampling frame of the research, the total population of the
study was consisted of 615 transportation companies (70 per
cent in the total population) and 264 information technology
companies (30 per cent in the total population).
Research instrument and pilot testing
The research instrument was a structured questionnaire that
was tested extensively prior to the full-scale survey in order to
increase its validity (Malhotra and Birks, 2003). First, it was
tested among ten marketing academics, with a request to
check the wording and sequence of questions. Second, it was
tested among twenty managers that participated in the initial
qualitative phase of the study (based on in-depth interviews).
Figure 1 Research constructs and their relationships
Table I Pricing objectives pursued by service companies
Mean
Maintenance of the existing customers 4.31
Attraction of new customers 4.28
Customers needs satisfaction 4.18
Cost coverage 4.08
Creation of a prestige image for the company 4.07
Long-term survival 4.06
Service quality leadership 4.03
Achievement of satisfactory sales 3.85
Achievement of satisfactory prots 3.84
Sales maximization 3.78
Market development 3.64
Achievement of a satisfactory market share 3.53
Determination of fair prices for customers 3.50
Prot maximization 3.49
Sales stability in the market 3.39
Achievement of social goals 3.34
Price differentiation 3.24
Price stability in the market 3.24
Liquidity achievement and maintenance 3.19
Market share leadership 3.15
Price similarity with competitors 3.15
Coverage of the existing capacity 3.04
Price wars avoidance 2.96
ROI 2.93
Market share increase 2.84
ROA 2.67
Distributors needs satisfaction 2.61
Discouragement of new competitors entering into
the market 2.56
Notes: Minimum: 1; Maximum: 5
Source: Avlonitis and Indounas (2005)
The relationship between pricing and ethics
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Volume 23 Number 3 2008 161169
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In both cases, minor alterations were suggested (concerning
mainly the layout and the wording of questions) and
implemented.
Sampling
A request sample of 600 companies was set and the selection
process was based on a stratied random sample (Aaker et al.,
2004). The population was stratied by company type and a
proportionate sample size per stratum was determined (420
transportation and 180 information technology companies in
total), while through the use of a table of random digits a
random sample of companies from each stratum was selected.
Data collection and response rate
Data were collected through a mail survey. The nal version
of the questionnaire along with a cover page, explaining the
objectives of the research and soliciting co-operation and a
returned envelope were sent to the 600 companies. In
deciding to whom to send the letter, the experience gained
from the in-depths interviews was used. During these
interviews it emerged that, concerning smaller companies,
the determination of prices was very much a top management
decision, while with reference to larger companies the
marketing, sales (where a marketing manager did not exist)
or nancial manager had the main responsibility for setting
prices. Consequently, in the smaller companies the
questionnaire was sent to the managing director or an
equivalent, while in the larger companies it was forwarded to
the marketing, sales or nancial director.
After a two-wave mailing, 177 usable questionnaires were
returned (129 from transportation and 48 from information
technology companies in particular), representing a response
rate of 29.5 percent, which is similar with other studies in the
eld of pricing (e.g. Hornby and MacLeod, 1996; Tzokas
et al., 2000a, b). In order to evaluate possible sources of non-
response bias, a comparison of early and late respondents
regarding the studys main variables was undertaken. This
comparison found no statistical differences suggesting that
non-response bias was unlikely to be a problem.
Measures
Pricing practices that lead to non-ethical pricing behavior
Respondents were provided with a list of ve pricing practices
and were asked to indicate through a ve-point scale (1 not
at all, 5 to a great extent) the extent to which each one of
these practices is associated with non-ethical behavior. Four
of these pricing practices are presented above. The remaining
one emerged from the qualitative research that was conducted
through 20 in-depth personal interviews in the initial phase of
the research, namely, the determination of prices that take
advantage of a customers urgent need.
Factors that could reduce a non-ethical pricing behavior
Respondents were asked to indicate through a ve-point scale
(1 not at all, 5 to a great extent) the extent to which each
one of the factors could reduce a non-ethical pricing behavior.
Pricing objectives
Based on the operationalization put forward by Avlonitis and
Indounas (2005), respondents were asked to indicate through
a ve-point scale (1 not important at all, 5 very
important) the importance that they attach to each one of
the 28 pricing objectives when setting prices.
Data analysis and research results
Ethical aspects of pricing behavior
The majority of the companies (61.6 per cent or 109 in total)
indicated that pricing decisions do entail ethical
considerations, suggesting the importance of an ethical
behavior when levying prices.
Table II presents the pricing practices that were indicated
by the companies in our sample to lead to non-ethical
behavior. The chase of excessive prots when setting prices
was cited as the single most important practice (3.64).
Respondents also believe that ethical considerations could
also arise when taking advantage of a customers need (3.42)
and levying prices below cost (3.12). On the other hand,
determining prices in collaboration with competitors through
the form of collusions (2.93) and differentiating prices across
different customers (2.67) are not considered to be non-
ethical pricing practices.
Some interesting results also emerged regarding the factors
that could reduce a non-ethical behavior. More specically,
from the mean values presented in Table III, it is interesting to
note that this reduction is more an issue of a companys own
culture and philosophy and the markets mechanisms rather
than an issue of governmental intervention. Thus, a re-
orientation of the current pricing practices seems to be
regarded as an adequate factor to eliminate any traits of non-
ethical behavior without the need of any specic laws.
Moreover, as it should be expected, the adoption of a
customer orientation when setting prices and the
gentlemens agreements between competing companies
could also contribute to this direction.
Pricing objectives
From the mean values that are presented in Table IV it is
interesting to note that most of the seven pricing objectives
that score above 4 reect the implementation of a customer
relationship management approach. For instance,
Table II Pricing practices that lead to non-ethical pricing behaviour:
mean and standard deviation
Mean SD
Prices that lead to excessive prots 3.64 1.40
Imposition of prices that take advantage
of a customers urgent need 3.42 1.42
Pricing below cost 3.12 1.61
Price collusions among existing competitors 2.93 1.63
Differentiated pricing 2.67 1.66
Notes: Minimum: 1; Maximum: 5
Table III Factors that could reduce non-ethical pricing behaviour: mean
and standard deviation
Mean SD
The corporate culture and philosophy 4.12 1.24
Gentlemens agreements between existing competitors 3.61 1.39
A customer orientation towards pricing decisions 3.14 1.42
The imposition of specic laws 3.03 1.63
Notes: Minimum: 1; Maximum: 5
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
164
maintenance of the existing customers (4.31), attraction of
new customers (4.21), customers needs satisfaction
(4.19), service quality leadership (4.23) and creation of
a prestige image for the company (4.17) reect the priority of
the companies in our sample to manage their clientele basis.
Certainly this is not to say that nancial priorities and prot-
related objectives are disregarded: cautiousness to cover costs
(4.22) and long-term survival (4.03) are still quite
importance, while other objectives, such as satisfactory
protability and sales (3.92), are still quite top on the agenda.
The explanation of the above ndings might be attributed
to the fact that relationship marketing strategies aimed at
safeguarding long-term nancial performance through
customer satisfaction and retention is now long
acknowledged to serve the rms prosperity without
jeopardizing its protability and/or market share and sales
(Yilmaz et al., 2005). Thus, it appears from Table IV that the
respondents have a clear hierarchy of pricing objectives, which
is most probably related to an effort to sustain and protect
their clientele base and future protability through
relationship marketing efforts.
The high correlations identied among the majority of the
28 pricing objectives led to the conclusion to identify patterns
of objectives used by rms. Thus, a factor analysis was
conducted (principal component analysis, varimax rotation),
which revealed seven underlying factors (Table V) on the basis
of loadings . 0.3 and eigenvalues . 1. Those objectives
with factor loadings ,0.3 were excluded from the analysis.
The rst factor, nancial objectives, comprises objectives
that aim to enhance a rms nancial indices such as return
on assets and return on sales. The second factor,
competition related objectives, emphasizes the need to
give a close eye to the market in general and competitors
actions in particular. The third factor, service quality related
objectives, underlines the importance in rendering high
quality services that will be differentiated from the competing
ones, while the fourth factor, customer related objectives
reects the efforts to sustain and expand the existing clientele
basis in order to ensure the companys long-term presence in
the market. The remaining three objectives (i.e. market
share related, cost related and achievement of satisfactory
prots and sales) emphasize the need to control costs and
achieve a satisfactory nancial performance when levying
prices.
These objectives are similar with the ones identied in the
study by Avlonitis and Indounas (2005), namely, stability in
the market, competition-related objectives, customer-related
objectives, service quality related objectives, nancial
objectives, market share and capacity related objectives,
achievement of satisfactory prots and sales and maximization
of prots and sales. Moreover, they present a combination of
both quantitative and qualitative objectives that have been
suggested to enter the objective functions of any rm (Shipley
and Jobber, 2001).
The reliability of this seven-factor model was tested by
splitting the sample randomly into halves and conducting
again a factor analysis in each half. Both the eight-factor
solution and the loadings remained unchanged suggesting
that the results reported here are not due to chance.
Ethical behavior and pricing objectives
Table VI presents the variance and the standard deviation of
each pricing objective for those companies, which believe that
pricing behavior has ethical consequences and those
companies that do not share this belief. In order to examine
the differences between these two groups of companies
regarding the pricing objectives that they pursue, a t-test
analysis was conducted, which is presented in Table VII.
What can be seen from this table is that the service quality
related objectives along with the achievement of satisfactory
prots and sales are important for both types of companies
(no statistical differences were found), indicating the
signicance of offering high quality services in the market
and achieving satisfactory prots and sales in order to ensure
the viability in the market. However, the former companies
seem to follow a more balanced approach when setting prices
by placing their emphasis on both company and market
related objectives. In particular, their higher mean values in
those pricing objectives that statistical differences were found
(i.e. nancial objectives, competition related objectives
and customer related objectives) reect that they are
pursuing objectives which are oriented towards their
competitors and customers, as it should be expected,
without, however, disregarding the nancial implications of
their pricing strategy by paying attention to achieving
satisfactory nancial results.
Table IV Pricing objectives of industrial service rms
Mean SD
Maintenance of the existing customers 4.31 1.18
Attraction of new customers 4.21 1.20
Service quality leadership 4.23 1.16
Cost coverage 4.22 1.05
Customers needs satisfaction 4.19 1.21
Creation of a prestige image for the company 4.17 0.99
Long-term survival 4.03 1.36
Achievement of satisfactory sales 3.92 1.12
Achievement of satisfactory prots 3.92 1.00
Sales maximization 3.87 1.21
Market development 3.69 1.48
Achievement of a satisfactory market share 3.52 1.46
Determination of fair prices for customers 3.49 1.38
Sales stability in the market 3.45 1.44
Prot maximization 3.42 1.28
Liquidity achievement and maintenance 3.35 1.64
Market share leadership 3.29 1.48
Price differentiation 3.23 1.53
Price stability in the market 3.23 1.50
Achievement of social goals 3.22 1.56
Price wars avoidance 3.18 1.44
Price similarity with competitors 3.16 1.38
Coverage of the existing capacity 3.09 1.59
Market share increase 2.81 1.65
Discouragement of new competitors entering
into the market 2.68 1.46
ROI 2.60 1.65
Distributors needs satisfaction 2.44 1.43
ROA 2.42 1.57
Notes: Minimum: 1; Maximum: 5
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Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
165
Conclusions
The fundamental objectives of this research were to examine
the pricing practices that are considered to lead to non-ethical
behavior along with the factors that could reduce such a
behavior. Moreover, the differences between those companies
that perceive that pricing decisions entail ethical
considerations and those companies that do not accept such
a notion were investigated by focusing on the pricing
objectives that they pursue in order to set their prices.
Table V Factor analysis of pricing objectives
Factors Variables Loadings
F1: Financial objectives ROA 0.858
(14.853% of variance) Coverage of the existing capacity 0.803
(Eigenvalue: 3.57) ROI 0.772
(Cronbachs alpha: 0.831) Distributors needs satisfaction 0.568
Liquidity achievement and maintenance 0.532
F2: Competition-related objectives Price stability in the market 0.783
(13.402% of variance) Market development 0.778
(Eigenvalue: 3.22) Sales stability in the market 0.687
(Cronbachs alpha: 0.799) Price wars avoidance 0.622
Price similarity with competitors 0.467
F3: Service quality-related objectives Creation of a prestige image for the company 0.875
(9.922% of variance) Service quality leadership 0.676
(Eigenvalue: 2.38) Customers needs satisfaction 0.566
(Cronbachs alpha: 0.717) Price differentiation 0.508
F4: Customer-related objectives Maintenance of the existing customers 0.813
(9.862% of variance) Achievement of social goals 0.713
(Eigenvalue: 2.37) Long-term survival 0.692
(Cronbachs alpha: 0.719) Attraction of new customers 0.416
F5: Market share-related objectives Market share increase 0.749
(8.301% of variance) Achievement of a satisfactory market share 0.685
(Eigenvalue: 1.99) Market share leadership 0.540
(Cronbachs alpha: 0.678)
F6: Achievement of satisfactory prots and sales Achievement of satisfactory prots 0.771
(8.195% of variance) Achievement of satisfactory sales 0.615
(Eigenvalue: 1.97)
(Cronbachs alpha: 0.724)
F7: Cost-related objectives Cost coverage 0.799
(5.752% of variance)
(Eigenvalue: 1.38)
Notes: KMO test 0:732, Bartlett test of sphericity: 905.617, Sig: 0:000
Table VI Variance and standard deviation for each rating for the two groups of companies
Companies which perceive that
pricing decisions entail ethical
considerations (n 5109)
Companies which do not
perceive that pricing decisions
entail ethical considerations
(n 568)
Variance SD Variance SD
Financial objectives 0.94 0.939 1.05 1.026
Competition-related objectives 0.96 0.979 1.00 0.997
Service quality-related objectives 0.99 0.994 1.01 1.006
Customer-related objectives 0.95 0.975 1.03 1.015
Market share-related objectives 0.99 0.994 1.20 1.010
Cost coverage 1.06 1.028 1.49 1.219
Achievement of satisfactory prots and sales 0.75 1.028 0.97 0.982
Notes: Min: 1; Max: 5
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
166
Analyzing data from 177 industrial service companies
operating in the transportation and information technology
sectors, the study concluded that the majority of the
companies in our sample do believe that pricing is
associated with ethical considerations. More specically, the
pricing practices that were reported to lead to non-ethical
behavior refer to the determination of prices that lead to
excessive prots or take advantage of a customers needs.
Pricing below cost is also perceived to be a non-ethical pricing
practice. On the other hand, price collusions among existing
competitors in the market and differentiation of prices across
different customers are not considered to be related to any
ethical constraints.
Some interesting results also emerged with reference to the
factors that could reduce a non-ethical behavior. The
companies in the sample seem to believe that such a
reduction is more an organizational and environmental issue
than a governmental issue. Thus, a corporate culture that
facilitates a customer orientation towards pricing decisions
along with the markets own mechanisms or even the
agreements between companies are regarded as more
effective ways to eliminate any aspects of non-ethical
behavior than the intervention of government through the
imposition of specic laws.
Finally, companies that do believe that pricing behavior has
ethical consequences tend to follow a more systematic
approach when setting prices by focusing their effort on both
internally and externally oriented issues. More specically,
they are interested in pursuing customer and competition
related objectives, without, however, disregarding the
nancial implications of their pricing decisions.
Managerial implications
The above ndings indicate that the suggestions made by a
number of academics regarding the necessity of pricing
decisions to be guided among else by ethical considerations is
embedded in the pricing behavior of the companies in the
sample. Certainly, adopting such an approach is in line with
the increased role of ethics in todays business world. As
Palmer and Hartley (2002, p. 148) have pointed out,
commercial organizations need to take into account
societys values because if they dont, they may end up
isolated from the values of the customers they seek to attract
. . . they should act in a socially acceptable manner. Thus,
apart from endeavoring to satisfy customer needs and build
long-term relationships with them, managers responsible for
setting prices within their rms might have a lot to gain by
avoiding pricing practices that raise ethical considerations.
The present study shed some light on these practices such as
the determination of prices that lead to excessive prots or
take advantage of customers needs.
After all, the companies in the sample that do accept the
notion that pricing decisions entail ethical considerations were
found to follow a more balanced and systematic approach by
placing their emphasis on both environmental and
organizational related pricing objectives. Such an emphasis
is in line with the suggestions made by authors such as Shipley
and Jobber (2001) regarding the need for taking into account
both rm and market related inputs when levying prices, if
effective pricing decisions are to be made. Within this context,
managers are advised to re-examine their current pricing
strategies by taking into account the ethical consequences of
these strategies.
Moreover, the importance that is attached to the corporate
culture and the markets mechanisms as the main factors that
could reduce a non-ethical behavior indicates that companies
do not have to wait for governmental initiatives in order to
adopt an ethical orientation when setting prices. Managers
may rst invest on changing their current mentality towards
the issue of ethics and also collaborate with their competitors
in order to establish a market climate that will avoid practices
that might be characterized as non-ethical. Thus, any
governmental or legal aid might be only required in
situations where company and market initiatives will not be
effective.
Limitations and future research
Despite the useful guidelines that the current research has
offered regarding the relationship between pricing and ethics,
there are also some caveats associated with it. The
operationalization of all variables related to ethical pricing
behavior needs further research. Given the lack of a
worldwide-accepted typology of non-ethical pricing
practices, future research would be useful in establishing an
empirically based construct, coined, non-ethical pricing
behavior. Furthermore, the present study examined
managers perceptions on whether they feel that pricing
entails ethical aspects. This fact notwithstanding, an objective
measure of whether a company could be characterized as
ethical when making pricing decisions would also be useful.
Moreover, further research could address in more detail the
potential effect of a number of contextual variables. For
Table VII Ethical behaviour and pricing objectives
Companies which perceive
that pricing decisions
entail ethical considerations
(n 5109)
Companies which do not
perceive that pricing decisions
entail ethical considerations
(n 568) t-value Sig.
Financial objectives 3.02 2.58 1.669 0.079
Competition-related objectives 3.48 2.99 2.950 0.004
Service quality-related objectives 3.82 3.81 0.027 0.979
Customer-related objectives 4.19 3.82 2.547 0.012
Market share-related objectives 3.20 3.06 0.859 0.392
Cost coverage 4.26 4.16 0.637 0.525
Achievement of satisfactory prots and sales 3.88 3.99 20.652 0.509
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
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instance, how does market structure affect the relationship
between pricing and ethics? Does the type of service (e.g.
consumer vs industrial) have an effect? Does the type of
relationship with customers or a strategic perspective
regarding pricing lead to a different perception on what
constitute non-ethical pricing practices? Does the top
managements attitude have an impact on such a
perception? A quest for a more detail examination of these
issues may not be futile, since it would enrich the existing
theory on this topic.
Also, it should be noted that due to the sample size (177)
and the fact that the absolute differences, as identied in the
present study, among those companies that perceive that
pricing decisions entail ethical considerations and those
companies that do not hold such a perception in terms of their
pricing objectives are not large, one could argue that the
stated signicance (Table VI) does not imply much of an
effect. Consequently, replicating the study in a larger sample
could provide a solution to this problem.
Additionally, despite the importance of the sectors
investigated in the current study, the research results may
not be easily applicable to other industrial service sectors.
Thus, sample representative ness may be an issue of concern.
To this end, replication of the study in a larger sample through
incorporating other industrial service industries as well (e.g.
banking, insurance, professional services) might be a fruitful
direction for future research. Also, replication of the study in
other national contexts with different cultural characteristics
could test the extent to which the results reported here can be
generalized in other countries.
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About the author
Kostis Indounas received his PhD in Marketing from the
Athens University of Economics and Business, Athens. He is
currently a Lecturer in Marketing at the same university. His
works have appeared in international conferences and
academic journals such as European Journal of Marketing,
Journal of Services Marketing, Journal of Marketing
Management and Journal of Product & Brand Management
among others. His teaching and research interests are in the
areas of pricing, services marketing, marketing for non-prot
organizations and new product development. Kostis Indounas
can be contacted at: indounas@aueb.gr
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
168
Executive summary and implications for
managers and executives
This summary has been provided to allow managers and executives
a rapid appreciation of the content of the article. Those with a
particular interest in the topic covered may then read the article in
toto to take advantage of the more comprehensive description of the
research undertaken and its results to get the full benet of the
material present.
From Oscar Wildes denition of a cynic as a man who
knows the price of everything and the value of nothing to the
seventeenth century French writer La Rochefoucaulds view
that the height of ability consists in knowing the price of
things, price was, is and no doubt forever will be an
important consideration in many aspects of human
interaction.
Underlining the wisdom of the notion that the price we pay
for something in monetary terms cannot always be kept
separate from the price extracted in terms of human
accountability and responsibility, other sages have told us
that the price of dishonesty is self-destruction and every
man has his price.
So, too, in business where charging a price for goods and
services is much more than deciding what sum will attract and
retain customers, while allowing the organization to pay its
costs and make a prot. For instance, when is a prot
considered a fair one rather than one which rips off the
organizations customers, and who denes fair?
In 2007 some UK supermarkets and dairy rms were
convicted of collusion in illegally xing the price of milk,
cheese and butter, with consumers estimated to have lost
270 million. A justied governmental response to businesses
acting unethically? Well, maybe. But, as some of the
supermarkets insisted, their actions allowed them to give a
fair price to farmers who were facing particularly difcult
conditions at that time and who might otherwise have gone
out of business.
Whatever the rights and wrongs of that particular episode,
it is clear that customers dont like powerful organizations
with immense buying power acting unethically and neither,
of course, do competitors. But do companies consider they
must act ethically in deciding prices, or is staying in business
with healthy bottom-line results the only consideration?
Looking at two industrial services industries in Greece
transportation (offering cargo services by air, sea or road) and
IT software solutions Kostis Indounas investigated pricing
practices that lead to non-ethical behavior and the factors that
could reduce such behavior, and examined differences
between the companies which perceived that pricing
decisions entail ethical considerations and those that do not
hold such a belief in terms of the pricing objectives they
formulate in order to levy their prices.
The majority of companies believed that pricing is
associated with ethical considerations. More specically, the
pricing practices that were reported to lead to non-ethical
behavior referred to the determination of prices that lead to
excessive prots or take advantage of a customers needs.
Pricing below cost was also perceived to be a non-ethical
pricing practice. On the other hand, price collusions among
existing competitors in the market and differentiation of
prices across different customers were not considered to be
related to any ethical constraints.
Companies seemed to believe that action to reduce non-
ethical behavior is more an organizational and environmental
issue than a governmental issue. Consequently corporate
culture that facilitates a customer orientation towards pricing
decisions along with the markets own mechanisms or even
the agreements between companies are regarded as more
effective ways to eliminate any aspects of non-ethical behavior
than the intervention of government through the imposition
of specic laws.
Companies that do believe that pricing behavior has ethical
consequences tend to follow a more systematic approach
when setting prices by focusing their efforts on both internally
and externally oriented issues. More specically, they are
interested in pursuing customer and competition related
objectives, without, however, disregarding the nancial
implications of their pricing decisions.
Kostis Indounas says:
The ndings indicate that the suggestions made by a number of academics
regarding the necessity of pricing decisions to be guided among else by
ethical considerations are embedded in the pricing behavior of the
companies in the sample. Certainly, adopting such an approach is in line
with the increased role of ethics in todays business world.
After all, if businesses do not pay heed to the values society
places on issues, and do not reect socially-acceptable values,
they could become isolated from the very market they need to
attract.
Consequently, apart from endeavoring to satisfy customer
needs and build long-term relationships with them, managers
responsible for setting prices might have a lot to gain by
avoiding pricing practices that raise ethical considerations
such as those which are seen as leading to excessive prots or
taking advantage of customers needs.
The companies in the sample that do accept the notion that
pricing decisions entail ethical considerations placed their
emphasis on both environmental and organizational related
pricing objectives. Within this context, managers are advised
to re-examine their current pricing strategies by taking into
account the ethical consequences of their strategies.
(A precis of the article The relationship between pricing and ethics
in two industrial service industries. Supplied by Marketing
Consultants for Emerald.)
The relationship between pricing and ethics
Kostis Indounas
Journal of Business & Industrial Marketing
Volume 23 Number 3 2008 161169
169
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