Stupid Discrimination
The last principle suggests a basic contemporary management truism. There is often no reason to base differential pricing on race or gender—they are crude screens.[15] Generally, there are more sophisticated behavior criteria. For instance, rather than differentiate car repair prices based on gender, it is much more effective to base them on the history of car ownership and prior repairs. This will distinguish the price-insensitive from the knowledgeable who may not be able to evaluate costs. Doing this by gender—especially in an age of social media—may generate anger and backlash.
If only one identifiable group has been subject to a unique set of factors, it can be easy for marketing managers to reach confident conclusions regarding potential actions. But this is almost never the case. For instance, confronted with low Net Promoter Scores, many line managers simply undertake the program they wanted to execute anyhow and say—usually incorrectly—that it will cure the low score in the market.[16]
Implementation
How to implement an ethical pricing program? A key question is who will be the champion of such a program? It may take effort to convince some managers that ethics increases profitability. Some market-facing managers who have obtained short-term revenue hikes from unethical actions may be uninterested in the longer-term consequences. In other cases, there may be unethical actions which, while highly annoying to customers, are important to a small budget. For instance, a shift from billing via USPS to online-only has a 2% to 20%+ impact on billing operations, or less than 1% to 5% of total costs, but this may alienate buyers who are not computer facile. Thus, in the short term, there is some money to be saved. But over the longer term such savings may be overwhelmed by customer defections.
Trials are a common means for testing market response to changes in policy/customer offers. Ethics-based initiatives differ from general marketing initiatives in that there should be no trials regarding ethical value. Trials suggest that the company has some doubt about whether an ethical practice is the right path. The use of a trial leaves open the possibility that the company could, in effect, say: “Oops! I guess we won’t be ethical in that way!”[17] Trials are acceptable as long as they are clearly operational trials, such as testing out a new supervisory approach.
An ethical pricing trial cannot be a consensus-based process. There must be complete confidence in the ethics. The vast majority of employees look for strong leadership from top management in dealing with ethical issues.[18]
For many companies, the notion that ethics may be a powerful driver of annual revenues is a novel concept. For some, this is a foundation for longer term growth. In fact, all may benefit from applying ethical rules broadly.
Roles
Institutionally, it is worth distinguishing management roles. As the chief financial officer (CFO) of one bank observed, some “C” titles are inclined to defend the institution (CFO or Chief Counsel, for example) while others are more focused on short term revenue (CEO, Head of sales, product management).[19] In general, the more institutionally-oriented management will be more willing to make a short versus long term trade-off in migrating to more ethical practices, and so may be the better initial champions of these efforts.[20] Later, after the practices are successfully established, the leadership efforts might be taken up by revenue-oriented titles.
Often employees/managers may also resort to questionable ethics/greedy actions not in direct response to explicit CEO requests but based on how they interpret a CEO’s unspoken wishes or “wink and nod.” In bigger companies, CEO wishes/preferences are handed down through multiple management layers and often lose context in translation. A company’s general counsel will advise the CEO on what actions could be viewed as illegal, but what is greedy or ethically questionable is not generally within the counsel’s scope of advice. It would be highly unlikely for employees to tell a CEO that his suggestions were greedy/unethical.
What to Do?
– Have advanced tools and measures (shown as a cloud, in 12-1 below) to show the harm in some greedy tactics. This way, management will know the sequence of the harm:
Assessment of Greedy Actions
Few companies or marketers have reliable links among the steps Few have really quantified the value of the ancillary service quality. How long does it take customers to respond when, for example, 5% of the market value of a good or service is removed, but the price remains the same? What channel events happen after the change in price/value? What is the lifetime Net Present Value (NPV) of such a move? Without provable benchmarks, the decision will be up to whoever is in power within the firm. Unfairly, without support in financials, the more ethical players may not always win.
– Make incentives include long-term results. There are many ways a smart manager with the wrong motivation can succeed in the short-term, but leave chaos in later years.[21] Fortunately, there are early warning signs of greed, such as lack of candor about proposed actions.
– Monitor competitors more closely. In many competitive industries, the competitors may be the ones who will notice short-term impacts first. Their actions, if called out, may be a good early-warning signal if the market frowns. The market will often punish poor behavior –for example, creating extra customer accounts hurt Wells Fargo,[22] and violating privacy at Facebook has led to user hesitancy.
– Pre-emptive ethics and transparency. This has worked well, both for signals to the market and signals internally. One leading soft drink company got a package containing confidential competitor research on new products and potential pricing being undertaken by its primary competitor. The package was sent by an employee of the competitor. The soft drink company immediately returned the information, unread, to the competitor. The message was clear: only honest competition would be countenanced.
Ethical Strategy[23]
Perhaps the best way to encourage ethical behavior is to build an ethical culture. With the right culture, it is more likely that employees will notice unethical actions and act accordingly. But for that to happen, most or all employees need to be part of the ethical culture, and that can take 18 months or more.
The alternative to relying on building a culture is to rely on rules. However, relying on rules is often inadequate because there are too many types of marketing and pricing initiatives and because these rules work only under certain circumstances or contexts. If the task of ferreting out violations of rules is left to top management and the legal department, the number of violations will not be curtailed.
On the other hand, if management knows precisely what the ethical threats are, it can counter them effectively. This is why our outline of greedy tactics/strategies is helpful. This enables top management to ask the right questions, to make sure the right screens are in place, and to have a strategy for stopping unethical actions before they start. This is the most strategic ethical approach.
Approaches A and B may work, but are less effective and efficient than C.
A Case Example
An example of the evolution of management behavior can be found by examining a leading manufacturer of Aerial Work Platforms (AWPs), also known as “cherry pickers.” The sales force had become proficient in switching allowable discount amounts from one account to another. In this fashion, a salesperson could exceed the allowed account discount set by finance. This was a violation of their condition of employment, and so, in the absence of any overarching contrary principles, was unethical.
In addition to excessive discounting, this practice also made it difficult to penetrate new market segments via discounting since intended discounts were transferred to accounts that the sales force felt comfortable with. When the huge differential in discounts across accounts became public knowledge, customers were angered and went elsewhere.
Management was aware of this practice but had no idea of its extent. Because management believed the practice was infrequent, it did not want to punish random salespeople. Management was reluctant to spend great effort to correct the behavior. The abuse ended only after the AWP manufacturer installed a new accounting system which tracked cash discounting. The shell game ended abruptly.
The benefits were apparent. There was a 5-7% increase in revenues. Customers were no longer outraged to discover discounts of much as 40% to others and not them. And salespeople were educated on more scientific bases for discounting. This process took about 18 months.
A Chief Ethics Officer
One approach used by a number of companies such as Target, Salesforce.com, Boeing and others is to appoint a Chief Ethics Officer (also called a Chief Trust Officer). They operate on different charter, including one which is “To develop a strategic framework for the ethical and humane use of technology.” The Chief Ethics Officer has a variety of reporting relationships, often CEO or CFO.[24] To be effective, they must also work closely with the company General Counsel, and legal staff.
The key decision in designing the function is what ethical issues to target. Are they the large collection of line practices, some identified in this Chapter? Or are they matters which have reached the board? In part, this shapes what the ideal manager’s credentials will include. We believe that some connection with ethical theory, moral practices and legal rules is important. But, there is the need to have an Officer who can understand the increasingly complex unethical practices at a line level. Many will not detect—or know how to prevent—the unethical strategies mentioned in Chapters 1 and 13. This means that their company will not address some ethical issues until they blow up, because they are not recognized. These include pricing and information technology, which are often not familiar to top managers. This is likely to grow to a larger problem as pricing and information technology, e.g., AI, grow in sophistication and use.
Often, a robust financial analysis is important to fight unethical decisions. In 1970 an internal memo was said to have circulated to top Ford management. It was reported that the memo estimated that there would be 180 burn death, and 180 serious burn injuries in Pintos without fuel tank modifications. It estimated that this would cost Ford $200,000 per death, and in total would cost $50 million.[25]
In fact, the NHTSA found that nearly 9,000 people burned to death, and tens of thousands suffered severe burns. A 50X mistaken estimate. The cost per death was also underestimated, and other damages (e.g., to company reputation) were omitted. A good Ethics officer would have challenged the initial estimates, and used better financial and outcome estimates to persuade the board to correct the problem. As usual, only poor financial skills and poor judgement reinforced a drive to the unethical. If done properly, an ethics officer would have been able to stop the unethical process from the beginning.
What is clear is that the ability to spot and prevent greed and unethical behavior from the top is usually difficult. Top management must exercise effort to ensure policies are ethical and that an ethical culture is enforced.
This article is adapted from chapters in Rob Docters, Hans Gieskes, Ethics and Hidden Greed, Emerald Group Press, 2023.
