Gouging Is Good, But Not Advised
I recently posted a blog on how some of the airlines were being good corporate citizens and capping the price of their flights from Florida, just before Hurricane Irma. Huge kudos to them. The takeaway of the post was to think about the lifetime value of your customer. When we gouge buyers because we can, especially during natural disasters, we will upset our loyal customers hurting our long-term revenue and profit.
A good friend of mine replied: Wouldn’t it have been better if the airlines raised their prices and brought more planes into Florida? Of course they would have been empty flying in, but full flying out. More people could have escaped the hurricane by air. Without higher prices though, the airlines had no incentive to bring in more flights.
A couple of days before the hurricane hit Florida, I was listening to talk radio (in the safety of Reno, Nevada). The host, trying to learn what the roads were like leaving the area, interviewed a truck driver. I was shocked to hear her say, “The roads leaving are a mess, but I’m driving into the area. Traffic is clear going this way.” She was delivering water and supplies to fill some empty shelves at retail outlets.
Think about that for a second. She was driving a semi truck into a soon-to-be-hit hurricane area? Someone would have to pay me a lot of money before I would do that. But that’s the point, isn’t it? If gouging were acceptable, more people would drive bottled water into the area. It would provide supply.
So, which is right, gouging or not gouging? The answer is: It depends on what you’re trying to maximize. If you are trying to maximize your own long-term revenue, not gouging is better. If you’re trying to maximize social good, then gouging may be better.
The problem is that what is good for the people, they don’t like. It’s kind of like wanting to lose weight but not being able to pass up the chocolate cake. Chocolate cake, like low prices, feels good in the short term. Losing weight, like gouging so supply can meet demand, requires a big picture view. A goal bigger than the short-term pleasure of the buyer.
Is it possible to do both? Is it possible to raise prices during peak demand times without customers seeing it as gouging? One company that deals with this a lot is Uber.
When Uber first started, they had surge pricing on New Year’s Eve in San Francisco that was 7+ times the price of a normal ride. There was a huge uproar. They were upsetting customers and the business press was making fun of them. Uber has since spent years educating their market on surge pricing. One big reason for surge pricing is that higher prices bring more drivers onto the road. Surge pricing increases supply. Most Uber users now understand and accept surge pricing from Uber.
Now the lesson: Should you gouge when you can? Probably not. It is likely better for society, especially if higher prices drive more short-term supply, but your buyers aren’t thinking about society. They are thinking about themselves. If you want to think about yourself, think about the lifetime value of your customers. Don’t upset them.
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