Marketplace Ethics, Part I
23rd July 2005
The other day I engaged in a short discussion with someone at work. I had just closed a sale - one that I really wouldn’t have done ordinarily, because the customer had driven a very hard bargain. She showed me a quote from a competitor with a price that was very close to our cost. We normally would not go after such business, but this time my boss and I decided that we could win that business because (1) we were having a few good runs the past quarter and could afford to win a few businesses close to our profit margins, (2) every new business we win from this particular competitor was one less they would otherwise win. We were hoping that by winning business off this particularly competitor, we were hoping to either drive them out of the marketplace or to reevaluate their cut-price tactics. Ironically we had to stoop to their level and low-ball them in the process, something that I did not particularly enjoy. Finally, (3) the vendor was offering extra incentives for each new business won that month by way of rebates and marketing credits. We decided that the sacrifice of profit margins to gain vendor favors was well worth it.
My friend and I were discussing the ethics of winning business via cost-cutting tactics. I was voicing my frustration with the affair as I did not believe that this was the right way to form business relationships, neither from the customer nor from the supplier perspective. The customer loses even though temporarily they gain tremendous savings in their initial investment. However, as it turned out, they were expecting such deep discounts in the subsequent services, and when I refused they decided to take their business elsewhere. They have lost the opportunity to work with our consultants, who are some of the best in the business. I did not mind losing them in the end, because I really could not sustain cutting my prices just in order to retain them as a customer. I believe business is a value exchange, and in this case, I really thought that the customer had not appreciated the value they were receiving from us.
My friend and I talked about the ethical propriety of being a “price leader” or a “price cutter” in the marketplace. I voiced my ambivalence of the ethics of a “price leader” and asked aloud if it is necessarily the right thing for any business. For, I suggested, if being a “price leader” means lowering the price of products just in order to win business without consideration of other factors, then, I feared that such a tactic also have the unfortunate consequences of lowering standards of service in the industry as well as lowering the quality of relationships that have far reaching repercussions. I opined that companies in general, and large companies especially, ought to behave ethically by not dragging the whole industry down the gutter in lowering prices indiscriminately. If every business decided to follow the price leader and compete on price alone, which they must try to do in order to stay competitive, then something has got to give. This means that service quality will be lower as the business with minimal profit margins would have to expend energies to spread itself thin and win more business in order to remain in business.
Unfortunately, it is not easy to not be drawn into a price war once a competitor, especially a large one, decides to lower the price. That is why I believe that even if a company can afford to lower its price because of the economies of scale, there are reasons why it should maintain the prices of goods it sells at a particular level. I suggested to my manager that companies have a social responsiblity not just to its shareholders to earn a profit, but also to all their constituencies and stakeholders, including the competition, and the industry as a whole. Further, companies also have a responsibility to its employees and partners or suppliers. The entire chain of relationship must be held at a higher value chain. In most cases, price leaders cut prices and the cost of doing business at the relationships points of lowest power. Thus, smaller suppliers and employees at the lowest end of the organizational structure usually suffer the brunt of such tactics. This is unethical, I believe, in doing so corporations misuse their power and fail to uphold the responsiblity they have to maintain value in these relationships.
My friend didn’t agree, and said that companies should do whatever possible to win in business, and if driving prices down allows it to do so, then they ought to do it. My friend believed in the freedom of choice. According to him, there is freedom on the part of the seller to set whatever price they want, and there is also freedom from the part of the buyer to take his or her business elsewhere if they didn’t like it. There is also freedom of choice for the employees to work for someone else and freedom for suppliers to do their business with some other organization. Somehow that type of reasoning just didn’t sit well with me. I just think that there ought to be more than just plain freedom of choice and the rule of the jungle as key principles in marketplace ethics.
Coming back to the issue of whether or not companies should lower the price of products just so that they can win more business. I believe that even if companies can sustain the lowering of prices due to the economies of scale, focusing on price reduction alone can devalue the entire enterprise. Walmart for instance, is well known for being a price leader. However, they use bully tactics in dealing with their suppliers, squeezing the profit margins of their own partners. Thus the quality of many goods at Walmart are questionable. They also pay the lowest labor, with the large majority of its workers not being able to survive just holding down one job. The whole enterprise is geared towards the profitability and wealth of very few people at the top of the chain, while the rest of the organization, its partners and even its customers lose out on the deal. Yet, because customers keep coming back and because one price leader leads to the entire industry striving to better one another on the same thing (reducing prices while sacrificing the value of relationships, lifestyle and product quality), everyone in the community suffers. How and when will society realize that such practices are not just unethical but also unhealthy to the community as well?
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July 25th, 2005 at 6:13 am
This is an interesting discussion.
I deal with a similar debate in my work as a musician. There is an ethic which says musicians should not undercut one another, and that particularly folks who have “real jobs” should not do music gigs for free or low prices, because it hurts those of us who do music for our living. On the other hand, I don’t know that it’s right to hold prices high to protect our network. It’s tough to balance concern for the customer with concern for other musicians. Compared to some folks, my fees are high; I’ve had a few people not hire me for that reason. But they’re low compared to a lot of other folks, and I’ve also had other people (some musicians, some clients) tell me I should charge more. I think it’s hard to price any kind of labor or service; what is anyone’s time worth, and why? Whereas a product involves costs that can be added up, like raw materials and manufacturing and that sort of thing.
July 26th, 2005 at 10:24 am
Is this about Ethics or it about Wise dealing?
In the Outer has a post about Marketplace Ethics, Part I. I don’t think this is about ethics, I think it is about wise dealing.
Customers pay for value received.
If another company can provide the same value that you provide at half the cost then …