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Hearsay When Proof is Illegal: A Legal and Ethical Pricing Challenge in Business Markets

April 2016 Corporate, Pricing

Pricing challenges can always be answered by addressing three simple questions from the customer’s perspective:  What is my alternative? Are you better or worse? Do I care about those differences? From this position, executives are told to find the price of the competitive alternatives, calculate the benefit differential, and then determine how much to discount the benefit differential to account for the perspective of the customer in question. From a logic standpoint, this is pretty straightforward.

From an analytical perspective, numerically answering these core-pricing questions may require historical statistical analysis, modeling your exchange value to the customer, or some form of conjoint analysis. Each of these forms of analysis is a well-known form of pricing science. A science, like any other, that is evolving and improving with time, reducing the role of art and replacing it with knowledge and experience.

Yet there is a basic, inextricable hole in this science. Knowing the price of your competitive alternatives.

Sure, if you are in consumer markets it is easy to know the end customer price of a product. Just go out and look. And, if you don’t want to look yourself, use a web-scrapper, mystery shopper, or research firm to collect the data for you. This is an easy problem to solve and there are many firms that would love to compete for your business to solve it.

And, if you are in a business market where prices are published, again, the problem is solvable. Just go look at your competitor’s publically available prices. You may be missing some of the discounting information but at least you have a starting point.

But many businesses work in markets where the competitor’s prices are not publically available. In these cases, collecting your competitor’s prices may not only be procedurally difficult, but ascertaining those prices may be unethical and illegal.

Western Legal Restrictions on Price Information Sharing

While in some Far East and Middle Eastern countries, price fixing is not only legal but encouraged (OPEC for example), in the EU, U.S., and most of Latin America, price fixing is highly illegal. The western anti-trust laws on price fixing extend broadly, often beyond the country’s borders.  On top of these anti-trust laws, some countries have laws like the 1996 Economic Espionage Act in the U.S., which forbid the use of a competitor’s confidential information for gain.

Hence, in the west, it is never legal to talk to competitors about your prices and you cannot use a competitor’s confidential information.

This means:

  • You can’t ask your competitors for their prices.
  • You can’t ask a prospective employee from a competitor about the pricing at your competitor’s company.
  • You can’t pretend to be a shopper at your competitor to collect prices from a competitor.
  • You can’t use the pricing information in a competitor’s proposal that is marked as confidential.
  • You can’t ask customer for a copy of competitor’s private invoices.
  • And, you can’t use a consultant or an intern do any of the above actions for your firm either.

The legal and ethical boundaries are well established at multinational corporations. GE, ABB, Chevron, P&G, and many other firms have established clear codes of conduct with respect gathering competitive information, and more specifically competitor’s prices.

Private firms in the competitive intelligence industry also have well-established codes of ethics. Flud + Company have published legal and ethical guidelines on collecting non-public competitor prices.  Even SCIP, the Strategic and Competitive Intelligence Professionals association, publishes rules of ethics and clarify the legality of specific types of work a competitive intelligence officer can do.

If You Can’t Get Your Competitor’s Price Information Directly, What Can You Do?

Seek public information.

Publically available competitive price information is completely legal. As mentioned, many businesses operate in markets where prices are transparent and competitive price information is readily available.  It is completely legal and ethical to use publically available competitive price information.

Notice the key work: public. That is the key managerial difference between illegal and legal price information.  Was the information in the public sphere?

The public sphere can be rather broad as well.

  • There are many industry associations that collect and publish compiled pricing and costing information on their members. It is generally legal and ethical to purchase that information for price benchmarking.
  • In some industries, suppliers share costing information and procurement information firms that publish and sell the collected information. Firms selling into that supply chain can purchase that information just as easily as procurement managers can. And, it is generally both ethical and legal to use such benchmark information in setting prices.
  • In a few industries, firms share list price information with regulatory agencies. Moreover, those regulatory agencies will publish that price information for the general public. Firms can acquire that information as well for benchmarking competitive prices.
  • When it comes to the pricing habits of specific firms, a bit more digging might be necessary. Published annual and quarterly reports, information on a competitor’s website, and public statements by managers can all be useful sources of competitive price information.

To augment this competitive information, firms can conduct other forms of research. Executives can talk to customers. They can do market research.  They can conduct a historical sales analysis.  And they can do much more. But they can’t ask a competitor for their pricing.

Agreed, the signal may not be exact when using publically available information to benchmark competitive prices. It may not be exactly precise even when found from market research. But it will generally suffice for most pricing questions. In many cases, it must suffice.

When none of the above sources of information are available, hearsay may be as good as it is going to get. Any further proof of a competitor’s pricing habits may be both illegal and unethical.

Disclaimer:  I am not a lawyer and cannot legally provide legal advice. But I can share my understanding of the law as it relates to managerial pricing decisions. The above was my opinion as a pricing professional, professor, and ethical human being.  It should not be substituted for a legal opinion. If in doubt, contact a lawyer. (Why can’t lawyers write laws that any normal person can understand?)

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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