Successfully Implement Price Increases for Industrial Goods

The sales price has a decisive influence on the turnover and profitability of a company (Simon & Fassnacht, 2016). Therefore, science and practice are intensively dealing with the influence of the price level on the sales volume. One expression of this is the derivation of price-sales functions or the calculation of price elasticities. However, these approaches usually neglect the subjectively perceived fairness of price increases, which plays a central role in their sustainability. Companies can contribute to a favourable perception of price fairness on the customer side through various measures. Here, “connecting the dots” proves to be particularly effective, as the implementation of price increases can be better achieved through the expertise and good cooperation of several departments in the company (controlling, product management, sales and marketing communication). The common goal must be that customers largely accept price increases so that no negative effects on customer satisfaction (Herrmann et al., 2007) and the business relationship as a whole result. Price fairness is a concept of customer perception that has so far been predominantly studied in the B-to-C context (Friesen, 2008) and for which only few empirical findings are available in the B-to-B environment (Allmann, 2012). This is surprising since fair behaviour in B-to-B customer-seller relationships is considered central to long-term business success (Kumar et al., 1995). Based on a buyer study, this paper therefore aims to contribute to an empirically supported understanding of which motives and factors in B-to-B business relationships are decisive for the price fairness perception and acceptance of price increases for industrial goods. Purchasing processes in the B-to-B context differ fundamentally from the consumer goods sector due to the following characteristics (Allmann, 2012; Homburg et al., 2014): They are more rational and analytical due to the professionalism of purchasing, which also includes a better understanding of the price-determining factors on the customer side. The sales prices achieved also show a higher variability, as these are often determined in the course of personal interactions or price negotiations. Due to the continuous close contact between buyer and seller, this also leads to the personal customer relationship playing a much more significant role.

1. Price fairness perception as a decisive target variable

The perception of the fairness of prices is a central construct for the analysis of the effect of price increases (Fassnacht & Mahadevan, 2010). If a company’s prices or their increase are perceived as unfair by customers, customer reactions can often be observed that have a negative impact on the business relationship. In addition to refusal to buy, these include in particular migration to the competition or, in extreme cases, even retaliatory activities such as negative word-of-mouth propaganda or legal action (Xia et al., 2004). The construct of price fairness is a subjective perception of customers. It expresses whether a customer feels correctly treated or overcharged with regard to the price to be paid (Pechtl, 2014). The concept of perceived price fairness includes a cognitive and an emotional component (Fassnacht & Mahadevan, 2010). In the cognitive component, the comparison with a reference price plays a decisive role. Prices are not evaluated in absolute terms, but always in relation to a reference price. This can be a price already paid in the past or a competitive price (Bolton et al., 2003). If there is no comprehensible reason for a deviation, there is a risk that a price increase will be perceived as unfair. The theoretical basis for this consideration is the dual-entitlement principle (Kahneman et al., 1986) and the equity theory (Adams, 1963). According to the dual entitlement principle, the business partners in a transaction are entitled to the reference conditions of a previous transaction. A change in the reference terms through a price increase is only permissible if the company’s reference profit is threatened by a cost increase. Conversely, maintaining the price despite a cost reduction is considered acceptable, since the reference price relevant for the customer does not change as a result (Fassnacht & Mahadevan, 2010). In equity theory, the customer compares the outcome (product or service received) with the necessary input (price paid) and checks whether this outcome-input relationship is comparable with previous transactions or similar transactions of other persons as a reference point. The transaction is considered fair if a comparable relation exists (Homburg & Koschate, 2005). In the case of a price increase without a quality gain, the outcome-input relation is worsened from the customer’s perspective compared to previous transactions, which is perceived as less fair. These cognitive comparison processes are also usually accompanied by emotions, especially if the customer considers a company’s prices to be unfair. If customers see themselves as worse off, they react to the perceived disadvantage with indignation, anger and annoyance, which can ultimately also lead to the adverse reactions and actions already mentioned (Xia et al., 2004).

2. Attribution dimensions for price increases

Any price increase of a product with unchanged quality is basically classified as unpleasant by the customer. The assessment of the fairness of a price increase (increase in input) will depend on the extent to which the changed outcome-input relationship can be understood by the customer. In this context, it plays a decisive role which cause or which motive the customer suspects behind it (Campbell, 1999b). According to the attribution theory (Weiner, 2000), individuals attribute certain causes or motives to their own or others’ behaviour. Depending on the cause, different behaviours can be evaluated differently. The perceived fairness of a price increase is thus largely determined by the presumed cause behind the price increase (Campbell, 1999a; Homburg & Koschate, 2005). To assess the causal attributions of price increases, Weiner’s (1992) scheme can be used, which is composed of the dimensions of locus of causality, controllability and temporal stability. The dimension “locus of causality” circumscribes whether a reasoning is perceived as an “internal” or “external” reason. This addresses who is responsible for the price increase. Price increases that can be attributed to external circumstances (e.g. raw material price increases) are generally perceived as fairer than those that are attributed to internal reasons (e.g. miscalculation) (Vaidyanathan & Aggarwal, 2003). The second factor, “controllability”, means that the assessment also depends on whether it is a volitional decision, i.e. whether the acting actor would have had other options for action than a price increase. For example, if a supply shortage leads to an increase in the wholesale price for a commercial product, it seems legitimate for the trader to increase the price. However, if customers know that the retailer has a large buffer stock and that the bottleneck could therefore have been controlled or bridged without disadvantages, the perception of price fairness reverses from “acceptable” to “unfair” (Kahneman et al., 1986). Another relevant factor is the “temporal stability” or permanence of a motive. Reasons for price increases that are perceived as permanent tend to have a stronger effect, as they influence customers’ future expectations. In sum, it can be seen that the attributed motives and their locus of causality, presumed controllability and temporal stability play a decisive role in the perception of price fairness.

3. Empirical results of the B-to-B buyer study

In an online survey, 222 buyers from various sectors in German-speaking countries were interviewed. Table 1 gives an insight into the composition of the sample. The survey was divided into a survey part to determine the acceptance of various price increase motives and a practical experiment to determine the influence of two important factors in the B-to-B context.

3.1 Acceptance of different price increase motives

In the price fairness assessment for different given motives, the agreement to the statement “I perceive price increases by a supplier to be fair with unchanged performance if …” was queried for different items. Figure 1 gives an overview of the assessment of the different price increase motives. The selection of items was based on the generic pricing approaches, with cost-oriented (“increased raw material prices”, “increased manufacturing costs”, “inflation compensation”) and competition-oriented motives (“other suppliers … demand higher prices”, “other suppliers also raise prices … also increase prices”) as well as a customer benefit-oriented motive (“product is better than comparable products …”) were derived. These were supplemented by items oriented towards the supplier’s own benefit (“supplier would like to reposition himself”, “supplier would like to increase his profit”). It can be seen that, in accordance with the dual-entitlement theory, cost-oriented motives consistently score better than competition-oriented motives and that, as expected, the self-benefit motives are rated worst. Relatively high agreement is found with the only customer-benefit-oriented motive: a price increase is judged to be comparatively fair even if the product is better than competitive alternatives. Even if this violates the claim to the reference condition according to the dual entitlement principle and the outcome-input relation worsens for the customer according to equity theory, this seems to be more acceptable in view of the relatively higher customer benefit provided. The communication of given higher customer benefits can thus reduce price unfairness perceptions in the case of price increases for existing products (Xia et al., 2004). It is interesting to note that in the group of cost-oriented items, the agreement with the motives “increased manufacturing costs” and “inflation compensation” drops significantly compared to the raw material price increase. In the case of the motive “increased manufacturing costs”, this could be due to the fact that it is unclear whether it is an external or internal reason (locus of causality), with recourse to the explained categories of attribution theory. Studies show that acceptance of cost-based price increases is significantly lower when customers suspect an internal reason (Vaidyanathan & Aggarwal, 2003). This goes hand in hand with the question of possible alternative actions to a price increase (controllability), such as by increasing production efficiency. The argument “inflation compensation” scores even worse despite its inherently external origin. A possible explanation could be that the motive in its sweeping nature contributes to the assumption of possible controllability and that under certain circumstances a controllable internal cost component is assumed. This illustrates that when communicating a price increase to the customer, a comprehensible, transparent explanation of the motives for a favourable attribution is likely to be crucial (Bechwati et al., 2009). This is especially true if the customer might assume an internal locus of causality or a high degree of controllability and assume a self-benefit orientation.

3.2 Motive transparency and trust as central influencing factors

Following on from these considerations, companies should proactively provide relevant information in order to be able to influence the perception of price fairness via customer attribution (Xia et al., 2004). B-to-B purchasing processes in particular are rational and analytical, which is why the justification of a price increase plays an important role. In a practical experiment with buyers, the question was therefore investigated as to whether the transparent presentation of the motive for a price increase (“motive transparency”) can contribute to a higher price fairness assessment. The following hypothesis H1 is thus tested: The factor motive transparency has a positive effect on the price fairness perception. In the investigation of the factor motive transparency, three levels of expression were distinguished: “low motive transparency” without naming a concrete reason for the price increase, “medium motive transparency” with the justification of a raw material price increase and disclosure of the raw material share as well as “high motive transparency” by referring to a concretely quantified raw material price increase and disclosure of the raw material share of the product under consideration.

As a second presumably important factor, the influence of a trusting customer relationship was examined. As already explained, B-to-B purchasing processes differ from the consumer goods sector in that they usually involve regular, more intensive contact and the resulting closer buyer-seller relationship. In various consumer studies, corporate reputation has been taken into account and a positive influence on perceived price fairness has been demonstrated (Campbell, 1999a; Zagel & Steul-Fischer, 2014). On the other hand, Xia et al. (2004) mention the customer-seller relationship with varying degrees of trust as a factor that still needs to be researched. This applies in particular to the B-to-B business, in which the trusting customer relationship between buyer and sales consultant is likely to be of great importance, as mentioned. The following hypothesis H2 is therefore tested: A trusting customer relationship has a positive effect on the perception of price fairness. In this context, it is interesting to ask whether there are interaction effects between the two factors examined, i.e. whether a transparent explanation of the motive for price increases can be completely or partially dispensed with in the presence of a trusting customer relationship due to the given credibility bonus. Assuming such a moderating effect of the factor “trusting customer relationship”, the following hypothesis H3 can be derived: The customer relationship moderates the effect of motive transparency on price perception. Table 2 shows the structure of the experimental 2×3 between-subjects design in which the respondents were randomly assigned to the resulting six different scenarios. The factors “motive transparency” and “trusting customer relationship” were varied by the textual information presented and then the price fairness perception was surveyed. By means of a two-factor analysis of variance (ANOVA) it could be determined that the overall model is statistically significant [F(5,216) = 5.773, p = 0.000] and that significant effects on the perception of price fairness emanate as main effects from both the factor “motive transparency” [F(2,216) = 8.883, p = 0.000] and the factor “trusting customer relationship” [F(1,216) = 8.773, p = 0.003]. Figure 2 presents the core results of the experiment graphically. The two lines illustrate the effects on price fairness in trusting and non-trusting customer relationships depending on the level of motive transparency. It can be seen that in the case of a trusting relationship, the line of price fairness perception is consistently higher for every level of motive transparency and that a medium or high motive transparency leads to a higher price fairness perception than a low motive transparency. Thus H1 and H2 can be confirmed. Contrary to hypothesis H3, however, there is no interaction effect of the two factors [F(2,216) = 0.006, p = 0.994]. Even in a trusting relationship, an increase in motive transparency causes an increase in perceived price fairness. Hypothesis H3 must therefore be rejected. A trusting customer relationship has a significantly positive effect, but is not a general substitute for the transparent presentation of the price increase motive in a professional purchasing context. The higher the motive transparency, the higher the mean values of perceived price fairness on both lines. The mean difference between the low level of motive transparency and the medium or high level is significant according to Bonferoni’s post hoc test (p < 0.002 or p < 0.001). However, the increase from the medium to the high level of motive transparency is moderate on both lines, which is why no significant difference (p = 1.000) could be proven here. One reason for this may be that in the medium level, the motive of raw material price increase and the argumentation of passing on the raw material share was already relatively concrete and transparent. A further increase in motive transparency through even more detailed argumentation with concrete figures on the scope of the raw material price increase and the concrete raw material share of the product under consideration tends to have a positive effect on average, but does not lead to a significant difference due to the decreasing communicative marginal utility (ceiling effect).

4. Final consideration

In order not to generate too negative effects on customer-perceived price fairness in the case of price increases of industrial goods, both the motive and its transparent communication play an important role. Cost-oriented motives are considered to be better accepted, as they are outside the supplier’s sphere of responsibility, especially in the case of raw material price increases, and cannot be controlled by the supplier. If possible, cost-oriented motives should be used in the argumentation and it should be made clear that they cannot be influenced. The more transparent and thus comprehensible and credible the motive is communicated, the higher is usually the perceived price fairness. In addition, the survey results on the acceptance of price increase motives in the B-to-B context indicate that an accompanying customer benefit-oriented argumentation can have a supporting effect. Companies should therefore always remind their customers of the given advantages and USPs of their own service offering when raising prices. If neither a difference in performance nor cost motives can be used as arguments, the establishment of a trusting customer relationship in the B-to-B environment is another important starting point for increasing the acceptance of price increases. A trusting personal relationship causes a positive attribution process on the customer side and consistently leads to higher perceptions of fairness. It acts as a credibility advance and also supports the basic assumption on the part of professional buyers that they will not be taken advantage of by the seller. However, this does not generally release the supplier in a rational B-to-B purchasing process from a transparent explanation of legitimate reasons for price increases, since even in a trusting customer relationship the perception of price fairness and thus the acceptance of the price increase benefits from a credible argumentation.

Bibliography

Adams, J. S. (1963). Toward an understanding of inequity. Journal of Abnormal Psychology, 67, 422–436. doi.org/10.1037/h0040968

Allmann, J. (2012). Pricing in Business-to- Business-Geschäftsbeziehungen: Eine Analyse der Preissuche und der Preisfairness. Zugl.: Mannheim, Univ., Diss., 2012. Gabler Research. Springer Gabler.

Bechwati, N. N., Sisodia, R. S. & Sheth, J. N. (2009). Developing a model of antecedents to consumers’ perceptions and evaluations of price unfairness. Journal of Business Research, 62(8), 761–767. doi.org/10.1016/j.jbusres.2008.09.004

Bolton, L. E., Warlop, L. & Alba, J. W. (2003). Consumer Perceptions of Price (Un)Fairness. Journal of Consumer Research, 29(4), 474–491. doi:10.1086/346244

Campbell, M. C. (1999a). Perceptions of Price Unfairness: Antecedents and Consequences. Journal of Marketing Research, 36(2), 187–199. doi.org/10.1177/002224379903600204

Campbell, M. C. (1999b). „Why did you do that?“ The important role of inferred motive in perceptions of price fairness. Journal of Product & Brand Management, 8(2), 145–153. doi.org/10.1108/10610429910266995

Fassnacht, M. & Mahadevan, J. (2010). Grundlagen der Preisfairness – Bestandsaufnahme und Ansätze für zukünftige Forschung. Journal für Betriebswirtschaft, 60(4), 295–326. doi.org/10.1007/s11301-010-0067-5

Friesen, M. (2008). Wahrgenommene Preisfairness bei Revenue-Management: eine verhaltenswissenschaftliche und empirisch gestützte Untersuchung der zeitlichen Veränderung im Kaufentscheidungsprozess einer Luftverkehrsdienstleistung. Dissertation Universität St.Gallen.

Herrmann, A., Xia, L., Monroe, K. B. & Huber, F. (2007). The influence of price fairness on customer satisfaction: an empirical test in the context of automobile purchases. Journal of Product & Brand Management, 16(1), 49–58. doi.org/10.1108/10610420710731151

Homburg, C., Allmann, J. & Klarmann, M. (2014). Internal and external price search in industrial buying: The moderating role of customer satisfaction. Journal of Business Research, 67(8), 1581–1588. doi.org/10.1016/j.jbusres.2013.10.003

Homburg, C. & Koschate, N. (2005). Behavioral Pricing-Forschung im Überblick. Teil 1: Grundlagen, Preisinformationsaufnahme und Preisinformationsbeurteilung. Zeitschrift für Betriebswirtschaft, 75(4), 383–423.

Kahneman, D., Knetsch, J. L. & Thaler, R. H. (1986). Fairness as a constraint on profit seeking: Entitlements in the market. The American Economic Review, 76(4), 728–741.

Kumar, N., Scheer, L. K. & Steenkamp, J.-B. E. (1995). The effects of supplier fairness on vulnerable resellers. Journal of Marketing Research, 54–65. doi.org/10.1177/002224379503200107

Pechtl, H. (2014). Preispolitik: Behavioral Pricing und Preissysteme: UTB Lucius.

Simon, H. & Fassnacht, M. (2016). Preismanagement: Strategie – Analyse – Entscheidung – Umsetzung (4. Aufl.). Springer Fachmedien Wiesbaden; Imprint: Springer Gabler.

Vaidyanathan, R. & Aggarwal, P. (2003). Who is the fairest of them all? An attributional approach to price fairness perceptions. Journal of Business Research, 56(6), 453–463. doi.org/10.1016/S0148-2963(01)00231-4

Weiner, B. (1992). Human motivation: metaphors, theories and research. Sage Publications.

Weiner, B. (2000). Attributional Thoughts about Consumer Behavior. Journal of Consumer Research, 27(3), 382–387. doi.org/10.1086/317592

Xia, L., Monroe, K. B. & Cox, J. L. (2004). The Price is Unfair! A Conceptual Framework of Price Fairness Perceptions. Journal of Marketing, 68(4), 1–15. doi.org/10.1509/jmkg.68.4.1.42733

Zagel, T. & Steul-Fischer, M. (2014). Wahrgenommene Preisfairness bei Preiserhöhungen in der Schadenversicherung. Zeitschrift für die gesamte Versicherungswissenschaft, 103(5), 447–459. doi.org/10.1007/s12297-014-0283-5