Price Gouging

One of my more controversial opinions is that what most would consider price gouging, I believe is a normal and healthy part of the free market price system that best allocates resources, especially during disasters and crises. 

For example, after a hurricane, if fuel stations were to raise the price of gasoline, “Price gouging!” accusations would erupt.

But in economic terms, that price increase signals scarcity (messenger) and encourages conservation or alternative sourcing (motivator). It tells buyers: this is rare, use it wisely. And it tells suppliers: there’s money to be made if you can bring more in.

Most view price gouging as immoral because they see it as exploitation. But in crises, price signals are critical. Without them, needs get flattened. For example, a tow truck driver and a remote office worker are treated the same. As such, price controls create scarcity, long lines, and hoarding.

During shortages, the average automobile fuel tank creeps from half to three-quarters full. Millions of small, rational hoarding decisions drain the gasoline supply.

After Hurricane Sandy, gas was scarce in NYC due to price caps. Yet Craigslist showed the truth: $12/gallon black-market gas. A tow truck driver might gladly pay it because no fuel means no business. For the casual hoarder, that price isn’t worth the hassle and that’s exactly the point.

Most people think of price as a simply the cost plus a markup. But prices are actually one of the most effective means of communication the world has ever known. It’s both a messenger and a motivator.

Understanding the elements of both will help you set and change your prices to effectively communicate the value of your products and services.

Let’s break down what makes up a price using a real-world case study: your neighborhood bike shop. This shop sells:

• Physical products: bikes, helmets, accessories

• Services: tune-ups, repairs, fittings

• Digital products: training plans, virtual coaching

The Messenger

Scarcity

Scarcity is simply the lack of availability and can occur from the any or all of the following:

True Scarcity

Example: The shop only receives a limited shipment of higher-end road bikes each season. These are hard to source and demand is rising. Bike markups are typically 100% over cost ($2,500 wholesale would be $5,000 retail).

Price Signals: These are exclusive. First-come, first-served.

Action: The shop should raise the price above its normal markup. If they feel like they should limit purchases they might want to raise it even further.

By doing so, they preserve access for real customers and profitability during real supply constraints.

Prompt: Where in your business have your products or services experienced true scarcity? If they have, why haven’t you raised your prices? Are you worried about customer reactions?

Artificial Scarcity

Example: The shop releases a “Winter Fit Tune-Up” package for 20% less than its normal tune-up fee. Only 50 available. The service isn’t limited by labor, but the cap creates urgency.

Price signals: This deal is special, short-lived, and valuable.

Action: For the shop, the special increases bookings during a normally slow month. Most customers may not be thinking about riding for weeks until the weather breaks. The incentive accelerates their demand and will have them on the road when better weather arrives.

Prompt: Where in your business is there excess capacity? It could be slow moving inventory or seasonal periods when demand is slow. How can you signal artificial scarcity through limited availability and alternative pricing?

Value

There are too many value attributes to cover in one article. The important thing to remember is your customers value different things. Even customers within a niche such as cycling will value your products and services differently. Your prices should be set to communicate those differences.

Example: The shop offers a “Pro Package” that includes a $2,000 bike bundled with a year of free tune-ups, a helmet, and a bike fitting.

Price signals: You’re getting more than a bike, you’re getting the entire bike owning experience.

Action: For the shop, this a way to create a new product out of it’s current, selected inventory. For customers, especially new customers who are just getting into cycling, this is a great deal. Anyone who is into sports like cycling or golf understand how easily money can leave one’s wallet. For the new cyclist, this is a low risk and low intimidation way to begin the sport. They know their max out-of-pocket, $2,000.

Prompt: Have you thought about your customers’ values? How are they different? Why would the same product or service you offer be valued differently and by how much? How could differentiated pricing speak to them individually?

Costs

Example: The bike shop offers custom, professional fittings for $500, 30% to 50% higher than other bike shops. The shop also includes a guarantee in the form of a fitting adjustment good for up to four weeks post fitting.

Price signals: We know what we’re doing and our service and time is worth it.

Action: A bike fitting is a service where a technician adjusts the bike to best match the riders body type and build. A correct fitting isn’t trivial as it prevents overuse injuries and improves comfort on long rides.

Why the premium price? Why not discount it so casual cyclists can take advantage of the service? Providing the service requires a lot of employee and owner time, not to mention the need for specialized equipment.

Prompt: Where in your business are you charging for time, be it employees or yours? The cost to provide the service isn’t simply the wage costs of the employees or an hourly rate for your time. It’s the opportunity costs of what else the business could be offering. If you offer a premium service, price it as such.

The Motivator

Urgency

Mostly, pricing strategy comes down to understanding your customers’ wants and needs. When they plan on fulfilling those wants and needs is another matter.

Example: The shop runs a “Weekend Only” flash sale on bike accessories, everything 20% off.

Price signals: Act now or miss out.

Action: Your customer needed a new water bottle cage at the end of last season but hadn’t thought about it since. The weekend flash sale will have them at your shop buying a new water bottle cage and likely a few other items while they’re there.

Prompt: What limited-time incentive could you offer that drives action without eroding brand value? Similarly, if your product or service often isn’t top of mind, how can you automate or reduce friction in the purchasing process via subscriptions, etc.?

Sensitivity

Just as values differ customer-to-customer, an individual customer can be a premium buyer when it comes to one product or service and a discount buyer for another. Understanding your customer’s price sensitivity is essential.

Example: The shop notices parents are rightly price-sensitive when buying kids’ bikes. Knowing they will likely replace the bike as the child grows, the shop offers a generous trade in program instead of discounting the sale price.

Price signals: The shop sells premium, high quality bikes even for kids.

Action: The trade-in program is effectively a discount that signals to the customer that the shop wants a long-term relationship with their whole family.

Prompt: Have you clearly identified which of your customer segments are most price-sensitive? Are different customers price sensitive or are the same customers price-sensitive in different ways across your products and services?

The Next Step

The key element to remember is that your pricing has to be a credible reflection of the value your product or service delivers.

A price is never just a number. It’s a signal and a guide.

• It tells the market who should buy it and what it’s worth.

• It guides behavior including when to act, how much to buy, what to prioritize.

Whether you’re selling bikes or software, services or subscriptions, your pricing tells a story.

Make sure it’s communicating the proper messaging and motivation to the right people.

My goal with The Leap is to provide you each Saturday with the knowledge, tools and lessons learned to help you get started and keep going toward building your future. 

Whether you are making the leap to startups, solo-entrepreneurship, freelancing, side hustles or other creative ventures, the tools and strategies to succeed in each are similar.