Fair price is a selling price that considers quality, performance, supply conditions, time of delivery and payment options. It is calculated at the level that is fair for both sides. The seller gains some margin, which is not excessively too high. Therefore, both sides of the transaction should be glad with that price.
In some cases it is difficult to calculate fair price. It is especially a problem if the place of production is distant and trade is made with intermediary. The price of the product in third world countries can be extremely low, as there are very low costs of labor. The intermediaries add their margins and the same product in Europe or US costs 100 or 1000 times more. That led to creation of idea of fair trade. The margins of intermediaries are kept on more reasonable level (however still high), and payments for producers are increased in order to give them opportunity for development (J.Reinecke 2010).
Fair price in Fair Trade
The idea of a fair price is one of the fundamental assumptions of the Fair Trade, established by the World Fair Trade Organization. According to the WFTO, it should be negotiated between both the seller and the buyer, and should be carried out in a transparent manner. The heigth of the fair price is supposed to be calculated based on:
- the minimum and estimated wages (the wages paid by the company should be at least as high as the minimum wage in a country and should be regurarly negotiated with the spokesmen of employees),
- current cost of the products,
- costs of production,
- a fair profit for all members of the supply chain, so that all of them will get a just share of the ultimate price.
O. Heino and A. Takala show that a price is considered fair if (O. Heino, A. Takala 2015, p. 855):
- customers are ready to pay it, meaning it will be accepted by them personally,
- it is based on what they consider morally right and equitable.
On the other hand, the price is viewed as unfair if it somehow disobeys social norms – quite often when it is extremely high. Although that does not mean that an exceedingly low price will be deemed as fair – on the opposite, it may be regarded as representing lack of fairness and in such way violating the social norms (O.Heino, A.Takala 2015, p. 855).
These statements were earlier proved by S. Maxwell and L.Comer in their analysis of the influence of elements of a fair price. In the research the authors came to a conclusion that the customers are more willing to accept a change in the cost of a good or service and consider the new price as fair if they are given a reason (L.Comer, S.Maxwell 2010, p. 378). Seven ingredients of the price fairness can be indicated (H. Diller 2008, p. 354-355):
- distributive justness – one part should not gain by causing a loss for the other,
- constant behaviour – interactions between both parties should every time be done in the same way, according to some certain rules,
- price uprightness – informations about the price should be complete and clear,
- price reliableness – complying with the prices set primary,
- fair dealing – being ready to do inconsiderable things not required by a contract (e.g. doing some repair without charging an additional fee),
- esteem and concern for a partner – none of the sides should pressure too hard on the other, they both are supposed to comprehend each other's problems and not to capitalize on them,
- privilege of co-determination – both parts of the business transaction are more eager to accept a price if they have the right to decide on its heigth.
Examples of fair price usage
Fair price can refer to international trade as well as local trade. Here are some examples:
- When Negotiating a Salary: When negotiating a salary, it is important to consider what is fair and reasonable for both the employer and the employee. Both sides should take into account the market value of the job and the skills and experience of the employee, in order to come to a fair price for the position.
- When Shopping for a Used Car: When shopping for a used car, it is important to consider the fair price of the car based on its condition, age, and mileage. By researching the market value of the car and comparing it to similar cars, one can determine a fair price to pay for the car.
- When Purchasing a Home: When purchasing a home, it is important to look at the fair market value of the property. This can be done by looking at similar homes in the area and taking into account any upgrades or improvements the home may have. By determining the fair price of the home, the buyer can ensure they are not overpaying for the property.
- When Purchasing Imported Goods: When purchasing imported goods, it is important to consider the fair price for the item. This can be done by researching the market value of the item in the country of origin and comparing it to the price the seller is asking for. This ensures that the buyer is not overpaying for the item.
- When Setting Tariffs: When setting tariffs on imported goods, it is important to consider the fair price of the item in the country of origin. This will ensure that the tariffs are not too high or too low, and reflect the market value of the item.
- When Negotiating International Trade Deals: When negotiating international trade deals, it is important to consider the fair price of the goods and services being exchanged. This ensures that the deal is beneficial to both sides and reflects the market value of the items being traded.
How to know whether price is fair?
- Research the Market Value: Researching the market value of the item or service is a good way to determine whether the price is fair. By comparing the price to similar items or services, one can assess if the price is reasonable and in line with the market value.
- Consider the Quality: The quality and condition of the item or service should also be considered when determining if the price is fair. If the item or service is of lower quality than expected, then the price should be adjusted accordingly.
- Get Quotes from Others: Getting quotes from other vendors or suppliers is a good way to determine if the price is fair. Comparing the price to other quotes can help one identify if the price is too high or too low.
- Consider the Seller's Costs: It is important to consider the seller's costs when determining if the price is fair. This includes the cost of materials, labor, and any other expenses that the seller may have incurred in order to provide the item or service.
Fair price in marketing
The fair price is also an important aspect in the ideology of sustainable development, which assumes that all entities should strive for the improving the living conditions on the planet. In this context, a price is considered fair if it guarantees that the sacrifice made by the buyer (meaning the amount of money paid) and the value of a good or service that the seller offers are equivalent. In their research, I. Cătoiu, A. Filip and D.M. Vrânceanu proved that consumers are ready to pay a higher price if its height is due to social reasons.
Price, as one of the elements of marketing-mix, has a very big influence on customers' choice. In context of sustainable development, it is referred to as sustainable marketing which puts a strong emphasis on the social and environmental aspects of the traditional marketing. Nowadays the customers are more and more aware of for example how big companies exploit their employees, and tend to turn to those brands that are actively acting on increasing the standards of working conditions. The clients are also willing to pay more for their products. This means that a higher price is considered as fair if it comes with environmental improvements. What is more, the three authors in their research claim that “a company that set fair prices is perceived as offering a good value for money, increasing the satisfaction of its customers” (I.Cătoiu, A.Filip, D.M.Vrânceanu 2010, p. 120-122).
- Cătoiu I., Filip A., Vrânceanu D.M. (2010). Setting Fair Prices – Fundamental Principle of Sustainable Marketing, Amfiteatru Economic 12(27)
- Comer L., Maxwell S. (2010). The two components of a fair price: social and personal, Journal of Product & Brand Management 19(5)
- Diller, H. (2008). Price fairness, Journal of Product & Brand Management 17(5)
- Heino O., Takala A. (2015). Social Norms in Water Services: Exploring the Fair Price of Water, Water Alternatives 8(1)
- Heo C.Y., Lee S. (2011). Influences of consumer characteristics on fairness perceptions of revenue management pricing in the hotel industry , International Journal of Hospitality Management 30(2)
- Reinecke, J. (2010). Beyond a subjective theory of value and towards a ‘fair price’: An organizational perspective on Fairtrade minimum price setting. Organization, 17(5), 563-581.
- WFTO Fair Trade Standard.
Author: Anna Telakowska