Price increases are one of the most psychologically loaded decisions in customer-facing business. Most businesses avoid them for too long, implement them with insufficient communication, and then attribute the resulting churn to the increase itself rather than to the specific factors the research identifies as making increases feel exploitative. The Kahneman, Knetsch and Thaler (1986) fairness research is among the most directly commercially applicable findings in the pricing literature — and among the least consulted by businesses facing the decision.

Kahneman, Knetsch and Thaler’s dual entitlement principle: the fairness standard

Kahneman, Knetsch and Thaler’s (1986) American Economic Review research established the foundational account of how customers evaluate price increases. The research used survey experiments to identify the community standards that determine whether price increases are perceived as acceptable or exploitative. The pattern that emerged was the dual entitlement principle: customers believe they are entitled to a reasonable transaction at a price consistent with their reference price; firms are entitled to a reasonable profit but not to the extraction of additional profit from market power or customer inertia.

The principle predicts the specific conditions under which price increases are accepted as fair. A firm that is passing through genuine cost increases — raw material costs, supplier price increases, wage increases driven by labour market conditions — is exercising its legitimate entitlement to maintain its profit position by adjusting prices in proportion to its cost reality. Customers accept this as fair because the increase is attributable to an external cost driver that has changed the firm’s position, not to a decision to extract more from an existing relationship.

A firm that is increasing prices because it can — because it has market position, because customers are locked in, because it wants higher margins — is violating the customer’s entitlement to a reference-price-consistent transaction in the absence of any legitimate cost driver. Customers experience this as exploitation regardless of whether the new price is objectively reasonable, because the fairness evaluation is not about the absolute price level but about whether the increase is justified.

The lumber yard experiment in the original Kahneman research illustrated this with striking clarity. Two scenarios presented the same price increase to participants: one attributed to the vendor’s increased costs, one attributed to the vendor taking advantage of scarcity in the market. The attributed-to-costs version was rated as acceptable; the attributed-to-market-power version was rated as unfair — despite identical actual prices. Attribution is the primary fairness determinant, operating independently of the price level itself.

The reference price and loss aversion: how the magnitude is experienced

Monroe’s (1973) reference price research and the Tversky and Kahneman (1974) anchoring mechanism together predict how customers experience the magnitude of a price increase. The increase is not evaluated against the new price’s objective value — it is evaluated against the reference price that the customer has established through prior experience. The psychological loss of moving from the reference price to the higher price activates the loss aversion mechanism that Kahneman and Tversky’s (1979) prospect theory documented: losses are weighted approximately twice as heavily as equivalent gains.

A 25% price increase from £80 to £100 produces a reference-price loss of £20. Through the loss aversion weighting, this loss is experienced as having a psychological magnitude equivalent to a £40 gain in the opposite direction. The customer evaluating whether to accept the increase is not comparing £80 and £100 symmetrically; they are comparing the £20 loss against whatever benefit they associate with the continued relationship — and the loss aversion coefficient means the threshold for acceptance is higher than the objective arithmetic of the increase would suggest.

The framing of the increase interacts with the reference price in a specific way that the research supports exploiting legitimately. If the increase can be framed as the removal of a temporary discount rather than as an increase from the current price, the reference price activated is the original undiscounted price rather than the discounted price the customer has been paying. “We are returning to our standard rate of £100 from the introductory rate of £80” activates a different reference point than “we are increasing your rate from £80 to £100.” The first positions the £100 as the established reference; the second positions the £80 as the established reference and the £100 as a deviation from it.

The communication factors that shift the fairness evaluation

The Kahneman et al. (1986) fairness research identified three communication factors that determine whether a specific price increase is experienced as fair or exploitative: attribution, proportionality, and notice.

Attribution is the most powerful factor. An increase that is attributed to specific, genuine cost drivers is accepted at substantially higher rates than an equivalent increase presented without explanation — even when customers cannot verify the attribution. The honesty signal of providing an explanation shifts the fairness evaluation independently of the explanation’s verifiability. The research confirms that customers do not primarily verify attributions; they evaluate the social signal that providing an attribution represents. A firm that provides an attribution is communicating that it believes the increase requires justification, which communicates respect for the customer’s fairness entitlement. A firm that provides no attribution is communicating that no justification is necessary — which communicates either confidence in the relationship’s lock-in or indifference to the customer’s fairness evaluation.

Proportionality is the second factor. An increase that is attributable to cost increases is experienced as fair in proportion to the cost increase it reflects. An increase that substantially exceeds the stated cost driver activates the exploitation evaluation even when the initial attribution shifted the fairness frame. The Xia, Monroe and Cox (2004) perceived price fairness scale research confirmed that the interaction between attribution and proportionality is the strongest predictor of fairness perception: genuine attribution with proportionate increase produces the most positive fairness evaluation; no attribution with disproportionate increase produces the most negative.

Notice is the third factor. Price increases implemented without advance notice activate the exploitation evaluation more readily than those with adequate warning — because the absence of notice communicates that the firm did not consider the customer’s preparation for the change relevant. Adequate notice, combined with the option to take a preparatory action (lock in the current rate, adjust their own plans), shifts the fairness evaluation by providing the autonomy that the self-determination theory research identifies as a basic psychological need. The SDT autonomy provision predicts that customers given advance notice and a genuine choice show substantially lower churn than those who receive transactional notification alone — not because the price is different but because the communication architecture has provided the autonomy signal that the fairness evaluation depends on.

The Netflix 2022 case study and its lessons

Netflix’s 2022 price increases were implemented with different communication approaches across markets. Markets that received communication explaining investment in original content and production quality showed lower churn rates than those that received purely transactional pricing notifications. The differential is the Kahneman attribution mechanism operating at scale: the content investment explanation provided an attribution that shifted the fairness frame even when customers could not verify the specific relationship between the stated investment and the price increase.

The finding also demonstrates the proportionality requirement: the content investment attribution was plausible and broadly consistent with Netflix’s visible production activity. The fairness evaluation responded to a credible attribution rather than demanding verification.

The grandfathering strategy and its psychological architecture

The grandfathering strategy — maintaining existing customers at current rates while charging new customers higher rates — is the most consistently successful structural price increase approach for businesses with established customer bases. Its success is explained by the reference price and fairness mechanisms simultaneously.

For existing customers, grandfathering maintains the reference price relationship: their entitlement to a reference-price-consistent transaction is honoured. The fairness evaluation is positive because the customer’s relationship is being protected. The long-term cost of this approach is that it creates a two-tier customer base and delays the reference price updating that the increase is supposed to achieve.

For new customers, the higher price is their initial reference price — they have no prior lower-price reference to activate loss aversion against. The new pricing communicates the current quality assessment through the Rao-Monroe price-quality heuristic without the fairness evaluation problem that the same price triggers in existing customers. The grandfathering strategy effectively manages both populations simultaneously with different mechanisms.

The optimal grandfathering implementation includes a defined timeline — “your current rate is guaranteed for twelve months, after which the standard rate applies” — which provides the notice factor while setting an expectation that the reference price will eventually update. This prevents the indefinite maintenance of the discounted tier while managing the immediate fairness evaluation.

The timing of implementation

The research on price increase timing supports implementation at moments when the customer’s relationship investment is highest and their evaluation of alternatives is lowest. Immediately after a service delivery that generated positive peak-end evaluation — a successful project completion, a feature release that solved a significant customer problem, a service interaction that demonstrated exceptional care — the customer’s implicit assessment of the value of the relationship is at its highest. The fairness evaluation of a price increase at this moment is more positive than the same increase implemented at a neutral moment, because the recent experience has updated the value reference that the increase is being evaluated against.

Implementation at contract renewal is the most common practical timing — the renewal moment is structurally appropriate for price review, which provides the attribution that the fairness research supports, and it includes the notice factor naturally. The announcement of a renewal-point increase six to eight weeks before renewal provides the notice, the implied attribution (this is our standard rate for the next period), and the autonomy signal (you have time to decide) simultaneously.

Books worth reading on this

Negotiation Genius by Deepak Malhotra and Max Bazerman. Malhotra and Bazerman’s account of negotiation psychology — specifically how anchoring, fairness perception, and the communication of legitimacy determine whether a price position is accepted or resisted — provides the most directly applicable available complement to the Kahneman fairness and reference price mechanisms. Their specific account of how to communicate the basis for a price position in ways that shift the fairness evaluation from exploitation to legitimate entitlement maps directly onto the attribution and proportionality factors this article identifies as the primary fairness determinants.

If the dynamics described here are significantly affecting your wellbeing, speaking with a psychologist is the right next step. UK: Samaritans (116 123, free, 24/7). Mind (0300 123 3393). BACP: bacp.co.uk/search/Therapists. Crisis Text Line — text HOME to 741741 (US, UK, Canada, Ireland). International: internationaltherapistdirectory.com.

This article is for educational and informational purposes only. Sources: Kahneman, D., Knetsch, J.L. & Thaler, R.H. (1986), Fairness as a Constraint on Profit Seeking: Entitlements in the Market, American Economic Review, 76(4), 728–741. Monroe, K.B. (1973), Buyers’ Subjective Perceptions of Price, Journal of Marketing Research, 10(1), 70–80. Tversky, A. & Kahneman, D. (1974), Judgment Under Uncertainty: Heuristics and Biases, Science, 185(4157), 1124–1131. Kahneman, D. & Tversky, A. (1979), Prospect Theory: An Analysis of Decision Under Risk, Econometrica, 47(2), 263–291. 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. Rao, A.R. & Monroe, K.B. (1989), The Effect of Price, Brand Name, and Store Name on Buyers’ Perceptions of Product Quality, Journal of Marketing Research, 26(3), 351–357. Malhotra, D. & Bazerman, M. (2007), Negotiation Genius, Bantam Books. Diamond, S. (2010), Getting More, Crown Business.