Islamic Ethics related to Pricing
The price of goods and services reflects the value of the product offered to consumers. It is a very important factor which determines consumer purchasing decision. In Islam, the seller must significantly assess diverse aspects before making this decision. Here are some ethics related to marketing:
- Not to sell the commodity at a lower price than the market price
- Moderate profit is the best
- Market demand and supply forces
- Prohibition of Ghaban –e- fahish
- Price and Quality relationship
- Business Transactions should be Free from Maisir
- Prices must be kept after calculating the value-added in the goods or services
1. Not to sell the commodity at a lower than the market price.
Sometimes, a businessman charges a lower price to attract more consumers. The sale eventually increases but it causes loss to other fellow traders. Therefore, it is not allowed because more profit is earned at the expense of others.
Once the second Caliph Umar Ibn al-Khattab passed by Hatib ibn Abi Balta’ah and found him selling raisins at a much lower price with the intention of putting his competitors to loss. Caliph Umar Ibn al-Khattab told him: “Either enhance your rate or get away from our market” (Malik, 1989).
It was reported that the second Muslim Caliph, Omar, noticed that a seller was deliberately lowering his prices and undercutting the prices of the rest. He told him ‘either you bring your price up, or leave the market’ (Quoted in Raghib, 1995, p. 344)
So, we can say that lowering the price to attract the customer is unethical. It is not allowed even to drive other competitors out of market, because Islam promotes healthy competition.
2. Moderate profit is the best
A moderate profit is better for business as it doesn’t harm society and also it improves the efficiency of the exchange system. Huge profit reflects greed and limits its marketing in any transaction. Greed may harm society and dealings stimulated by greed weaken trust in business relationships.
Ibn Khaldun argued (1989, p. 312) said that many times a little [profit] is much.’
Jabir ibn Abdullah reported: The Messenger of Allah, peace and blessings be upon him, said: “Guard yourself from oppression, for oppression will be darkness on the Day of Resurrection. Guard yourself from greed, for greed destroyed those before you. It caused them to shed blood and to make lawful what was unlawful.”(Muslim 2578)
3. Market demand and supply forces
Islam promotes free marketing and pricing which means the market forces of Demand and Supply will dictate the prices of commodities. It results in healthy competition. The Prophet Muhammad (peace be upon him) refused to interfere to fix or control prices.
Anas reported that the current price once became dear at the time of the Messenger of Allah. They asked: O Messenger of Allah! Fix a rate for us. The Holy Prophet replied: Verily Allah is One who controls price, curtails, gives amply and provides sustenance; and certainly I hope that I should meet my Lord while there will be none amongst you who will hold me responsible either for blood or for the property. -(Tirmizi, Abu Daud, Ibn Majah)
The last of it is musk. So for this let the competitors compete. (Quran, 83:26).
However, the Islamic jurists said that if corrupt businessmen and hoarders have raised prices of essential food-stuffs by artificially creating a scarcity of these things in the market or there is the natural scarcity of these goods in the market then, the state is allowed to intervene to place a temporary limit. The role of Vezir (prime minister), Kadi (canonical judge) and other experts are crucial in fostering an atmosphere for a liberal economy. One option that the government can do is to buy up the surplus supply in order to keep them in stock and use it when there is an excess in demand to avoid the price from increasing (Oguz and Tabakoglu, 1991).
The state, however, may intervene in price setting in case of crisis or when prices skyrocket (Asaf, 1987).
Hoarding of commodities to increase its price is strictly forbidden in Islam. Our beloved Prophet Muhamad said:
“Whoever hoards food (in order to increase its price), has certainly erred.” (narrated by Muslim)
“Whoever strives to increase the cost (of products) for Muslims, Allah, the Exalted, will place him in the center of the Fire (narrated by Ahmad and Al-Haakim).
Also, a marketer should always be aware of Riba. The Prophet (Peace be upon him)said, “To cheat the easy-going customer constitutes illicit gain (riba’)” (Ibn Taymiya 1982:62-68).
4. Prohibition of Ghaban –e- fahish
The prophet Muhammad (peace be upon him) prohibited ‘Ghaban –e- fahish’. It means the sale of commodities at a high price and making the consumer think that he is charged the normal market price.
5. Price and Quality relationship
Consumers buying decision also depend on the quality of product offered with respect to its price. There are several scholars who undergo to study the relationship between price and quality as an indicator of buyers purchase decision of goods and services.
(Monroe, Rao, and Zeithml ) found that buyers believe that higher price indicates higher quality.
(Dodds 1985) review that price of the products is positively correlated with brands. Though the correlation is unclear, but observation made by Dodds reveals that branded item signal the higher quality of the product and hence its higher price is deemed reasonable as it reflects the higher value.
A study by (Zeithaml 1988) includes the buyer’s perception on branded items, consumer tend to purchase branded item as they perceive it to be higher in quality and thus the consumer is willing to pay more for that item.
Review by (Qiang Di 2009) raise the issue on the factors that affect buyers’ decision to purchase luxury or branded goods despite the fact that its price is so much higher relative to other items available in the market.
In one study by (Qiang Di), to determine the factors of consumer purchase of luxury goods, indicates that, customer will evaluate the product prior in making purchase decision, and customer evaluation of such luxury goods in terms of its value is high and since the value are higher than cost of acquiring the goods, customer thus decide to purchase such luxury goods after doing cost and benefit analysis.
Empirical studies by (Gerstner 1985) reveal that though buyer perceives higher price is tie to higher quality that remains as perception the actual relationship between the price and quality is not strong. This suggests that higher price do not necessarily indicates superiority and lower price does not too reflect inferior quality of the product.
Producer are allowed to charge price higher than the cost of producing it(mark up) but a same time, producer must ensure that the price it charge is not exorbitant (Mohammad Saeed et al 2001)
It is not allowed to change a price without altering the quality or quantity of the product because this is cheating the easy-going customer for illicit gain (Ibn Taymiyah, 1982).
Pricing must reflect the value of the product quality. In Islam, prices must be fair and just. The seller is prohibited to charge a price that is incompatible with its quality
O ye who believe! Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be (against) rich or poor: for Allah can best protect both. Follow not the lusts (of your hearts), lest ye swerve, and if ye distort (justice) or decline to do justice, verily Allah is well-acquainted with all that ye do. (Quran 4:135)
“[O Muhammad S.A.W] Say: My creator has commanded justice”. (Qur’an 07:29)
6. Business Transaction should be Free from Maisir
Maisir means earning without hard-earned means. If a businessman plans to increase or decrease the quality of the goods, he must also increase or decrease the price of the good to avoid Maisir. By doing so, there will be no unjustified gains.
Free from Maisir is one of the principles that need to be considered by marketer in making pricing decision. (Al-Buraey 2004).
7. Prices must be fixed after calculating the value-added in the goods or services.
Some factors should be kept in the mind before fixing prices of goods and services such as Raw material cost, electricity cost, warehousing cost, transportation cost, geographic distance, season etc. The Risk Involved in business is also an important factor. If the risk is high, the sellers are permitted to charge higher prices to compensate for losses.
Business Ethics in Islam, Abbas J Ali