When Prices Feel Expensive: The Behavioral Limits of Pricing Power
In February 2024, Wendy's CEO Kirk Tanner mentioned "dynamic pricing" in an earnings call. Within 48 hours, #BoycottWendys was trending, Burger King launched a "No urge to surge" counter-campaign, and the company was forced into damage control mode with a $1 burger promotion. The price had not even changed yet.
This is the gap that pricing models miss. Most companies assume customers evaluate prices rationally. They do not. Price is a signal, a social statement, and an implicit contract. When a price change violates psychological expectations, the backlash is swift and disproportionate to the price change itself.
The question is not "what will customers pay?" It is "what will customers accept, and under what conditions?"
Four Constraints That Pricing Models Miss
Reference Dependence: Customers do not evaluate prices in absolute terms. They compare them to what they paid before, what competitors charge, and what they believe they deserve. Economists Kahneman and Tversky formalized this in “prospect theory”, showing that gains and losses are measured from a reference point, not from zero. Disney+ subscribers who paid $6.99 at launch do not evaluate today's $18.99 Premium tier against content value. They evaluate the price against their original anchor point. The October 2025 Disney+ price increase triggered cancellation waves not because $18.99 is unreasonable, but because it represents a near-tripling from the reference price many customers still carried.
Fairness Norms: Customers reject prices that they perceive as unfair, even if they are economically advantageous. Economists Kahneman, Knetsch, and Thaler demonstrated this in their 1986 research on "dual entitlement." Customers believe they are entitled to a reference price, and companies believe they are entitled to a reference profit. Price increases traced to cost increases are typically tolerated. Price increases that appear to exploit captive customers are not. When Wendy's said "dynamic pricing," consumers heard "surge pricing" and reacted with moral outrage, not price sensitivity.
Loss Aversion: Price changes are felt asymmetrically. Paying more for the same thing registers as a loss, and losses hit harder than gains. Economist Thaler's work on mental accounting showed how this asymmetry shapes purchasing decisions, and it’s why “shrinkflation” works. A 1% price increase reduces sales by 1.19%, while a 1% pack size decrease reduces sales by only 0.56%. However, when shrinkflation becomes visible, the framing shifts. Dunkin's 2025 portion reductions sparked disproportionate backlash because consumers perceived dishonesty. As one analyst put it: "Consumers forgive a price increase more readily than a hidden reduction, because honesty maintains equity while concealment dissolves it."
Trust as a Pricing Asset: Trust is the accumulated expectation that a company will price consistently and fairly over time. High-trust relationships expand the acceptable range of pricing moves. Low-trust relationships contract it. In late 2025, Australia's consumer watchdog ACCC sued Microsoft for hiding a cheaper Microsoft 365 plan after forcing 2.7 million users into a more expensive Copilot-bundled tier. Microsoft's apology email then included broken refund links. Each misstep compounded the trust deficit. Execution failures don’t just frustrate customers. They become evidence of character.
Why Backlash Is About Meaning, Not Magnitude
Customers who cancel streaming services can still afford $18.99. The issue is not affordability. It is meaning. When a price change feels unscrupulous instead of a reasonable response to costs or other factors, customers update their beliefs about the company. Same price, different intent, completely different reaction.
Tactical Takeaways for Teams
Pricing power is real, but it is bounded by psychology in ways models do not capture. Pricing boundaries depend less on economics and more on what customers believe about your intentions. Smart commercial teams apply a few repeatable habits:
Run qualitative research before quantitative. Surveys tell you what percentage of customers would accept a given price. Customer interviews reveal why. Surface the mental models, reference points, and fairness thresholds that quant methods miss.
Communicate rationale, not just numbers. Customers are trying to make sense of price changes. Help them reach a reasonable interpretation that even a skeptical customer would see as fair, or they will fill in the blanks with suspicion.
Move incrementally. Reference prices adjust gradually. A 3% annual increase builds a new baseline consistently and predictably. A 30% jump after years of stability triggers fairness alarms.
Audit every customer touchpoint for consistency. Microsoft's broken refund links turned an apology into a second offense. Take the time to assess each touchpoint before rolling out the change. Execution failures compound trust damage.
Leave some pricing power unclaimed. Pushing to the limit of what customers will tolerate captures revenue today but erodes the trust that enables growth and flexibility tomorrow.
Price changes are both an economic decision and a trust decision. When you manage reference points, fairness, and execution with care, you preserve the flexibility that growth depends on.
If you want a structured way to stress-test price changes before they hit the market, reach out to us. FintastIQ can help.
