WHAT WE THINK ABOUT WHAT YOU THINK ABOUT.
Iâ€™m preparing to do payroll. As part of my personal program of productive procrastination, I thought I would delay this task with a little blogging. Whenever itâ€™s time for payroll, I start to think about the price â€œPâ€ of the marketing mix. Itâ€™s a natural, because it is a most practical reminder of the importance of gross margin, which is a function of price.
I read a book not long ago, Pricing on Purpose, in which the author talks about methods for stratifying prices, so that you can get higher prices from customers/clients/situations in which the tasks or goods have a higher value (that would be above the equilibrium line on the supply and demand curve, which I also learned helps to define price elasticity).
To a pure market economist, a thing is worth what the present customer is willing to pay for it at the present time, under the present circumstance. To a glass half-empty type (angry marxists), this is a definition of exploitative pricing. To that guy, a thing is worth precisely the cost of producing itâ€”Marx lived with his mum for most of his adult life. That guy doesnâ€™t take into account all of the times when the seller has to sell, and the present buyer, at the present time, in the present circumstance is willing to pay LESS than the cost of producing the goodsâ€”look at Florida real estate.
For the most part, I think itâ€™s sort of silly to attach moral judgments to pricing. But people do. To some people, the â€œcorrect/fairâ€ price of a thing is exactly what the last guy paid for it. By that logic, if a guy bought a bottle of drinking water for a buck before the famine, then the seller should be obligated to sell drinking water for a buck during the famine (remember Richard Nixonâ€™s wage-price freeze?). As a practical matter, the most common idea of correct/fair pricing is some cost-plus equation. There is some arbitrary idea of a â€œfairâ€ markup (usually somewhere between 15 and 300 percent, depending on the industry), beyond which, the seller is gouging the buyer.
Sometimes I like to turn the tables. Is it fair for somebody to make $100,000 on a piece of advice or work for which he paid $5,000? Thatâ€™s a 2000 percent profit!!!!! Outrageous!!!! Yet that is often the case with people who purchase professional services. Then again, if the person rendering the service only spent two hours rendering the $5,000 piece of advice, then heâ€™s making $2,500 per hour. Outrageous!!!!!! Nobodyâ€™s worth that!!!!!
By common, cost-plus logic (complete with added morality), the guy should not have been allowed to charge more than, say, $200 (at $100 per hour); and the person using the advice should not have been able to make more than $600 (that would be a 300 percent profit). That would be $104,100 in value that never gets into the economy. With the multiplier effect, thatâ€™s like $300,000-500,000 in goods and services that never get purchased. Thatâ€™s ten unemployed households created in the interest of some arbitrary idea of a â€œfair profit.â€
Wish I could make $2,500 an hour. Some days I wish I could make $25. Gotta get some paychecks written.