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Posted: April 11, 2013

Rip-off or just good business?

Is it wrong to charge more for less?

David Sneed

Economists say that the price of X is determined by the market.  If you’re willing to pay $34 for an ice cream cone, then:

  • a) That's what it’s worth, and
  • b) That's what I should charge.

But what about an industry versus the consumer?

If we both sell kronts and they cost us $5 to produce, what should we charge? And I don’t believe "As much as you can get’" is the right answer.

Fact: When a natural disaster strikes and I have the only bottled water in town, I can’t (legally or morally) sell them for $500 each.

Fact: During a cold spell, the electric company can’t (legally) raise the price for watts.

We probably agree that it’s useful to prohibit profiteering, so we aren’t opposed to limiting profit in principle.

Now back to the kronts.

Customers don’t know our cost; they only know it’s a product they want but can’t produce at home.

I charge $25, and net $20 each. That seems fair to me. My competition charges $50, and some people pay it.

“Okay,” you think, “the customer should have shopped around.” Caveat emptor and whatnot.

Well, this $50 kront dealer has been around a long time, and some people assume they have a superior product, or better service, or something that makes their kront worth twice as much.

But the fact is, there’s no objective benefit to using company B.

So question: Is company B acting in bad faith?

I wonder: If your business model is built on selling fewer for more, to customers who are poor decision-makers, are you ripping them off?

And I don’t know the answer.  

But in the fence industry we have a company like that. Their product is objectively worse, and their service terrible, but they charge 50 percent more than the competition. And people pay it because they believe it MUST be better.

If you have a dog, you need a fence up quickly when yours blows down. In that respect, most fences are ‘necessary’ purchases, and people don’t have tons of time to compare deals. And most don’t.

Now my company does alright; we have plenty of work, and I’m certainly never the low bid. In fact, I’m at the higher end. But even when I know a customer can/will pay more, I don’t raise my rates. I’m not trying to be a hero; it’s just something inside me I can’t control. (I’m also not making a stand against the practice.)

But my question is this:  

  • Should a business raise their prices (without remorse or a valid reason) if people are willing to pay it?

I’d like to know what you think.

David Sneed is the owner of Alpine Fence Company,and the author of" Everyone Has A Boss– The Two Hour Guide to Being the Most Valuable Employee at Any Company." As a Marine, father, employee and boss, David has learned how to help others succeed. He teaches the benefits of a strong work ethic to entry and mid-level employees. Contact him at  David@EveryoneHasABoss.com

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Readers Respond

Thank you Elizabeth By David Sneed on 2013 04 18
Answer: NO! In today's world of internet real time customer reviews, Company B would soon find they have fewer and fewer customers buying Kronts at outrageous prices. If you produce your Kront for 5 dollars and net 20.00 for each sold, you are making a great profit. Integrity is what is missing in today's businesses. That is why we have products that barely last past their warranties. Product quality is trumped by greed. And also why we have lots of companies making lots of money for their owners and upper management through market abuse and greed. If someone asks you why your kronts are so much cheaper than Company B, you can say we can produce the Kront and make a profit at this 25.00 price. We are not in the business of ripping off our customers. Believe me, word will get out. By Elizabeth on 2013 04 17
I agree with Borat. By Ta Tee on 2013 04 12
Due to the embargo with Russia, it was illegal to buy/trade/sell Kronts in my country. But the demand was so high, that the Kront black market was one of the most thriving industries, aside from Besbarmak vendors. You could get at least 34 tenge for one Kront (to a gullible tourist), although every clever Kazakhstani knew they were only worth 100 tiin at best. Just basic microeconomics of Kront supply and demand, I suppose. By Borat S. on 2013 04 11
When I show clients how to price their services, we explore many avenues of insight: their cost, their desired profit, what is being charged by the market for what they offer, and what package of services they can, or should, offer at what price. There are, as you noted, people who pay a higher price because of what they see as an implicit guarantee that, if it costs more, it must be better/best. It's not possible to entice these people with lower prices. If you cannot sell because your price is perceived by your target market as too low to be worth considering, the answer is to raise the price. But it's not simple. It's, likewise, not just "raising the price because people are willing to pay it". By Diana on 2013 04 11
If you're by the side of the road without gas, I have every right to make you pay $100 for a ride to the gas station. If you don't know that my car has a bad engine, I have a right to take full price for the car if you'll pay it. By Will on 2013 04 11
David, Your examples relate specifically to situations where there is a monopoly (i.e. a utility). Where there is competition and a level playing field, I believe the market eventually dictates what is a fair profit margin. This also raises the issue of tariffs which are often necessary because overseas producers have the "benefit" of not having to comply with labor or environmental standards that domestic producers do, thus creating an un-level playing field. Good discussion. By Jonathan Spencer / Cascade Env on 2013 04 11
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