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