Tuesday, March 12, 2013

What are you worth?

"How much is a bike tune-up?"

Good question.

How are prices set?

Anyone alive today was born into an economy already in progress. Things cost a certain amount when we first became aware of them. Those prices have been adjusted up or down (mostly up) during our lifetime based on forces most of us do not control. Maybe no one controls them, even the people who can manipulate them to some degree. That's beyond the scope of this inquiry and the reach of any researcher. Everyone hides at least a little something about their finances.

As we enter the work force we may take a job in which our price is already set. Some workers get to negotiate, but the employers with whom they negotiate know the upper limit of how much they're willing to pay.

Service providers compete with each other. Some can charge more than others based on various factors. A customer has to do a lot of research to consider all the qualities of a service provider before deciding which one is worth the price. How many people really do all that checking? How often do you have the time, let alone the inclination? We use shortcuts like advertising or reputation or personal acquaintance.

Business for profit is based on the concept of charging more for something than it is actually worth. Profiteers tell us that this extra is the money put in reserve to cover shortfalls later or to reinvest in the business to fuel further growth. This is separate from the amount of the consumer price that covers material costs and overhead. How much is reasonable? No one can say. How short will the next shortfall be? What great innovation will a business want to pursue, for which they'll need ample funds?

In the bike business shortfalls can be caused by numerous factors. Ugly weather can keep people off their bikes. Ugly social climates can keep people from feeling like they have any place to use a bike at all. Competing activities can draw down consumers' funds.

On the service side, someone always seems to need something repaired. These numbers can fluctuate from season to season and within a season, but they never seem to drop to nothing. In the repair shop we can be the victims of innovation more than the beneficiaries when restless manufacturers unleash their latest improvements on the world, requiring a whole new inventory of spare parts and several expensive, specific tools.

The monetary values of materials and time are derivative. At some point in the dim past were the original numbers based on something tangible or did the whole process start from arbitrary values? I doubt if anyone knows. That's the factor that makes all our arguing about public and private money impossible to conclude. We're always bitching about relative values even if some participants think they're absolute. And public and private money come from the same pool. Some is drawn up through one vascular system, some through the other. Government funds, theoretically, are collected based on an agreement among the citizens to pay for certain things. They're gathered from each of us for the benefit of all of us. The bitching starts when someone who does not feel the benefit starts to feel ripped off.

What does all this have to do with the price of a tune-up? Any element of the economy feels the effects of pressures on other parts of the economy. What's a fair price? Am I paying for the shop owner's speedboat and his kid's private school and college? Could I go to the shop run by someone with cheap hobbies and no family and pay less? Maybe. But if a market area supports a certain level of pricing, the person with the lower personal overhead can charge only slightly less than the schlemiel with the maxed-out credit cards and put the extra money aside. We're not talking about enough to make an account in the Cayman Islands worth opening, but it illustrates the very easy way in which pricing is invisibly subject to the ethics and life choices of the business owner. It's not really unethical to offer a better price, draw business to yourself, and still make more margin than the other operator who has shackled himself to a set of inescapable personal expenses.

When I perform work in my own shop, as opposed to what I do for my employers, I have to figure out what seems like a fair hourly rate as a basis for my pricing. This is still based on the numbers received from the evolved economy in which I find myself operating. I suppose the dedicated profit seeker just keeps pushing the price higher until customers balk and then backs off a bit to make them happy again. Whatever you make, that's your operating budget. If it's never enough, go into a different business.

On a temporary basis, the method of pushing the price to the breaking point and then dropping it just enough to get wallets to open again is exactly what most businesses in tourist economies do. You want that now, while the rest of your group mills around impatiently? Ka-ching! In two or three months you'll all be gone. You are the cash crop. Prepare to be harvested. Look at it from the point of view of the people who live where you are visiting. The rest of the year there may be no outside money coming in and no local economy to speak of.

On a larger scale, price pushing goes on all the time to see if more revenue can be squeezed out of a market sector. It has nothing to do with what things cost to produce and deliver, and everything to do with the quest for more return, even temporarily. Consumers balk. Companies compete by lowering prices. They lower overhead by paying less for production. All that chiseling comes out of the pockets of people who work in the supply chain from beginning to end. Then they have less money and demand lower prices.

The two ways to have more money are to bring in more and spend less. But since money is the circulatory fluid of the economy, a penny saved is a penny not earned by someone else.


Steve A said...

There are two phenomena at work. In the first, money is flowing from some to others. In the second, the total supply of wealth is growing (or shrinking) in which case everyone can be richer - or poorer. Even Apple makes a lot more computers and sells each one for less than they used to do.

cafiend said...

Simultaneous phenomena or differing scenarios?

Economies of scale eventually come up against limits. Apple's plentiful computers only represent value if enough consumers can afford to buy them and replace them at regular intervals.

Everyone can only be richer if the disparity is shrinking between bottom and top. Nothing natural grows and grows forever without killing its host. I have often wondered what an even distribution of wealth would look like. Would it be everyone in a mud hut? I fear it's likely. So then we're back to trying to stick each other with the mud hut.