Cost, Price, Value and Ethics

[2ndRateMind]

So, despite everything, I have decided to launch a new company. I will be producing widgets. The success of my nascent company is not in doubt. Everyone needs a widget. But anyone who has read any of my posts will realise I have moral scruples about wealth. So I want to ask this question of you all: how should I price my widgets?

 

Should I charge cost price plus a percentage?

Should I charge (as Karl Marx would want) for my labour only, and what rate should I charge my labour at?

Should I charge some figure that guarantees me a lot of sales, so that most people will be able to afford, and benefit from, my widgets?

Should I charge some figure that maximises my profit/ return on my investment?

Should I charge some figure that optimises my effort/return ratio?

Should I charge each person differently, according to what they can afford to pay?

Maybe there is some other formula I haven't thought of, that you can suggest. I'd be grateful to know about it.

 

Anyway, the idea is not to make a load of money, but to arrive at an ethical solution to the pricing dilemma, which any of you who have been in business at the sharp pointy sales end will recognise. What is a fair price to charge for a widget, in your opinion, and why do you think that that method of charging is fair?

 

Best wishes, 2RM.

Edited November 16, 2014 by 2ndRateMind

[PolarVortex]

Well... since you asked us...

 

Your question doesn't say whether you have any competitors, and this is critically important.  Also, except for food, medical care, transportation, and housing, there are few things that all people really need.  Is your widget some sort of drug that everyone must have to stay alive, or just a particularly delicious type of blackberry jam that some people really like? 

 

But let's assume that your widgets are truly needed by everyone and that you hold no special patents or barriers that would block entry into the market from your competitors.  The most ethical solution in the long run is to price your widgets at whatever the market will bear.  If you have the capacity to manufacture a million widgets per month and you can sell them all at $100.00 each (but not at $100.01) then sell them for $100.00.

 

(Actually, this is not entirely correct.  You should manufacture some number of widgets that maximizes your profit.  If it costs you $1 million to manufacture a million widgets but only $500,000 to manufacture 900,000 widgets, you should manufacture fewer widgets.)

 

If you start making a killing on profits, competitors will arise and the price of widgets will drop.  I'm sure you know this.

 

I understand that many people are nauseated by the thought of maximizing profit above everything else, but usually when you try to manipulate the price of some critical good or service for some noble purpose you end up injecting distortions into the market that cause shortages.  If you don't believe me, ask anyone who grew up in the Soviet Union.  (My favorite Soviet joke is about the woman who goes into a store and asks, "Is this the store that doesn't have any bread?" and the clerk replies, "No, this is the store that doesn't have any eggs.  The store that doesn't have any bread is across the street.")

 

Meanwhile, the profit motive and free enterprise have lifted hundreds of millions of Chinese from grinding poverty into growing affluence.  Leaving aside special cases like price gouging and illegal protection of monopolies and cartels and consumer fraud, the free market is the most efficient way known to generate the most wealth for the most people.  At least in my opinion.

 

If you sell your widgets and notice that poor people truly need them and can't afford them, then use your new wealth (you'll have a lot of it) to subsidize widgets for genuinely poor people who won't secretly stockpile your widgets at a low price and resell them.  This is far, far superior than making the price artificially low to everyone so more people can afford them.

 

I do not think price gouging is ethical, even though some of my libertarians would argue that price-gougers enrage consumers and put themselves out of business in the long run.  However, there is nothing unethical about letting the market determine a price, and there's a lot unethical about causing unnecessary shortages.

[Just_A_Guy]

Anyway, the idea is not to make a load of money, but to arrive at an ethical solution to the pricing dilemma, which any of you who have been in business at the sharp pointy sales end will recognise. What is a fair price to charge for a widget, in your opinion, and why do you think that that method of charging is fair?

 

That depends on the size of the luxury yacht you plan to purchase.  I like this one:

Edited November 16, 2014 by Just_A_Guy

[Guest]

The price of an item is simply how much one is willing to pay for it within an acceptable time.

But your question is not answerable because... You have not stated Why you want to make that specific widget. The mission statement of your company drives how it needs to be run.

[2ndRateMind]

Thanks, guys, for your inputs. I like the yacht, though I prefer sailing catamarans. I intend to call mine Storm Dancer. Anyway, that is beside the point, for now. 

 

Firstly, we have to tackle the idea that the maximum (presumably) price the market will bear is the ethical price to charge for a widget. Suppose my widgets are useful to everyone, but not so useful they will die without it. Suppose this is an original idea, but not patented and not protected from competition right now. But suppose, right now, there is no competition and that it will take those clever copiers in China about a year to catch on and catch up. There is no market price, yet, because widgets have yet to be unleashed on the unsuspecting world and no market price has been established. Suppose widgets cost $x to make.

 

Should my pricing bear any relationship at all to $x, other than exceeding it? If not, given there is no established market price, how to set that pricing? How to discover the maximum price the market will bear? And is this price maximisation strategy 'ethical', at all? Would not a 'utility' maximising strategy be more ethical, given that the world has finite resources to be shared out, and widgets, by their physical nature, involve the deployment of some of them?

 

Best wishes, 2RM.

Edited November 16, 2014 by 2ndRateMind

[Guest]

Still does not hint on any mission for producing these particular widgets. Therefore, ethics cannot be determined. It's like asking - is typing on a computer ethical? Depends on what and why you're typing....

Setting a million dollars as the price of a widget it cost you $1 to make is not, by itself unethical nor ethical. Ethics comes into play when you can figure out what drove the price to a million.

For example, there's this young teen who just survived some kind of illness. She started making embroidered pillows and she sold them at $1,000 each. All proceeds went to the research foundation that deals with her illness. She sold over 50 pillows in just one day...

Edited November 16, 2014 by anatess

[2ndRateMind]

Hmmm. I don't want to be more specific about my widgets, for two reasons. Firstly, I don't want to be seen to be using the forum for advertising purposes. And secondly, and more importantly, I think we can talk about pricing strategies as ethical or unethical in abstract of the product, and market, and corporation. And I'm more interested, in this thread, on zeroing in on the ethics, than any other consideration.

 

I applaud your young teen. I am not talking about a charitable enterprise, however, any more than Microsoft is a charity, however Bill Gates may choose to spend his earnings.

 

If it helps, my personal 'mission' is to generate enough income for me to forego social security benefits, earn my own living, and get to a position where I can contribute to society again, rather than drain from it. My company mission (in abstract terms) is to get a useful product to people at a fair price. It seems to me to be an ethical failing of capitalism that this is different to the mission of most corporates. But it still leaves me requiring to determine; what is a fair price? And why is that price 'fair'?

 

Best wishes, 2RM.

[JimmiGerman]

So, despite everything, I have decided to launch a new company. I will be producing widgets. The success of my nascent company is not in doubt. Everyone needs a widget. But anyone who has read any of my posts will realise I have moral scruples about wealth. So I want to ask this question of you all: how should I price my widgets?

 

Should I charge cost price plus a percentage?

Should I charge (as Karl Marx would want) for my labour only, and what rate should I charge my labour at?

Should I charge some figure that guarantees me a lot of sales, so that most people will be able to afford, and benefit from, my widgets?

Should I charge some figure that maximises my profit/ return on my investment?

Should I charge some figure that optimises my effort/return ratio?

Should I charge each person differently, according to what they can afford to pay?

Maybe there is some other formula I haven't thought of, that you can suggest. I'd be grateful to know about it.

 

Anyway, the idea is not to make a load of money, but to arrive at an ethical solution to the pricing dilemma, which any of you who have been in business at the sharp pointy sales end will recognise. What is a fair price to charge for a widget, in your opinion, and why do you think that that method of charging is fair?

 

Best wishes, 2RM.

 

Just too much thinking. Try to make money and it will do it. 

[kapikui]

So, despite everything, I have decided to launch a new company. I will be producing widgets. The success of my nascent company is not in doubt. Everyone needs a widget. But anyone who has read any of my posts will realise I have moral scruples about wealth. So I want to ask this question of you all: how should I price my widgets?

 

Should I charge cost price plus a percentage?

Should I charge (as Karl Marx would want) for my labour only, and what rate should I charge my labour at?

Should I charge some figure that guarantees me a lot of sales, so that most people will be able to afford, and benefit from, my widgets?

Should I charge some figure that maximises my profit/ return on my investment?

Should I charge some figure that optimises my effort/return ratio?

Should I charge each person differently, according to what they can afford to pay?

Maybe there is some other formula I haven't thought of, that you can suggest. I'd be grateful to know about it.

 

Anyway, the idea is not to make a load of money, but to arrive at an ethical solution to the pricing dilemma, which any of you who have been in business at the sharp pointy sales end will recognise. What is a fair price to charge for a widget, in your opinion, and why do you think that that method of charging is fair?

 

Best wishes, 2RM.

It depends on a lot.  If you try some of your "moral" ways of costing your product, you will be out of business in a month.  You need to charge enough to cover your materials, your labor, to pay yourself, to pay insurance, taxes, advertising (and if you don't advertise you will make a small fraction of what you could have), You will also need to charge enough to pay your investors.  That is just the tip of the iceburg.  You will likely incur debt unless you start off wealthy.  You need to charge enough to pay that off, and if you are smarter than a radish you'll want to have some cash set aside in the business in case something bad happens, like a machine breaking, or an entire batch of product having to be recalled.

 

Your exact margin will depend greatly on the product. Generally you want to maximize your profit.  Indeed in most countries if you have investors you are legally obligated to do so and can be sued if you fail to do so.

 

More accurate responses to your questions would require far more information about your widgets, the market in which you wish to sell, etc.

 

So let's go through each of your questions:

 

"Should I charge cost price plus a percentage?"

Yes, this is one way to look at it. figuring out that percentage is hard and would take a couple of masters level business courses worth of information to explain it fully.   It depends greatly on your widget, what market it's in, your market segmentation, your competition, and a lot of other things.

 

"Should I charge (as Karl Marx would want) for my labour only, and what rate should I charge my labour at?"

You would be out of business in a week, because labor is far from the only cost in business. At a minimum you have your materials, your shipping, taxes, insurance, rent on whatever facility you're using, pay and benefits for any other employees, utilities, etc. 

 

"Should I charge some figure that guarantees me a lot of sales, so that most people will be able to afford, and benefit from, my widgets?"

 

The more sales you have, the more widgets you need to make, this means hiring more people to make them, and thus more money you need to pay out to make them.  You may need a larger factory, more machines etc.  One of the biggest problems a lot of business have (and it's a good problem to have) is higher demand than supply.  A lot of businesses seek investment just to get the money they need to ramp up production.  If you use this method, you will either work yourself to death to keep up demand (and thus your business will fail), or you will run up against a hard limit on the number of your widgets.  If the latter happens, people will buy up all of the widgets they can, and then sell them at an obscene profit, thus ruining your moral ideal.  Your last option will be to find an investor to get the capital you need to ramp up production.  If you get an investor, you get other fun issues with your ideas which we'll get into on the next question.

 

"Should I charge some figure that maximises my profit/ return on my investment?"

In most free market countries, if you have investors (see previous question) you will be legally required to maximize your profit, and in many places you can be sued for failing to do so. Moreover, most investors aren't going to invest if you aren't willing to do this. They want to make their money back. Investors that don't have such an attitude only invest in a few things and then go broke.

 

"Should I charge some figure that optimises my effort/return ratio?"

This would be an advisable approach to much of life. That doesn't mean take the easy way out, but it does mean that you shouldn't do things the hard way just because you want to show how hard you work.

 

"Should I charge each person differently, according to what they can afford to pay?"

While offering discounts to those in need is a laudable thing to do, and many companies have done this, you do have to be careful because a lot of people will take advantage. What happens is not that the people who need a lower price get charged a lower price, rather the ones who don't wish to be freeloaders end up paying for those who do.  Remember the money from your business comes from customers. If you charge one less, you have to charge another more. Also remember that the ones you're charging more aren't going to appreciate having to subsidize others, and many will look to your competitors.

 

The truth is that any attempt to moralize in how you charge your customers tends to end up in your business going under. This means that you lose out, and your employees end up unemployed.  Essentially it will be your fault they're poor.  The reason that businesses do the things they do is because that's what works.  Attempts to do other things tend to result in failed businesses. 

[RMGuy]

Ask your bishop...:)

[Guest]

Hmmm. I don't want to be more specific about my widgets, for two reasons. Firstly, I don't want to be seen to be using the forum for advertising purposes. And secondly, and more importantly, I think we can talk about pricing strategies as ethical or unethical in abstract of the product, and market, and corporation. And I'm more interested, in this thread, on zeroing in on the ethics, than any other consideration.

 

I applaud your young teen. I am not talking about a charitable enterprise, however, any more than Microsoft is a charity, however Bill Gates may choose to spend his earnings.

 

If it helps, my personal 'mission' is to generate enough income for me to forego social security benefits, earn my own living, and get to a position where I can contribute to society again, rather than drain from it. My company mission (in abstract terms) is to get a useful product to people at a fair price. It seems to me to be an ethical failing of capitalism that this is different to the mission of most corporates. But it still leaves me requiring to determine; what is a fair price? And why is that price 'fair'?

 

Best wishes, 2RM.

 

I don't need to know what widget it is.  I only need to know the purpose for the business' existence.

 

Okay, from what you're saying - the business is for you to earn a living and be a contributing factor to society.

 

In that case, free market capitalism works perfectly for you.  The design of free market is such that greed is naturally controlled by the economy.  The only thing that prevents the system from controlling greed is if a governing agency restricts market competition and consumer education.

 

Therefore, the price of your product is determined by supply versus demand.  It's Economics 101.  That is, the price is how much somebody is willing to pay for it within the timeframe that you are comfortable with.

 

If somebody is willing to pay $1 Million for your widget knowing exactly what that widget is (as in, you're not trying to hoodwink the market into thinking that chip off a broken bottle are diamonds) while you're still alive to collect the money... then the price of that widget is $1 Million.

 

You might think... but, but, but... it only cost me $1 to make so that's highway robbery and unethical!  No it isn't.  That's how life works.  Somebody wants your widget bad enough that he is willing to give you $1 Million for it - selling the widget to the consumer makes the consumer happy.  What you do with your $! Million decides your ethics.  If you are a good Samaritan, you'll find somebody "beaten and robbed and left for dead" to spend that $1 Million on.

 

Now, I am sure that it won't take much longer than 24 hours for the enterprising bloke next-door to realize you can make $1 Million selling widgets.  By tomorrow, he'll have his own version of your widget selling for $900K... and if it's still selling like hotcakes, pretty soon, some other enterprising bloke is going to cut the price to $800K, and so on and so forth until you'll be competing with some Chinese company who can make the widget for 5 cents and selling the widget on Ebay for 10 cents making 50% profit to feed a portion of their 1.3 billion population... and, thereby, running you out of business unless you can figure out how to make that widget for a penny to sell for 5 cents... or you can make that widget dance the Cha-Cha on Britains Got Talent...

 

Welcome to the beauty of the real world.

Edited November 17, 2014 by anatess

[Blackmarch]

So, despite everything, I have decided to launch a new company. I will be producing widgets. The success of my nascent company is not in doubt. Everyone needs a widget. But anyone who has read any of my posts will realise I have moral scruples about wealth. So I want to ask this question of you all: how should I price my widgets?

 

Should I charge cost price plus a percentage?

Should I charge (as Karl Marx would want) for my labour only, and what rate should I charge my labour at?

Should I charge some figure that guarantees me a lot of sales, so that most people will be able to afford, and benefit from, my widgets?

Should I charge some figure that maximises my profit/ return on my investment?

Should I charge some figure that optimises my effort/return ratio?

Should I charge each person differently, according to what they can afford to pay?

Maybe there is some other formula I haven't thought of, that you can suggest. I'd be grateful to know about it.

 

Anyway, the idea is not to make a load of money, but to arrive at an ethical solution to the pricing dilemma, which any of you who have been in business at the sharp pointy sales end will recognise. What is a fair price to charge for a widget, in your opinion, and why do you think that that method of charging is fair?

the best ideal or closest to best would be the marxist one - just charge enough to cover operating expenses (underwhich i would put living expenses)... if you really wanted to be selfless.
however most people want to come out a bit more than even at zero, so putting the price above that line is fine.. as for judging how much above that line is fair or not i wouldn't know much about... i'd say take a look at similar products from other companies and see what the price average between them is. Edited November 17, 2014 by Blackmarch

[NeuroTypical]

I have moral scruples about wealth. So I want to ask this question of you all: how should I price my widgets?

 

I'm thinking you don't have a pricing problem, but a "what to do with the money" problem.  So set up your business as a not-for-profit corporation, intended to pour all profits into the charitable cause of your choice.

 

Then go price things however the heck you want.  If you wanna fail miserably at making profit, then your charitable cause will suffer.  If you make profit, then hooray for your charitable cause.

[Roseslipper]

I believe in profit. I do not believe in ripping people off.Some things deserves more profit then others.