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Date: Tue, 11 Jan 2000
Prices and Costs of Production
Thomas M. Miovas, Jr.
From years of experience as a custom picture framer, I can tell
you that our cost has nothing to do with our price, our
competitor's cost has nothing to do with our price, and our
competitor's price has little or nothing to do with our price.
We can match our competitor's price if we have to, but I can't
tell you how many times a customer has come in with a
competitor's estimate that we don't match -- and we (or I should
say I) still make the sale. Obviously, if they are still
shopping around, they weren't satisfied with the competitor's
product. The key is to find out why they weren't satisfied --
which involves much more than the price -- and satisfy them,
right then and there. I do this often with the customer more
than willingly paying much more than they would have paid the
competitor for the same final product, because I probe their
value hierarchy to make the sale. Once I show them a better way
of framing their picture, the competitor's price has absolutely
nothing whatsoever to do with our price. All that matters is
that we make a profitable sale by satisfying our customer's
values -- period.
Perhaps the discussion is a bit too abstract. You are charging
$100 a year to your customer's for subscribing to HBL. What does
that price have to do with your cost? What does that price have
to do with your competitor's cost? What does that price have to
do with your competitor's price?
When you charge someone a price
for delivering a lecture, let's say, what does that price have to do with
your cost? What does that price have to do with the your
competitor's cost? What does that price have to do with your
competitor's price? And who are your competitors anyhow? What do
you take into account in determining that?
Date: Tue, 18 Jan 2000 00:40:13 -0600 (CST)
Prices and Costs of Production
Thomas M. Miovas, Jr.
Sorry to take so long to get back to this interesting thread,
but I've been trying to figure out how to further approach the
issue. So far, two examples have been given of companies that
don't base their price on their cost or their competitor's cost,
nor do they directly base their price on their competitor's
price. Granted, both companies manufacture custom items, which
generally commands a higher price, but I think that is missing
the point. I really think an objective businessman aims at
profit, which is price minus cost -- making the motivation based
on a higher level abstraction than either cost or price. Both
cost and price are important considerations, but they are only
part of the equation.
I've concluded that this issue can best be understood
inductively, by either running a business or by being "on the
inside" of market issues pertaining to a business.
If you approach it from the perspective of the consumer, all you see is
the price and the quality of the product; you probably don't
know what went into the manufacturing and marketing of the
product, and you don't have a clue about the various costs
involved, so it becomes a non-issue. In those rare cases where a
consumer does know something about the cost and complains that
the price is too high, an appropriate response was supplied by a
former employee of ours. After a customer went on and on
complaining about the price and making a general nuisance of
herself, he looked her in the eye and said: "It's that high
because I can do it and you can't!"
Furthermore, getting a return that makes it worth your while is
not a cost, not unless you are accepting the idea of opportunity
cost, which I thought you had rejected on the grounds that by
that theory Bill Gates is a pauper.
I don't think Rembrandt, himself, made millions of dollars from
each painting, though I may be wrong. In the current market,
popular artists we deal with (in prints) get around $10k to $50k
per painting -- and it doesn't matter how long it took them to
develop that skill, nor how long it takes them to create a
painting. And a good easel and painting utilities sure don't
cost anywhere near those prices! So I don't see the connection.
I do think it is true that rational consumers search for the lowest
price, everything else being equal. But there are other factors
involved, such as do the sales clerks offer help in selecting
nails? If a deep discounter doesn't offer any sales help, he may
well lose business if someone has a question about which type of
nail works for which type of project. I have walked out of
stores because I couldn't get competent help; and I don't mind
paying a higher price if it will mean saving me multiple trips
to the store to return items that are not suitable for my purpose.
And values do come into play in the very selection of what to
purchase -- every purchasable item is in competition with every
other in this respect. I, myself, have little use for nails in
my private life, since I live in an apartment where repairs are
covered by the rent and I have no wood working projects for
which I need nails. So, it doesn't matter to me what price
someone is selling nails for -- I ain't interested.
Apartments are another example of costs not setting the price.
My rent has been going up roughly every six months -- nearly
doubling in about twelve years, because large numbers of people
are moving into the area; and I know their costs hasn't been
going up nearly that much.
I should clarify my position at this time. I do not think value
economic theory is in competition with supply and demand theory.
But I do think value economic theory is more fundamental. A
rational man won't purchase something that is of no value to
him, because he knows he can use that money to purchase things
that are of value to him. In essence, supply and demand theory
attempts to measure (relative) value with a unit called "the
dollar." This unit measurement is applicable to both producer
and consumer, based on the value of the product or service
according to the evaluation both place on the product or service
-- where the evaluations match up, the product or service is
purchased; where it doesn't, it isn't.
On Manhattan Island, for example, and the surrounding greater New York area,
the only place to build may well be up (since all of the land is
already in use), but out here in "Big Sky Country" whole new
communities are being constructed on land that for all practical
purposes was wilderness less than ten years ago.
I'm just curious as to how far you are willing to take this
idea. Are any natural resources "reproducible"? Is the copper in
Francisco's mines "reproducible"? No one else can own it, just
as no one else can own a given plot of land that is being priced
out of a potential purchaser's market. Given a free market,
there are always alternatives -- such as building up or out; or
finding new veins of copper or substitutes.
The evaluation that matches up is
that all persons involved in the transaction evaluate the
transaction as beneficial -- i.e. all involved think they are
getting a deal.
This is highly contextual, and is true even if a businessman has
to resort to selling his product below cost. In this case, he
evaluates getting cash as being better than sitting on items
that are not returning cash flow; because he knows he can then
buy other things he can sell at a profit. To a businessman,
there isn't much worse than having stock that is collecting dust
instead of cash or stock that is potentially rotting away into
total uselessness. Of course, he can't do this very often, and
not for every item in stock, or he'll go out of business.