My BYU business students often ask questions about how to price products and services. My usual response is short but easy to remember: "Charge whatever the market will bear."
Another way of saying that is: "Charge as much as the competitive market (customer) will pay, endure or tolerate." I believe that is what capitalism is all about.
At least, that's what I believed until the concept was used on me by a merchant last week. And frankly, I didn't like it one bit.
Let me tell you the story. I drive a beautiful 1993 Buick Riviera. Despite constant pressure from my family, my friends and also some who aren't especially my friends, I don't plan to give up this great automobile. I bought it shortly after I sold my business 12 years ago, and — I admit it — I am emotionally attached to this wonderful creation of red beauty.
Yet with 96,000 miles on the odometer, it is getting a little tired. Oh, it runs well enough, but I have had the transmission rebuilt, brakes fixed and the battery replaced. Still, we don't abandon people when their bodies don't work so well, so why should I get rid of this wonderful friend? Did I mention it is red and has a great shape for an automobile?
Anyway, back to the story.
In August I had the rear brakes fixed at the Buick dealer. Not a big deal. But the other day, after my office assistant got the car washed, the brake pedal felt mushy when I stepped on it. One thing you don't want from a car, no matter how much you love it, is mushy brakes.
We took the Riviera to a tire store, where we were told that the rear calipers were bad. In order to fix it, my auto needed rear calipers, pads and rear brake rotors. They could do all this for "only" $671.77. When my assistant balked at the price, he was told that maybe they could skip replacing the rotors. That would reduce the repair bill to just over $560.
While I don't believe that car brakes are an area where one should try to cut costs, I did feel that a second opinion was in order. I took the car into the dealership where I had the brakes repaired earlier in the summer. They promised to call after a mechanic had checked on the problem. Because it was a new-car dealer, I assumed the bid was going to be even higher.
But when they finally called they didn't quote a price; they simply said I could pick up the car.
"How much do I owe you?" I asked gingerly.
"Nothing," I was told. "It was just a loose bolt that was allowing the brake fluid to leak."
Let's compare: no cost from the Buick dealer and $671 from the tire dealer. Next time I need my brakes fixed, where do you think I will go?
And what about my "whatever the market will bear" philosophy? Do I still believe that?
Yes, I still believe in that principle but with an added line that I need to be sure to teach the students. As an entrepreneur and as an employer, one needs to be honest with customers, employees, suppliers, bankers — with everyone. And we also need to help our employees understand that honesty is always our policy. Always.
Can you still make money in business, be successful and profitable and be honest?
You bet! There is a difference between pricing to make a maximum profit and outright lying and misrepresentation of the truth. These are two different issues. We need to value the customer and ourselves enough to not lie, misrepresent the truth or make things worse by changing the facts just to make a sale.
The market will only bear so much, and dishonesty is too much to bear, tolerate or endure.
Stephen W. Gibson is affiliated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.