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is it the numbers or the percentages that matter?
Published on March 21, 2007 By Sean Conners aka SConn1 In Consumer Issues
this is a subject that often does spark some good debate. There are many theories on how much someone "should" make when offering a product or service. Pure capatalist types, contend that "whatever the market will bear" is the only way to go. They contend that all other factors are irrelevant. They are more comfortable in a realm where laws such as "supply and demand" which are constant, rule the day. Objections of fairness, sacrifice and decency play no role whatsoever.

Others contend that goverment should regulate prices on many fronts. Capping earnings and forcing companies and individuals to "do their share" and the like are paramount to their platform.

I subscribe to neither position inherently. And most of the time, I side with the more capatalistic side of things. But sometimes, I do see a need to stop out of control and greedy corporations by legally raping our society in the name of "market economies." Granted, those on the left get out of control as well, looking to regulate everybody and everything they can, revealing just a general contempt for any business larger than the corner store.

How and when we balance these two factions is really not what I wanted to discuss however. That is just a little too broad in my opinion, to dive into headfirst.

But in general, what is a fair profit to you? Not what should be regulated, and the politics and rhetoric behind it, but when you shop...how much is "too much" when you hand over your hard earned cash to a clerk or salesperson?

Sometimes we focus on percentages. Like when the oil industry defends it's record profit numbers. Other industries, have to look more at the actual amount of dollars produced per unit vs. a percentage.

For example, the resturaunt business typically sell food or booze at a 3 to 1 up to a 5 to 1 gross profit ratio. Meaning that whatever the food costs (if it costs a dollar to make a hamburger) you sell it for 3 to 5 times (3 to 5 dollars for the burger) what it costs you. The new car dealer, by contrast, generally makes between 1000 and 3000 dollars gross profit on a car selling for 20 to 30K (despite their appearance of "losing money on every deal, and making it up in volume"). Retail on a piece of fine jewelery might be 10 times what the wholesale cost of it is.

From what I can tell, 3 factors seem to dictate the profit. The amount of dollars generated typically means a smaller percentage. The exception, and 2nd factor seems to be the overhead involved. And of course, competition always plays it's part in our economy.

For example, the jewelery man has more overhead in paying for his storefront / insurance / inventory / salaries / etc... that greatly brings down his final net profit. Also, a jewler is going to often sell at a "discount" as a rule, thus never actually seeing a true "retail profit." And people generally feel good with the belief that they saved 50% or whatever off of a pie in the sky, inflated retail price.

But on the other hand, people seem to resent when a car dealer makes ANYTHING on a sale. Of course, unless you are buying a Saturn or a rare car, nobody pays sticker price on a car. But when I used to be in that industry, it used to amaze me when people showed an obvious contempt and a desire for the dealership to actually lose money on a sale. They felt entitled to it, almost.

But in the end, in the type of society we live in, businesses need to be profitable, on the whole. But what is fair? It seems that most businesses, especially larger ones, like the oil industry, like to focus entirely on the percentages, which almost makes them look benevolent. that is, until you look at the sheer numbers.

The guy in the corner diner may turn a dollar burger into a 4 dollar lunch special, and he will quadruple his money. But then again, he only made 3 bucks.

Any thoughts? What is a fair profit to you?

Comments (Page 1)
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on Mar 21, 2007

I don't believe there are any corporations who are "legally raping" anyone. At least nto for long. If profit margins are too high in an industry a competitior always steps in and undercuts their bretheren. Hell even oil companies are only taking 10 cents on the dollar for gas profits.

 

The car dealership analogy is a good one. My ex-wie used to sell cars and the dealership would routinely sell cars at a loss from the invoice in exchange for the rebates. Their profit was from the rebate and not the sticker so they also didn't have to pay anything but the minimum commision to the sales folks. The consumer gets a car below sticker price.. the dealer makes a decent profit and the sales folks got the shaft.

on Mar 21, 2007
Too much is when I decide not to pay. In the case of oil companies, if we would cut our gas consumption by 50%, the price of gas would drop sharply and suddenly. We could do it by carpooling, conserving trips, all those little trips we've heard about for years.

I don't believe in government regulation; I believe in pocketbook regulation. If we collectively stop consuming so much we can control the prices.
on Mar 21, 2007

if we would cut our gas consumption by 50%, the price of gas would drop sharply and suddenly.

At least through the incredible decrease of demand/supply ratio that this would cause. The problem is that as we decrease our consumption and the price drops there will be others who increase their consumption due to the price dro. Probably would result in an equilibrium at not much below our current consumption levels with almost the same prices.

Net result? We would do less, produce less, and stagnate while the folks who were able to ramp up use of oil products due to increased supply would rocket ahead.

on Mar 21, 2007
At least through the incredible decrease of demand/supply ratio that this would cause. The problem is that as we decrease our consumption and the price drops there will be others who increase their consumption due to the price dro. Probably would result in an equilibrium at not much below our current consumption levels with almost the same prices.


Well, if people weren't stupid and would actually stick to the plan, it would work. The problem is, people won't, as you properly point out, and this is actually what's happening. When gas hits three bucks a gallon, people scale way back...when it crosses under two and a quarter, they're using the gas like there's no tomorrow, driving the price back up.

Then they have the gall to complain about the oil companies' greed!
on Mar 21, 2007

Well, if people weren't stupid and would actually stick to the plan, it would work.

Not necessarily stupid. Gasoline is a major industry input and a drop in home usage would simply result in making a business consumption increase more viable.

on Mar 22, 2007
I don't believe in government regulation; I believe in pocketbook regulation. If we collectively stop consuming so much we can control the prices.


if we had any organization. unfortunately, in the case of big oil and gas prices, the american consumer is just way overmatched. this is where i sometimes split with the libertarians, concerning big business and their traditional unwillingness and resistance to any change that may effect 1 penny of their bottom line. and their ability to out lawyer and litigate anyone who doesn't have their deeper than deep pockets. a reasonable government could help in some cases, i believe.

unfortunately, government tends to step in, sometimes do some good, but all too often, doesn't know when to leave. so i do understand that side as well.
on Mar 22, 2007
The car dealership analogy is a good one. My ex-wie used to sell cars and the dealership would routinely sell cars at a loss from the invoice in exchange for the rebates. Their profit was from the rebate and not the sticker so they also didn't have to pay anything but the minimum commision to the sales folks. The consumer gets a car below sticker price.. the dealer makes a decent profit and the sales folks got the shaft.


i sold cars for years. and i know her plight. the "mini comm" is usually 50 or 75 bucks at most places (the most i ever got on mini deals was 100 bucks). that may seem like a good pay from the outside (75 bucks to sell a car) but when you consider the many hours most sales involve, and the time in between sales, it sometimes works out to a sub min wage proposition in the end.

the problems i saw when i was a salesperson / manager in the business was that the whole industry has trained the public into thinking that they are actualy losing money on the deal. selling 'Below invoice" is a cancer on the industry. 1st off, invoice includes all the expenses, holdback and other things the dealer may or may not have to pay. the "advertising expense" is usually greatly exaggerated. if the car hasn't been on the lot for very long, in most cases none or very little holdback is owed to the bank. and there's some other things like rebates and spiffs to the dealer that aren't even mentioned.

the dealers have to make it "look like" they are selling it for a loss. i think 50% of the customers i ever sold a new car to (except for the saturns) was convinced that we were losing money on his deal (he had "beaten us") and we could just make it up on the "next guy." not only was that a little humorous in my mind, but it was quite revealing about our "real nature" where many felt it ok to screw us and the next customer for their own benefit.

the one thing that has always kept me going in sales related jobs, that doesn't let me get all soft when hearing another sad story (which are usually as full of sh*t as the person spewing it) from a customer trying to get more money off their car than they should, or more for their trade than it is worth, is this line..."it is a customers "job" to get the car (or whatever) for as little as possible. it is my "job" to get as much as possible for the car or item. i make sure i do my job better than they do their job." no customer i have ever met volunteers extra money to me and i am sure doesn't head to the dealer wondering how they can ensure the person who helps them with their transportation needs gets paid really well. no one ever comes back and coughs up an extra 500 bucks because they felt guilty for getting such a great deal.

on the other hand, rest assured that i never "ripped anyone off" or overcharged anyone in my career. and whatever industry i have chosen to work in, my customers are loyal, sing my praises and often buy from me in different places and even different product categories. i have scores of letters of praise and several customer service awards on my mantle and walls. but you learn, after selling for only a few months, that "buyers are liars" and you have to learn to recognize and read thru the bs.
on Mar 22, 2007
When people start whining about some corporations supposed "unfair" profits I like to put their own income to the test.

Add up what it costs you to do the job you do (not how much you spend every month, just what you spend on what it takes to do your job). Compare that to what you make. Most people make a heck of a lot more "profit" than any corporation. The difference is, most people don't consider their "increase" profits... even if that's exactly what it is.
on Mar 22, 2007
Add up what it costs you to do the job you do (not how much you spend every month, just what you spend on what it takes to do your job). Compare that to what you make. Most people make a heck of a lot more "profit" than any corporation. The difference is, most people don't consider their "increase" profits... even if that's exactly what it is.


if you are going to do that, you must add up all your expenses from life, not just how much you spend to get to and from work and eat lunch. if you are going to analogize the individual as a corporation, you need to add in their debt expenses, along with every other expense they have. then you can take how much someone earns, compare the 2 and see if there is any "profit."

and from the way it looks, the way people's debts are going up, i'm figuring the vast majority of people are a bunch of companies that lose money most years.
on Mar 23, 2007

Yup, that's what most people try to pull on me with this question.  The thing is, a business owner or CFO of a corperation can't include purely private expenses.  The point is, if people are willing to point their fickle finger at others for "large profits" then they had better be willing to have that finger pointed back at them.

Profits are not the difference between what is spent and income.  Profits are the difference between the cost of doing business and income.  In figuring my profits for teaching guitar, I can't include such expenses as the Mountain Dew I drink while practicing the lessons (for example).

Try it, you'll probably find that your profit margin would be the envy of most of the corporations you love to hate.

on Mar 23, 2007
btw, if it only costs 25 cents to produce and 50 cents to sell, yet people are willing to pay $20 for it, why should you have to sell it for less?
on Mar 23, 2007
The thing is, a business owner or CFO of a corperation can't include purely private expenses.


think of it like this. the employer is the contractor, the employee is the subcontracting company.

the owner, as a person, would also be a subcontractor from the business entity.

Profits are not the difference between what is spent and income. Profits are the difference between the cost of doing business and income.

the cost of "doing business" for the employee is living. all expenses should be counted. if drinking a mountain dew while practicing costs you money, and the sole source of income is that job, then any good accountant would consider it an expense.

sorry ted, i understand what you are trying to say, but i just disagree with the viewpoint. perhaps something is getting lost in the syntax, but i think we just see it a little differently.

on Mar 24, 2007
We do see things differently and there's nothing wrong with that. On the other hand, you seem to think that price is somehow tied to the cost of producing something. My example only allows for legitimate costs directly associated with doing the job... Like I said, if you stick with legitimate costs (just like companies have to do when it comes to declaring business expenses) then the example works well.



I used to sell concert tickets on Ebay. I would do a little research to find out who was the hot up and coming bands selling out smaller venues. I'd buy tickets for Ticketmaster then post them on Ebay. There were times I got 3 or 4 times what I spent getting the tickets, but there were other times I lost the whole thing. In the case of the 3 or 4 times what I paid, should I have contacted the winning bidder and said, "You bid $180 for two Slipknot tickets, but they only cost me $50 total, in the name of ethics, send me a check for $60 and enjoy the concert"?



I don't think so, Tim.



The thing that gets me most about government intrusion into the profit motive is, except in very rare (and politically motivated) cases, you don't see the Hillaries of the world offering to compensate a corperation for its losses.



Now, should the government ever get involved? Absolutely. If there is criminal activity that brings on the higher profits, then those responsible should be arrested and tried in court. The problem is, there are too many so-called "freedom loving people" who are living under the delusion that making a huge profit in itself is criminal.
on Mar 24, 2007

Assuming that the product is produced in a competitive market, a fair profit is the maximum amount that a consumer is willing to pay for the product or service.

Consumers decide what is fair or not fair based on their buying choices.

on Mar 24, 2007
Assuming that the product is produced in a competitive market, a fair profit is the maximum amount that a consumer is willing to pay for the product or service.


so should businesses conspire to jack prices or manipulate supplies to yield greater profits? or should competition, and not prices be enforced in your view?
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