Forums: Discussions for entrepreneurs and small business.

Hey, simple is good if not always 100% accurate.

And, in fact, the first part of my reply was to your comment "I`d suppose that when public transportation goes belly up, either the government will step in to subsidize it . . ."

As to the operating mechanism, I believe that I said that certain market conditions will allow for that type of pricing practice to stand, not cause it.  It is still a decision on the part of someone in authority at the pricing entity to raise, lower or hold prices.   Look at the old USSR.  They had monopolistic pricing (state dictated) where the prices were low, not reflective of cost to produce, and they had shortages out their ears. 

What allows those prices to stay or not is market competition.  More competitors, they will over time lower prices to gain market share, etc.  The others will have to follow suit or modify product/service offering to maintain prices or they go out of business.  No, limited or an oligarchy/cartel, then prices are set, not competitively driven.

Sorry for the primer, got a little carried away.  I still like simple.

I just reread your prior response and I HAVE to slow down and read your posts thoroughly.  You have quite a bit of nuance or subtlety in them.  I just picked up on the raise/rise difference. Having thought it over, I think I`ll stick with my answer above: prices just don`t "levitate" on their own, someone has to see the opportunity in the market and act on that opportunity.  Up, down or sideways. 

You said you get upset at people who look for a simple answer to a complex question.  As far as I go, I don`t think I want to know . . .

Okay, so let`s summarize. In a general situation with some typical competition, if people are buying less and less over time, it seems backward to raise the prices.

However, in limited competition settings, pricing doesn`t matter all that much since people are going to "have to" continue using the service or product. Right?

I hope others will provide some illumination on this as well. 

SIMPLE ANSWER: 

To your first statement, yes, it seems backwards. 

To your second, kinda.  Are we talking governmental or monopoly?  These are two different discussions.  Monopoly, then people will continue to buy up to a price at which a suitable substitute can be found.  (Bio Diesel, anyone?)   At which time the monopoly has been broken and the market readjusts.  Governmental, then laws dictate the terms/price of service, users or no.  But then black market. Speaking of Chicago, prohibition anyone?

Detailed:

You have asked one question which seems to be based on the transporation system in Chicago, a public, semi-governmental entity performing a public service for which a private company cannot make a go.

Then there is the larger or more general question of the heading of this thread, raising prices to offset fewer customers. 

Economic theory provides a model for us to use to explain market behaviors.  However, as you point out, this is not a simple situation.  The question is, the reasons or explanations aren`t. 

I don`t know where you are in your understanding of economics.  I don`t want to waste your time going through things you already know and then I seem to be talking down to you, but on the other hand, I don`t want to gloss over information you may really want to learn. 

If your underlying question is how can some businesses get away with raising prices in a shrinking market, then that is one set of issues.  If your question is how can the Chicago transit system do it, that`s something else. 

I guess I`m looking for some guidence on what you are looking for.

 

I don`t include my personal knowledge and understanding as a standard of measure in any of my posts. It`s because I see SuN as a sort of topical salon, offering eduction through conversation. There are so many skill-sets and different types of experiences here, each thread ends up including not only facts, but opinions coming from that experience.

The intent of the topic is to first, draw a connecting observation between large-scale pricing situations that seem backwards. After highlighting that particular type of event, to re-connect it downward to the small-business entrepreneur.

We go through life, watching the way gas prices go up, stamps go up, and the cost of a bus token goes up. We also see that the price of eggs, socks, and screwdrivers goes up. Finally, we see the price of computers, video players, and commodity items goes down.

When I say "simplistic," I mean that too many people seem to "lump" all these price activities into a single concept---"the price of stuff." To that end, I thought I`d generate a topic where someone like yourself (BurninGreen) could bring in the economic theory and definitions behind all that "stuff."

I was fortunate. My father was an international businessman, and enjoyed talking about everything at dinner. Our family had long, involved conversations all the time, and he was skilled at forming analogies to explain just about anything, to whatever age level.

I`ve noticed that not many people had that type of family experience. SuN is a way to emulate those conversations. :-) In any topic, some group of people can be the "knowledge leaders," and other people can ask questions and get an "ah hah!" moment, or ask for more clarification. It`s a Good Thing. :-)

Another thing I`ve noticed is that although some people are seriously filled with knowledge about something, they don`t necessarily understand how to talk about it in conversation. Sometimes it`s helpful if they`re in a sort of interview situation, responding to specific questions. It helps constrain the level of the discussion.

One reason the book about computers I wrote, along with Jim, was successful is that we explained low-level assumptions in "sidebars." Who knows how the "meter" (metric system) was invented? Why is it such a bizarre number? How come computer stuff comes in sizes like 16, 24, 512, 256? That sort of thing.

Without those basic assumptions being clear, people wander off into all kinds of messed up confusion in their minds. These topics also act as a way to bring out and discuss many things that "everybody knows....duh!" Only NOT everybody knows. :-)

You`ve just confirmed a suspicion I had about your original post.  Your intent  was not from a need to know, but from an educational, "for the good of the whole", dialog starting motive.

I was a bit  doubtful about the original post, coming from you, but I thought I would try to lend a hand.  Your myriad of posts seem to suggest that you have a very broad range of interests with a good knowlege basis for most conversations.

I`ll step aside and let others join in.

:-) Actually, you shouldn`t step aside. You seem to be someone skilled in economic theory, and making that understandable to "the rest of the world."

What to you is Economics 101 or 202, is because you went through a degree course. I suspect most of the community members here on SuN don`t have that background. Where will they get it, if not from discussions like this?

My hope is to generate a "topic" that can be read in about 10-30 minutes, that summarizes a specific relationship between an everyday experience, and the accumulated understanding of how it works. (I always wanted to know how things worked, growing up.)

So....as someone with that knowledge, what IS the difference when prices go up at the gas pump, and prices go up on the cost of eggs? Is there an egg monopoly, or a gas/oil monopoly? Are they government controlled? Will people "always buy eggs?"

More importantly, in my experience a whole lot of people have little interest in riding a bus. So there was a limited market (or stable one) to begin with. Rather than lower the price and increase customers, the PACE system (in Chicago) has decided to raise the prices. I believe that`s foolish.

Why would it be foolish or wise, and how would people make an *informed* opinion about the problem? Is it a life-changing contemplation? Nope, not as it stands.

But suppose I sell written articles and fewer and fewer people are coming to me as customers. According to my observation about the PACE system, I should then increase my fee for writing. Right? What distinguishes what I`m doing, worrying about my singular product from what the bus system is doing that would make my decision right or wrong?

That`s the intent of many of my posts....to make more specific the way "regular folks" analyze their small-business decisions.

Ok, a little repartee for the voyeurs of community.  Serve to me.

And please, anyone reading this, jump in!  It would be too cool if I was the only one to get to say everything important around here. 

Whew!  Where to start?  You kinda machine gunned a bunch of related questions. 

To take them in order of presentation:

eggs vs oil - both are complex issues due to the entities involved.  Eggs, being an agricultural product, have a bit of pricing support from the government.  Plus, there are the egg producers association(s) which market eggs in general terms, then there are the coops which are groups of producers banded together to market their product under a brand name, then there is the large producers (Pilgrims Pride, Tyson, etc.) which produce/market their own.  All in competition with each other, all working cooperatively with each other.  Gone are the days (unless you live near a farmers market or small town) when you would buy your eggs from a local farmer (our neighbor gives us their eggs!) and would haggle with several to get the best price.  So, consumers are at the mercy of the government price subsidies, coops and oligarchies which pretty much set prices, however, sensitive to market demand and supply on a macro level.   Murky enough?

Oil - this is sooooo screwed up.  OPEC, a blatant oligarchy, but not illegal outside the US, international oil companies, government taxes, controls, etc.  However, if you dare to follow the futures market, investors, speculating on the future supplies of oil, actually drive the price at the pump more than supply/demand.  I know, I`ve made money and LOST money playing oil futures.  The futures go up on anticipated increased demand, so the price goes up now based on an anticipated future event.  Likewise, futures go down expecting lower winter demand, and the price will typically follow.  A terrorist attack, Venezuela ups production, the oil minister of Saudi Arabia *arts  whatever, the market jumps.

PACE - not knowing the funding and structure behind PACE, its hard to see through the actions.  If they were smart, they would lower the price.  I forget the name of the principal, but there is a way that when you lower prices, market share picks up and you wind up with higher revenues, and more profits, even if the profit margin goes down. 

If I invest a $1 and make a penny, is that good or bad?  In a year?  1% return Stinks! What if I can double my return to 2c?  Good or bad? What if  I cut my return to 1/2c, good or bad?  A big part of the equation is missing,  time.  What if my return is in a week? Now my 1/2c in a week translates into an annual return of 26%,  Great!  (really larger due to compounding, but who`s gonna get technical?) It has to do with the velocity of money.  How fast can you turn your dollars. 

"But suppose I sell written articles and fewer and fewer people are coming to me as customers. According to my observation about the PACE system, I should then increase my fee for writing. Right?"

Sure, go ahead   

Again, not enough info.  Unless your writing has a large following, a dedicated readership, a lifetime customer relationship, you really don`t know what to do.  Are your articles "Johnny one-note"?  Have you flooded the market with your writing/information so that there are fewer people who need to get your information?  Have you flooded the market, met demand?  If so, raising prices will accelerate your demise.  Your inventory has gone stale. 

Time to retool, rethink, change topics, rewrite. Has your market moved onto other areas of interest?  Either follow their interest or better yet, get them interested in something new that you offer.  Get them waiting for you to provide new content, information, ideas.

Has the perceived value of your writing been degraded?  Sometimes revamping the same material, putting out a "new, revised, never before revealed secrets" version and upping the price will get `em running back.  Puts new legs on your offerings.  They`ve bought from you before, they`ll buy again. 

If you have material that is deemed basic or essential to some aspect of everyone`s life, then you will have an element of "have to buy" and upping your price without changing anything else may work.  Bibles come to mind.  No new content in a few years, but still the #1 best seller of all time.   Different packaging appeals to different markets/needs.  Big heavy "Family Bibles", small pocket versions, study Bibles, "26 Translations", cross referenced, concordances, Greek interlinear, . . .

The bible reference brings to mind a comment I once got from a coworker: "Believe in the Bible? Shoot, I`ve actually seen one!"  :  )

Caveat on all this: in life "Know thyself", in business, "KNOW your market" 

There`s my shot, full of holes.

Return to you.

Craig,

On second thought, can we change the topic to the Universe?

You know the final exam where we have to define it in 20 words or less AND give 3 comprehensive examples.  I think that would be faster.

                                                        

Oligarchy -- government or controlling management by a select group (usually fairly small), typically a class of people.

RE: PACE
"If they were smart, they would lower the price......"

Yes, that would be my thinking. And yet they raise their prices. Does that mean they`re dumb? Or does it mean they`re following some kind of well-understood economic principle that makes sense in a different universe? ;-)

"........but there is a way that when you lower prices, market share picks up and you wind up with higher revenues........

Yah, that`s what happened when Kennedy lowered taxes. Revenues rapidly increased as the economy picked up. Reagan did the same, then Bush Jr., and it seems tax revenues increased.

As for knowing the market and re-tooling or re-packaging, writing or otherwise, I think that`s rational. I`ve seen it with musical collections, where every year it seems we get another "Best of" the same bands.

From what you`ve writ, it seems to me that small-scale entrepreneurs CAN use rational logic to examine their price-to-consumer formulas and equations. What matters is to:

• Look closely at the example you`re using to justify your price increases.
• Determine if the example is a monopoly.
• If not, determine if it`s being subsidized by "deep pockets."
• Evalutate how "necessary" is the product you`re selling.

It would seem that if none of the conditions are true, then you could make an almost direct comparison of prices and buyers, cause and effect.

Does it make sense to have some sort of "take-away" points like this?