Tuesday, September 15, 2009

Simple economics is not so simple

The economy has been in a down turn the last couple of years and I can't help but feel the squeeze from every direction. Back when the economy was good it wasn't like cars were cheap, morgages were low, and the price of every day things were rock bottom. Now that the economy is in the pits prices have gone up and not down to reflect our status. It's like businesses are ringing the customer towel trying to get every drop of capital they can. Tollways have added 20 to 35 percent markup on tolls, my grocery bill has risen 8%, and I have not gotten a raise in 2 years. What businesses are missing is to maximize profit in a poor economy you need to move VOLUME and not raise the price.

For example lets say you're in the market to buy a t-shit and your budget is $20. Now you go down to the t-shirt store and the store had some t-shirts you really liked for $20 but they wanted to make some more money so they decided to raise the price to $25 for t-shirts. Well that $25 dollar t-shirt is now out of your price range so you go to another store. The store has lost 100% of their profit for the shirt. If the t-shirt store were to LOWER the price to say $15 they would move twice as many t-shirts and lose very little per shirt but gain a lot with volume.

The lesson here is lower your price, increase your volume, make more money. Another side lesson is the economy is not an excuse to raise prices as much as greed is. Check the prices on things when the economy does go back up and notice the lack of price reduction.

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