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Raising Prices In Crisis

You’re out of toilet paper and soap. When you get to the store, you realize the shelves are just about empty. It’s somewhat of a crisis since a virus is forcing everyone to stay home and hunker down as much as possible. When you finally find a place that has soap and toilet paper, you notice that they’re multiple times the normal cost. We generally accept that business is business and let it go, pick up the toilet paper, and move on. Fairness and morality aside, does raising prices in this situation make good business sense?

Supply and Demand

Traditionally, economics would tell us that an increase in demand means prices should go up. Because of this dynamic, businesses should similarly raise prices if demand increases. The logic is to just use a simple formula: (price of goods x goods sold) – cost of goods and expenses = profit.

This means increasing the price or the number of goods sold is the bottom line. What if our inventory is somewhat fixed? Then the only ‘tangible’ things we can change are to either increase the price or decrease the cost of our goods or our expenses. This is business 101. If we tripled the price of goods during the crisis and sold the same or more supply, we’d have amazing profits over the course of the crisis. Then we could use this profit to build the business and invest or do whatever it is we wanted to do.

The problem with this model is that it is over-simplistic. It doesn’t account for psychological games and manipulation. It doesn’t account for how or why customers will continue to buy things in the future. It doesn’t account for how competitors will react or try to manipulate things. It doesn’t account for how the internet and social media could react. It doesn’t account for the fact that cheating and stealing are very similar (and not in a moral sense).

Cheating and Stealing

There are studies out there that show that, when we aren’t thinking about morals, we, ‘the collective we,’ have a tendency to cheat a little. For example, giving college students an exam, and allowing them to write down their own score produces many cheaters. Now, I promised that we wouldn’t use morals as a basis; so, what we want to do is think of cheating and stealing in terms of opportunity, cost, and the end goal. If we are provided an exam, and we cheat when instructed to write down our own score, our end goal is most likely to get a good score on the exam, get a good grade, and get our degree or whatever piece of paper we are trying to get.

However, what if our end goal was to understand our level of knowledge? What if our end goal was to know how we ranked next to our peers? What if our end goal was to be the best for ourselves and not for others, not for show, not for a grade, not for a piece of paper? Would we still cheat? Stealing is no different; it’s all based on our end goal.

What we don’t like to acknowledge is that cheating and stealing can be logical, given a specific end goal. If we just want an easy, good grade, and the teacher is giving us an easy way to cheat, and there’s no significant chance of it affecting anyone negatively, then it’s a no-brainer. Cheat.

The question is, however, are we really assessing the situation correctly? Have we properly identified the risks and impacts to ourselves and others?

Gaming the System

When we find legal loopholes or tricks to get extra out of something or get away with things that weren’t meant to be, we’re ‘gaming the system.’ For example, shamelessly, still to this day, when I use a vending machine, I will strategically look for an item that was stocked incorrectly, giving a chance of two for one. The result is essentially stealing from the vending machine owner.

If I was an excellent magician and used sleight of hand to steal a candy bar from a real person, how is it different? Again, right and wrong aside, the only real difference is that one situation is direct, while the other is more of a loophole and indirect.

Yet even if I was caught by a police officer getting two items for one from the vending machine, despite it being stealing, it’s not treated the same as directly pocketing a candy bar from the shop.

The point is that we wouldn’t normally assess them as having the same amount of risk or impact. In an obviously direct stealing scenario, even if we were a magician, there’s a higher risk and higher impact if something went wrong.

Gaming the system is often put in the moral gray area and not treated quite the same as something like direct stealing and is usually legal. Sometimes, it may actually be important to take advantage and game the system, yet the assessment of what risks and impacts it could have is just as important.

Back to Business

In business, the moral gray area of gaming the system is the norm. For example, in corner markets and negotiable stores, they can and will charge as much as possible. If we look rich or like a tourist, the price will get hiked up if they can get away with it.

Given the goal of ‘immediate profit,’ these tactics are no different than raising prices in crisis. Yet, what are the true risks and impacts? If we aren’t going to be in business anymore, then we could logically conclude that making a quick profit by increasing prices makes sense. We won’t have to worry about whether customers like us or not; we wouldn’t care about social media or Yelp reviews. We’d get our profit and go do whatever we wanted to do with the profit.

This short-term thinking of just getting profits is a normal working business model that has been in place for generations. We’ve been taught over and over that it’s all about the bottom line. Yet why is it that 50% of businesses fail in the first five years? Our societies may have been doing business for generations, but with a 50% failure rate, maybe we’re doing something wrong.

We’re so focused on revenue and profit over our competitors that we forget the whole point of the business: to provide something of value to the customer. Increasing prices in times of crisis is the opposite of providing value to the customer. It’s saying, “we know you need this right now, but we want more money, so we’re going to get over on you.”

Redefining Profit Without Being Non-Profit

If we use the concept of ‘provide value to the customer,’ then, times of crisis are a great time to show the customer how much they are valued and appreciated. In turn, for example, the ‘marketing campaign’ that normally would have taken lots of money and would provide no immediate value becomes a means to provide value and market at the same time. We could reduce the prices or give away free essential items and not only provide value but get more loyal customers. The long-term impact could be much more than short-term gains of raising prices.

There are always innovative ways to create value without focusing on increasing the profit margin, and the more we do so, the more likely our business will thrive.

Tough Business

The doubters that say the business will also be in jeopardy during times of crisis and that taking as much profit as possible is important fail to see that, if the business cannot afford to weather a crisis, then either 1. The business did not save or plan for bad times. 2. The business started prematurely. 3. The crisis is exposing the fact that the business is not really needed. Or 4. They are right, and the crisis is extreme, except in this instance, raising prices is not going to be the difference-maker.

This is no different than personal financial planning. If we personally aren’t at least somewhat prepared for bad scenarios, then we shouldn’t be starting a business or taking on a family for that matter. This is a tough pill to swallow, but it should be underscored that we all need to work on constantly improving for both ourselves and those we care for. For businesses, that means the employees and the customers.

Hard Times and Crisis

Next time we see a business raise prices in crisis, let’s give our business to someone else if we can. There are at least 100 better ways to make money than to take money from others against their will or better judgment. It’s a business’s job to find those 100 ways or get put out of business.

In hard times, we often see the worst in people. With business, it is no different. It’s up to every one of us to hold each other, the businesses, and even our own governments accountable. Let’s all remember: if we see something wrong, say something. Have discourse without blame. Let’s find better solutions together.

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