Tan Kin Lian's Blog: Price of a product or service

Thursday, July 17, 2008

Price of a product or service

In the free market economy, the price is set by the market. The business decide on the price and sell the product or service to the market.

In my view, there is a better way to set the price. It should be based on the cost plus a reasonable margin for profit. This is a fair way to set the price, and avoids exploiting the consumers.

A cooperative operate on this model. It is an ethical model. I hope that this concept can be applied to many types of businesses.

Some companies make excessive profits by misleading the consumers. They design complicated products, and get marketing people to sell these products to consumers through misleading means.

6 comments:

Anonymous said...: reasonable? how can we determine how much is reasonable? some goods are sold with tiny, 1% profit margin, while others are sold with more than 400% profit margin. and it is certainly possible to impose larger profit margin, but still selling the goods at a cheaper price, and vice versa.

in a completely fair market, sellers would not be able to get excessive profit. if they even try, their competitors will get the business instead. for example, try selling electronics with 100% profit margin, it is clearly not illegal. but see if you can even sell anything.

if you are talking about insurance, excessive profit margin is only the symptom, it goes much deeper than that. insurance companies can only make such large amount of profit because the market is not fair to the customers. customers are able to judge a product by its price, but apparently unable to understand opportunity cost.

rather than curing the symptoms by fixing the profit margins, we should aim to fix the market. the only way that I can see to do that is to make unbundling mandatory. if everybody sells insurance and investment separately, and nobody sells insurance+investment bundled product, you can expect profit margins to drop significantly.; July 17, 2008 12:03 PM
siewkhim said...: Let face it. Political leaders, religious leaders, business leaders and everybody who has an upper hand on the person next to him/her,will mislead those below them to sell their damn products.

The damn world will go on in this format till doomsday.

I am sure many of us who think we now are upright has in the past mislead others with our products.; July 17, 2008 12:29 PM
Tan Kin Lian said...: Hi Priyadi

Unbunding is one way to improve the transparency of the product and let consumers make a better choice.

Ethical behavior is another way. A reasonable profit margin is 5% to 10% of the cost of the product, including the marketing and other expenses.

The competitive product may force the margin down.

For products that are not transparent, it is important for the authority to enforce this "reasonable margin" so that consumers rae not exploited.; July 17, 2008 12:55 PM
siewkhim said...: Price depends on supply and demand. That is economic 101. The greater the demand, the higher the price.; July 17, 2008 2:43 PM
Wealth Journey said...: I agree with Mr Tan that unBundling only makes the product pricing more transparent.

Ethical Behaviour is the cure as pricing or product features that does not benefit consumers come about mainly because of unethical behaviour.

In the case of businesses that are for profit, there will always be a bias towards benefiting the company more.

Thus, to ensure competitive pricing, a co-operative company is needed to maintain the balance.; July 17, 2008 5:07 PM
SingaSoft said...: We should not confuse ourselves by mixing business issues of earning high profit margins with ethical issues of misleading people...

misleading, no matter how low the profits we earned is always wrong and bad

earning high profits, without misleading our customers, is nothing wrong at all...

cooperative is good...

free market is (also) good...; July 17, 2008 10:42 PM