Price has absolutely no relationship with cost!
The Sunday Nation
Nairobi,
21 December 2014
About ten years ago,
I attended a marketing seminar here in
The production cost
of this gadget was about 2 US dollars. The consultant came up with an
ingenious idea to ask potential buyers how much they’d pay for it. So,
he collected contact addresses of 1,000 possible customers and divided
them into five groups of 200 people each.
The first group was
sent a “special launch offer” of the gadget with a price of US$5; the
second group was given a “special launch offer” of US10; for the third
group it was US$25; the fourth got US$50; and the final one was offered
the gadget at US75.
The aim was to find
out which group would order the largest number of the gadgets. As it
turned out, the people offered at US$50 generated the best response! The
customer had spoken and soon thereafter, the gadget was put in the open
market at a price of US$55. Imagine that, something that costs US$2 to
make was being sold at US$55 – almost 30 times its cost. Is it a
rip-off? No: it just how business works!
The cost of energy
(oil and electricity) has fallen steadily in the last few months and, as
a result, I expect that people will soon start complaining that
manufacturers are ripping them off by sustaining high prices. Indeed,
the President touched on this when he was launching the Olkaria IV
Geothermal Plant.
Unfortunately, such
complaints and pleas do not work. In a free market, the price of an item
has absolutely no relationship with its cost. The price depends only on
the amount the buyer is willing to pay! Only the consumer can bring down
the price of an item. How? By refusing to pay the higher rate!
I was searching for a
vehicle spare part recently and after walking the whole lengths of
Kirinyaga and Dar-es-Salaam roads I could not find it in stock anywhere.
But I established that the “downtown market” price was about Sh15,000.
Reluctantly, I went
to the official vehicle dealer and they quoted it at Sh48,000! On seeing
the quotation, I quipped in shock, “I have to ground this car for I
can’t get this kind of money!”
The sales clerk
offered me a 25% discount but I told him that I still couldn’t afford
it. He thought deeply for a moment and then asked me to give him two
hours to see what he can do.
When I returned, he
had a quotation of Sh18,500 – complete with the sales managers signature
of approval! I gladly agreed to pay this price and got a guaranteed
genuine part.
That is how prices are “fixed” in a free
market. Many businesspeople have sold things at a loss (below cost)
because buyers refused to pay higher prices.
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