A common theme I’ve written about from the start of my blogging days is the Lean/Toyota notion that price is dictated by the market (the customers) — price is NOT something you can set in isolation based on your costs. Here are some earlier posts of mine on this topic.
The old notion, which flies in the face of basic economics, is that you took your costs (assuming you know them accurately) and then add a profit margin that you feel entitled to. So the Price = Cost * (1 + Profit Margin).
This only works if you are a true monopoly producer. But, far too many companies claim they “have” to raise prices to you, the customer, because of cost increases on their side. This even happens in medicine. Even at Toyota, at times.
Let’s say the market says the price for your product is $100. If your costs are $80, then you have a profit margin of $20.
If one of your input costs (materials or labor) goes up by $5, you cannot necessarily just raise your price to $105. Your job, from the classic Toyota perspective, is to eliminate waste to find $5 in other cost reduction if you want to keep your margin the same.
Think about it reverse… if you could reduce your costs by $5, would you automatically pass along a $5 price reduction to your customers? You might if you were trying to aggressively grow market share at the expense of competitors who charge $100 or if you had excess capacity that might otherwise sit idle.
Either way, pricing decisions (effective ones) are more complicated than simple addition based on an entitlement profit (Price = Cost + Entitlement Profit Margin). We “deserve” to make a profit, some might say, leading to that term entitlement.
Here is a picture from a recent visit to my doctor (where I was a patient at this specialist):
They are playing that same game of trying to convince the customers that they “have” to raise prices. If the patient is willing to absorb the higher price (choosing not to find another doctor or to quit getting shots), then maybe they should have been charging that higher price all along (if the market will bear it)?
I think companies (and doctors offices) get away with this practice since customers accept it and often don’t push back (maybe because their business is trying to do the same thing to their customers???). What a racket! :-)
I’d prefer to see the doctor’s office reduce waste and take out cost to counter that increase in antigen prices….
What do you think?
Some of my favorite older posts on this topic, including some cases where companies, like Parker Hannifin and P&G “get it”:
Thanks for reading! I’d love to hear your thoughts. Please scroll down to post a comment. Click here to be notified about posts via email. Learn more about Mark Graban’s speaking, writing, and consulting.