Minimum Profit Margin A Good Idea?

Cutting Profits

I often hear people saying, “competition is good for the consumer.” But is it? Of course they’re talking about speeding up innovation and driving prices down. Both of these are good, but in the case of driving prices down, it can go too far and be bad for us all.

Cutting Profits

We live in a time where paying little for something is seen as ideal, but there is more to a commodity than price. If we purchased based on quality, it would improve far more than our standard of living.

The issue with extremely low prices is it can force others out of business and reduce competition. The businesses that can’t compete are either not as good at marketing or have higher overheads.

The higher overheads could be things that are important to us; like a physical store to try the product, trained staff providing assessments, home visitation, convenience of in-store pickup etc.

However, all things being equal there are other things, aside from these, that make the race to the bottom a problem.

When a company competes purely on price they have only one way to beat their competition, reduce the price, shaving £’s off the profit per item in order to sell more of that item.

If they keep going down this route, the only way to keep lowering prices is to reduce the quality of their service, less staff, low wages, no brick and mortar shop, no trained staff, no in-store trials, or home assessments. It affects the product quality too, using cheaper materials, putting less time, energy and money into research and design.

If the market becomes saturated or a company can’t reduce it’s prices enough and is out marketed by it’s competition, it goes out of business.

To stay in business these companies keep pushing boxes, selling vast quantities at low prices. When all the competition has gone they can’t raise their prices, customers either come to expect the low price or a competitor opens and beats their price.

The businesses that close up, used to employ people, in the case of some internet business it may even put hundreds or thousands of people out of business and in its place, one business with 2 or 3 people shifting boxes.

No-limit profit margins cause companies to compete on price, which results is cutting corners, cheap materials and a throw away society. It’s a false economy when the cheap product you buy breaks and then you buy another (this seems far more common today than it did 20 years ago).

It also means, all of those people out of work are now not contributing to the economy, they’re drawing from it rather than putting into it. It means that to pay the way for these people more money has to be taken from those contributing to the cash pool.

Money get’s tight, people save money for a rainy day, less money is moving around, less money is being spent, businesses see sales drop and make workers redundant which compounds the problem and before you know it we’re in recession.

The solution though is a simple one…

Set a minimum profit percentage.

With a minimum profit margin, small and medium size businesses can afford not to compete on price, investing some of that profit on service, and quality. With customers making their choices based on value and value is more than price, it’s the aftercare and quality.

This allows a company adding exceptional value to increase their prices. This is good, value is good, it doesn’t mean sky high prices because we would still only pay what the product or service is worth and there will always be companies that offer less value for less money. Choice and competition like this is great.

With the race to the bottom competing on service is extremely difficult because there isn’t enough profit per item to make these improvements and we lose out.

And with more profit per item, businesses wouldn’t need to sell as many products/services to stay in business, they could grow or new competition spring up, each time employing more people.

Instead of buying because it’s cheaper, you’re choosing which is better quality, where is more convenient, who gives the best service.

Minimum profit encourages growth, employment and better products and service. It’s not low prices that competition should be good for. These newly employed people spend more money and businesses can thrive again.

Some businesses will benefit more than others, but all would benefit longterm. Especially small businesses, the staple of our economy which usually struggle to compete with the buying power of large companies.

Businesses won’t do this on their own because cutting price is a quick short term strategy, where as offering quality is a slow long term strategy that with out help won’t win, and I wish it would.

I think businesses should also be encouraged to increase wages and employ more people, perhaps the maximum amount of money a company can make should be based on their base line; the wages and number of employees.

Undoubtably there would be issues that need ironing out, I don’t know how to implement it, (maybe business to consumer only) but it’s a system we should be looking into. I have no doubt this system would be beneficial in the longterm.

As always, if you have any thoughts or comments post them below.

Yours

Ash

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