The Customer Always Sets The Price
American plagiarizes French original. What’s new?
It was Harry Selfridge (founder of the Selfridges stores) who coined the phrase “the customer is always right”. Well, actually he adapted it from a French saying “the customer is never wrong”, but never mind.
You can see what he was getting at. If a customer asks for a blue shirt, don’t try and sell them green shorts. That sort of thing.
The trouble is, it’s obvious that there are many cases where the customer is clearly not right. They may make unreasonable demands, indulge in unacceptable behaviour, or be in no position to make an informed decision.
If a customer has come to you completely ignorant of the matter at hand, or has been badly misinformed, or in fact expects you to make decisions for them, then the customer cannot possibly be right.
But regardless of whether or not the customer is actually right, he always sets the price.
What Price a Loaf of Bread?
Contrary to some opinions, the value of goods or services is not related to their cost of production. The value of anything is however much anyone is willing to pay for it (in one way or another).
The only reason that oil, for example, is worth $130 a barrel (well, today it is) whereas the heavy saline found at the bottom of the oceans is essentially worthless is because we assign value to it.
Had we developed technology that used strong saline as a power source then the position would be reversed. In fact, go back slightly over a Century and oil was worthless. We had no technology to exploit it and therefore no use for it, hence it had no value.
Gold is another example. It has no intrinsic value whatever. But it is reasonably scarce and, being malleable and shiny, perfect for making jewellery, hence people sought it out. The resulting interaction between supply and demand saw to it that it thus acquired a value – to humans at any rate.
But many have discovered the hard way that you cannot eat or drink gold. Jews in the ghettos under Nazi occupation would trade sizeable amounts of gold for a stale hunk of bread.
I’ld Like to Talk to You Now About Carburetors
The value of everything is subjective and dependant upon the context. Gold or bread? The answer is, it depends.
Let’s say you decide to hand make carburettors suitable for a Model T Ford. You can make 10 per month and they cost $100 each to manufacture but you can sell for $150, giving a profit of 10 x ($150 – $100) = $500.
So then you setup a factory that can turn out 100 carburettors per month, each costing just $50 to manufacture. You might now hope to make 100 x ($150 – $50) = $10,000, but in fact you will likely go bust.
Once your very few customers had each bought a carburettor then they would have no further use for your product and the value of your remaining stock would be effectively nothing, leaving you holding an impressive collection of cast metal paper weights that cost you $5,000 per month to produce.
Of course, had you followed this business plan way back when the Model T Ford was in its heyday then you would have absolutely cleaned up instead. Context is everything.
Now you might be asking at this point, so why exactly is oil so damned expensive then? I am the customer and I sure as heck didn’t set that price! Well, when I said the customer always sets the price I had a letter “s” in the wrong place.
What I should have said was “the customers always set the price”.
It Costs The Same But It’s More Expensive?
Let’s say you have a widget to sell. We both know it costs about $50 to make, but I’m an idle sod who would rather pay more and have one ready made and you want to recoup your material costs and the time you spent making it. So we agree a price of $80 for the widget.
What is happening here is an exchange of value – you value my money over your time in making a widget and conversely I value your skill as a widget maker over my money.
Now, along comes a second customer, equally, if not more so, as idle as myself. We know you won’t sell below your costs since you wouldn’t bother making widgets anymore if that happened, so now the price is determined by a tussle between us and the price of a widget goes up.
The amount by which it goes up is directly related to the value we each place on being idle – at some point one of us will conclude that price of idleness has gotten too high and leave the other to pick up the tab (and the widget).
The same is happening with oil. You want to carry on using it to drive you around, heat your house and so on. But now so do a billion Chinese who had formerly been content (apparently) to ride bicycles and freeze.
We can’t all have as much oil as we want since there is only so much physically available to be pumped, so we (you, me and all the other customers) sort it out with a price war.
The oil itself hasn’t become any more expensive – it still costs exactly the same to extract as it did before – it’s simply that more people now find a use for it and hence value it.
In time the price of oil will fall back to where it was all those years ago – almost nothing. But oil won’t ever actually run out as a surprisingly large number of folk seem to believe.
Like my preference for idleness and purchasing widget’s-2-go, there comes a point when one must conclude that indolence is out, the cost is not worth the benefit, and an alternative must be sought.
Once that alternative becomes established (as fuel injection replaced carburettors) there is no way back. Where once customers struggled to afford oil, oil will find it has very few takers at any price, and this transition will occur when there is in fact still plenty left in the ground.
The Relationship Between Price, Value and Money
Price is simply a measure of value. It is an aggregation of the value that all the potential customers of something place upon it. Although it may appear at times to be influenced by the underlying cost of the thing, value and hence price are in truth unrelated to cost.
We created the concept of money in order to be able assign a standardized price to all manner of otherwise unrelated things and so be able to compare them uniformly.
Before money you had to figure out how many chickens would be worth the same as a sheep and how many turnips you would owe the blacksmith for shoeing your horse.
Now we can just put numbers on these things and compare the numbers. Much easier. The higher the number, the more value we place on the item or service or idea even.
So what is value? All value is social value – the personal value that you and everyone else assigns to everything, all the time, and so far as I can tell is an entirely human concept that doesn’t exist in our absence.
Value is an expression of our desires and anytime anyone sets their heart on acquiring something they are in effect a customer, looking to buy and setting the price.
It’s worth remembering: price is a measure of value and money is simply a convenient mechanism for comparing prices.
Therefore, if money is what you desire, then things of value are what you must acquire or create.