What Is A 'Fair' Price?
For this month's column, I would like to share with you a story posted to the online Plumbers Discussion List (www.plumbers.org/pdl/opt.html) back in June by one of the industry's most astute marketing minds, Matt Michel. Matt is a vice president with the Arlington, Texas-based market research firm Decision Analyst, and a PHC industry veteran. He gave me permission to share this post with you.
Previous discussion on the list made reference to a recent round of golf I had played with two close friends from the plumbing contractor fraternity, Randy Hilton and Jack "The Irish Plumber" Simonson. Although Matt's contribution is obviously written with a lot of humor behind it, his conclusions are serious and absolutely correct.
He was responding to previous PDL discussions regarding the issue of fair pricing of PHC services. The rest of this column is in Matt's own words.
Matt Michel SpeaksWhat is a "fair" price? It's a question raised on this list from time to time. It's a question our elected representatives are wrestling with in regards to California electricity prices.
As long as there is no coercion, a fair price is whatever a willing buyer and a willing seller agree upon. Let me illustrate:
Say I went into the bottled water business. Knowing that people like to buy bottled water when it's hot and they're hot, I approach Tour 18 Golf Course in Flower Mound, Texas. I negotiate a deal with them where I can walk the course and sell my water, giving them a cut. It's been a good, hot day and I have only two bottles left. I decide to head for home.
I cut through the woods and notice the Irish Plumber lifting up logs trying to find a golf ball. The sweat is pouring from his brow. Aha, I think, I can sell another bottle.
"Wanna buy some water?" I ask.
"How much?" asks the Irish Plumber. "It better not be too much. I'm Irish, after all, and I work for a consolidator. Every dime counts."
Just then, Randy Hilton drops from a tree he had climbed in an effort to better survey the landscape looking for his ball. I smell the sweat before I see it. Great! I can sell out.
"I'll give you two bucks," says Hilton. "It's all I've got on me."
"Sold," I say, tossing him a bottle.
Hilton hands me two sweaty dollar bills and takes a swig. "Heck of a deal," he says.
Irish looks at me slyly. "I've only got a dollar," he says.
I think about it. What the heck, it's my last bottle.
"Wait a minute," says Hilton. "You charged me two dollars. If you sell it to the Irish Plumber for a buck, I want a dollar off."
"You just said two dollars was a heck of a deal," I say.
"That was before," he says indignantly.
"What if I told you I normally sell water for three dollars and already gave you a dollar off?
While Hilton is scratching his head and Irish is salivating, Frank Blau bulls through the brush. "Are you guys going to play golf or what? Let's get with it."
"We're buying water," says Irish.
"Hey, that sounds good. How much?" asks Frank.
"What's it worth to you?" I ask.
"Hey, wait," says Irish. "I just found a fiver. I'll give you six for the last bottle."
"No Irish Plumber's going to outbid me," says Frank. "Ten."
"Eleven," says Irish.
"Twenty," says Frank. "I'll jut put it in overhead and make a profit on it. What do I care?"
"Twenty-one," says Irish.
Suddenly, Randy Hilton pipes in, "I'll sell you the rest of my water for ten."
"I'll give you five," says Frank to me.
"What happened to twenty?" I ask.
"Do you want five or not?" says Frank.
"I'll give you ten," says Hilton.
"Sold," I say quickly before the price drops again.
Hilton takes a swig, then hands the rest to Frank. "It's ten bucks, Frank. Same as Irish paid. It's my flat rate price."
Pretty silly, huh? Silly or not, when was the price unfair? At no time. Where there is a willing buyer and a willing seller, it is impossible to sell at an unfair price. It's IMPOSSIBLE!
On The Other HandBut what if Tour 18 made me sell at two dollars a bottle? I would be short eight dollars. Randy would be short ten dollars. The Irish Plumber would have another eight dollars. And Frank would be thirsty. Would that be fair?
What if Tour 18 said I had to sell at three dollars? I would be short six dollars. The Irish Plumber would have another seven dollars. Frank would have another seven dollars. And Randy would be thirsty. Would that be fair?
What if Tour 18 said I had to sell to everyone as much as they wanted for a dollar a bottle, whether I had the water with me or not? I would have to run to the clubhouse and buy another bottle of water at four dollars (the clubhouse price), then sell it to Frank for a dollar, losing 25 percent on the entire set of transactions, not to mention my original costs and Tour 18's cut. Would that be fair?
No one would be thirsty, but we wouldn't be at Tour 18 in Flower Mound, Texas, anymore. We would be at a golf course somewhere in California with Gray Davis as the manager and I would be bankrupt, to the dismay of the little old lady that invested her entire retirement fund in my water business under the assumption that everyone needs water and I would have the golf course monopoly. Congress would be holding investigations, Tom Daschle would be blaming President Bush, and Dick Gephardt would be giving speeches, crying that real people were getting hurt.
If a contractor (or anyone) offers a price and the customer accepts, the price is fair, provided there is no coercion. I don't like the price I pay for a gallon of gas, but I can't say it's not fair. My daughter went to Six Flags Amusement Park yesterday and complained to me that it cost $2.50 for a coke. She didn't think it was fair. "You could have had water," I said.
This is not rocket science. It's fundamental economics. If demand exceeds supply, prices will rise. More people will be attracted to the trade. Supply will soon exceed demand. Prices will fall. At some point equilibrium will be reached. Despite the fact everyone is out to maximize things in his own interest, market forces act like an invisible hand guiding the transactions so that everyone's interests are best served.
If contractors are forced by the heavy hand of government, rather than Adam Smith's invisible hand, to sell at below-market prices, prices would not be allowed to rise, people will flee the trade, supply will fall, demand will rise, and shortages will result. We may not see the heavy hand of government distorting markets (yet), but we do see the dark hand of ignorance leading to the same result.
Contractor prices are suppressed by the trade's own fear, lack of self-worth and economic ignorance. This suppresses the returns to contractors, holding down pay, driving employees to other lines of work, and leading consumers to DIY centers out of frustration because they can't get a contractor.
If you don't think that at least some of the DIY business is the result of frustration, guess again. I had a self-inflicted sprinkler system and pool problem this week. I was traveling and told my wife to call the landscape, sprinkler and pool companies to find someone to fix it while I was gone. One said he could come out at the end of the month. Another returned the call Saturday afternoon, when I had nearly finished the repair. He was indignant when I told him he was too late and I was fixing it myself.