Thursday, November 20, 2008

The profit prophet

Ok, I admit I like cute subject lines. And I don't claim to be a Prophet with divine wisdom or to be able to determine the future. My intent with this blog post is simply to speak some basic facts about profits. And according to this site, a prophet is a person who brings a message or warning.

You may recall that I posted a couple of days ago about pyramid schemes. (see here) This is a method of making a quick profit. Unfortunately, it's an illegal method. Participants in these schemes are falsely promised great profits, but aren't told that the game will end and many people will be left with no profit at all.

But I want to be sure to send a message that profits are not always a bad thing. In fact, profits are good for everyone.

Let's say you take your car in for repairs. You realize that Bob the mechanic is buying parts and then marking them up before installing them on your car. Then he charges you a service charge for the time he actually works on the car. Why should he be entitled to a profit on the parts?

In my simple example, there are a lot of reasons that Bob should receive a profit. For starters, Bob's family counts on his profits. They probably like to have things like a house to live in, food on the table and maybe even clothes (unless Bob is a private nudist). Bob may also have expenses not directly related to your bill. Bob has to pay for electricity at his shop, franchise fees, advertising and that nasty tasting coffee that you drank in his waiting room (It wouldn't be nasty tasting if he read Steve's blog here).

Bob may have some management and they too have families and needs. Of course, Bob's co-workers also contribute to management's well being, so they're not entirely dependent on your car repair.

So profits for Bob the mechanic aren't a bad thing, in fact they're required. If Bob didn't make a profit, he probably wouldn't be repair cars. Instead he'd go to work as the greeter at Wal-Mart or take some other job that pays him for his efforts. Of course that doesn't mean that Bob has to make ALL of his profits from the repair of your car. You'd expect him to work on other cars as well.

My whole point here is to point out that profits aren't all bad. As you might guess, this is part of a series and (big surprise here) I have other thoughts in this series. You'll just have to wait a day or two to hear more.

8 comments:

4simpsons said...

Good points, Randy. You explain the essentials of capitalism well. People act like profit is a bad word, yet want to profit themselves. Healthy competition is the key, as it helps keep Bob from gouging you.

Adam said...

Another obvious reason Bob is entitled to a profit on the parts is because he took the steps to acquire the parts...unless of course you provided them (which I would say less than 1 in 100 would do).

DJ Black Adam said...

Profit is fine, the question is, what should happen to Bob if he is allowed to charge you 100% more than the part cost, and if the government makes it so that Bob has no competetors for you to turn to because they removed regulations regarding anti-trust laws?

Just one off the top of my head
:-)

Randy said...

DJBA, 100% mark up isn't unusual. I know a photographer who routinely marked up portraits at least that. I also know a clothing store who wouldn't even discuss anything less.

Competition is the key. If you don't like Bob's pricing structure, you should be able to go somewhere else. I'm not disagreeing with you, but I'm coming from a different angle. If we try to wrangle all of the profit from Bob, he will go out of business. And if we decide his profits are too high, he may decide to change jobs and quit servicing cars...

Brooke said...

I was going to say what Adam did.

He marks that stuff up because he had to pay to get it there and he has to pay inventory tax at the end of the year.

Randy said...

Thanks Brooke. I hadn't thought about the inventory tax. I'm not sure of the details of that aspect (I thought it was just inventory sitting on the shelf at year end - most companies today are "just in time"). But there are other costs that I didn't go into detail on, e.g. disposal costs that a garage has that you or I don't.

DJ Black Adam said...

@Randy:

I agree that a person should be able to make as much profit as bthey can, as long as there is real competion and no price fixing between competitors.

But really, who is suggesting that an entrepenour or business owner shouldn't make a profit OR that it should be taxed to zero?

Randy said...

DJBA, there are a lot of consumers who think of profit as a bad word. That's the focal point of my post.

I think we agree that compeition is a good thing and that taxes shouldn't prevent a businessman from making a profit.