Real Issues. Real Answers. Fair profit vs. price gouging

profit vs price

As in any business that sells a product or service at a profit, even one known for delivering razor-thin margins, the question of what constitutes a fair price is always present. Charge too little and hope to make it up on volume…or charge too much, and risk alienating loyal customers. It’s a timeless question with no easy answer, and one that generates lively discussion. That’s why this month’s Real Issue is fair price vs. price gouging.

This month’s question came from a dealer in Michigan who wrote: “How do you balance working to increase profits and margins with the risk of taking advantage of your loyal customers? Where is the threshold between ‘fair profit’ and price gouging?”

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As we do each month, we conducted this survey via email with readers who’ve opted in to receive our email communications. A big thank you to the 315 readers who took time to weigh in on this months’ survey. If you’d like to participate in future surveys, just drop me a note at Rick@LBMJournal.com and I’ll make sure we get you added. By the way, the surveys are very brief— this month’s was two questions—and Survey Monkey analytics show that it took less than three-minutes on average to complete the survey. We’d love you to join the discussion.

The Question

How do you balance working to increase profits and margins with the risk of taking advantage of your loyal customers? Where is the threshold between ‘fair profit’ and price gouging?

Reader responses

“Common sense is the answer. This is not a difficult issue when common sense is applied.”

“Be transparent with the increases and communicate often about rising overhead.”

“I would first need to know the definition of ‘fair profit’ and ‘gouging’ to answer the second question. The first question is our everyday task. Since our business in in the very competitive Southern California marketplace, we are constantly ‘testing’ our bid prices through our bidding process. If we’re too high, our customers tell us, and if we can’t get the last look, we lose the job. If we are too low, we get the job and don’t learn much about our pricing. Therefore, our best interest is served if we are slightly high, but by a small enough increment that we can still negotiate for the job. It’s an art, not a science.”

“There is no such thing as price gouging. You are in business to make as much profit as possible. You better make all the profit you can, because markets fluctuate and there will be a time you will make zero profits. How much you earn and retain today will someday determine your survival or extinction. I have been doing this for 45 years and seen six cycles. Trust me!”

“First of all, we are not a non-profit company. We have an obligation to our Board of Directors to make a profit or we won’t have jobs. Also, we buy everything we sell, so we must buy product at current market value to ensure that we have no inventory that is not turning. We explain to our customers about the rising market so that they don’t think we are price gouging. Of course, this sounds good but does not help much when you tell them the price of 2×12 redwood and they look at you like you are crazy.”

“One must first have a conscience to distinguish between gouging and fair. That internal guide is automatic. Unfortunately profits and greed will usually override and eventually kill the conscience. So first ask yourself, do I have a conscience? Or am I motivated by the incessant need to make more money? What do I need the profit for? To pay my employees a decent wage, give them benefits? Better my customer service? Or am I motivated by personal financial goals, bigger house, fancy cars, ultimate vacation place or my shareholders, unrelenting quest for more profit? Loyal customers will stay with you in good times and bad, that’s what loyalty is all about. As soon as a loyal customer realizes that all you care about is profit, he realizes your loyalty has been compromised. Once your loyalty is compromised it has no hold, and your loyal customers will find someone else.”

“I’m a free-market capitalist. With respect to margin, ‘Whatever the market will bear’ works for me. Lord knows we give it back at times, and there are times we are able to make it. It usually averages out. Aside from that, the competition and the market will let you know when you’re charging too much.”

“If the product you are selling is not available from a competitor you should price it at the highest price your customer is willing to pay. That is Economics 101.”

“For everyday common products, whatever is common for your area is fair. If you are more than 10% above that, then you should have a definite perk added for your customers. If you are over-priced for your area, you will know by lack of return business.”

“When short-term events lead to increased demand and need push pricing strongly upward, I’d view ‘price gouging’ as setting your prices well beyond the level needed to cover reasonable risk to making a normal/ reasonable profit through the expected life of the event. Clearly some risk and judgment calling required.”

“Understand your true costs and have a handle on what your customer values and will pay for, something that makes him money or reduces his overall costs.”

“How much is too much to charge? The market will tell you. Just remember, pigs get fed and hogs get slaughtered. Don’t be a hog.”

“The threshold is simple. If you have moral character then you will feel the pang when you go and try to get more than what you feel is a fair price for the article. The trouble nowadays is that most people’s moral compass has been put away in favor of ‘whatever the market will bear.’ This axiom probably was started by those who felt a need for retribution based on a supposed slight or in some cases being taken advantage of in a prior business deal.”

“I’m in favor of charging as much as the market can bear. We are all in business to make money. That being said, I don’t think we should take advantage of situations out of our or the customers’ control.”

“There is nothing wrong with increasing your margins as long as it is the same for all customers that fall into the same category (homeowner, contractor, high volume builder, etc.), and you are not pricing yourself out of the projects.”

“I don’t think there’s a magic number that defines fair profit from price gouging. So much depends on what the item is, but also there is a limit to what the traffic will bear. Normal stock items should have a competitive profit margin, specialty or custom items might have a higher margin based on a lot of circumstances.”

“For lumber and building materials, 25% margin is fair. Over 40% is considered extreme.”

“Margins should be large enough to cover costs, reflect value and return adequate dollars to the bottom line for the business.”

“When your not-so-loyal customers aren’t buying from you due to pricing, you may be at that tipping point.”

“I always refer to Adam’s Smith’s ‘invisible hand’ of competition. It’s a fine line where you can price your products, as too much profit will allow a competitor to take the business. Too little and you will close your doors. This industry knows exactly where the margins need to be to stay in business and show a profit. Once you get above industry norms, and believe your customer is willing to pay whatever price you set, is the time your competition starts to eat away at your sales. Nothing wrong with a ‘fair profit’ but gouging usually leads to losing your loyal customers, to say nothing of the disloyal ones.”

“People always think gouging happens with rapid price increases. I have always focused on a gradual increase, of course this requires being informed of potential increases before they actually happen. Communication is key.”

“1) First do no harm. Do not lose business in search of increased profits.
2) Pay yourself first. Being able to operate at a profit should not be sacrificed in order to remain buddies with customers.
3) If customers demand prices that don’t allow you to earn a profit, they are taking advantage of you.”

“It’s an educational process. Keeping our customers informed about market price dynamics should be one of our primary responsibilities. Supply and demand mechanics, countervailing duties, and politically-inspired tariffs are real and it’s our duty to inform our customers about the causes and effects thereof. Price gouging is when one inflates the gross margin % beyond the norm and then tries to blame the ‘gouge’ on the cost and not the mark-up.”

“Greater profit, greater potential service.”

“Whenever the markets get tight and you can raise your price to make a better margin there is nothing wrong with that, but you have to be reasonable. Making more profit is what you should do when the opportunity comes around.”

“The market will determine that. If pricing is too high the contractor will start looking for a better option.”