There was an economist named John Maynard Keynes, who created the concept where when you increase your prices, you lose demand. Conversely, he taught us that if you decrease your prices, demand for your product or service will increase.
This was the backbone of Keynesian Macroeconomics.
But another economist disproved a portion of that theory about 150 years ago. To explain, let me use a couple of examples.
1 – A Gallon Of Unleaded Gasoline
You own a gas station and all of your competitors are selling a gallon of unleaded for $3.50. You raise your prices 100% to $7 per gallon.
You don’t lose 100% of your demand because someone runs out of gas in front of your station and buys a couple of gallons to get to another station. But by raising your prices 100% you lose 98% of your demand.
In this instance, raising your prices wasn’t a great business move.
2 – A Defense Lawyer
He normally charges $400 per hour and a $40K retainer. But his last five cases were high profile drug dealers where he got obviously guilty felons off on technicalities leading to national coverage and fame.
The lawyer increases his prices 100% to $800 an hour with an $80K retainer. How much demand will he lose.
Probably nothing. In this instance, not raising prices would be a bad business decision.
This is an economic concept known as Price Elasticity. It comes down to the fact that the demand schedule for all goods and services isn’t the same.
If you have a product that’s the same as all of your competitors, it’s harder to raise your prices. But if you have a unique product, then you can charge just about anything within reason
Let me leave you with this…
The two examples cited are extreme ends of the spectrum. The first is a completely homogeneous product where all competitors are selling basically the same thing. The second is heterogenous.
My point is that most of us find ourselves somewhere in the middle of that spectrum. Many are worried about raising their prices when they have less to worry about than they know.
I’ve had a number of conversations with clients over the past couple of weeks about the coming tariffs and what they’ll need to do in response. The universal feeling was a fear of raising their prices.
Let’s face it. Talking about this isn’t a good time on a Saturday night.
But like it or not, this is our new Entrepreneurial Reality. This is what you signed on for. If it was easy, everyone would be doing it.
I’ve written extensively about Entrepreneurial Decision Making. The economy isn’t something that any of us can control. It’s something that we must respond to.
And the only response is to either cut expenses or raise prices. That’s it. That’s all. There’s no third way.
So get to it already. Get your head wrapped around this now.
The business you save might be your own.
If you need help, please let me know.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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