June 21, 2019
Sent by Jonathan Stark on June 23rd, 2019
Imagine two staplers.
One is a boring safe taupe color and the other is a racy fire engine red.
Other than the color, they are physically identical in every way.
Same brand, same model, same quality, same packaging, produced in the same factory on the same day, and delivered to the same store on the same truck.
They are both in brand new condition. They both work flawlessly. They both cost the manufacturer the same amount to produce. The manufacturer sold them to the retailer for the same price.
For the sake of discussion, let’s say that Alice is the manufacturer and Bob is the retailer. It costs Alice $2 to make each stapler and she sells them to Bob for $4 each.
The question is… would it be fair for Bob to set two different prices for the staplers?
There are a few schools of thought on this…
1. Same Cost, Therefore Same Price?
One school of thought says that the fair thing for Bob to do is to sell both staplers for the same price (let say $8) because they both cost him $4 to buy from Alice.
If you follow this logic, it would seem to indicate that anything Bob buys from any supplier for $4, has to be sold for $8 if he wants to be fair.
Whether it’s staplers or charging cables or sunglasses or Juul pods - if Bob bought it for $4, he has to sell if for $8, regardless of what those items sell for elsewhere.
If you follow this logic still further, you’d have to ask yourself whether Bob’s retail markup was absolute or relative (i.e., $4 or 100%)?
Bob also buys desks from Alice for $250. Should Bob sell the desks for $254 ($4 markup)? Or for $500 (100% markup)? What about a pencil Bob buys from Alice for two cents? Should he sell it for $4.02 or $0.04? Is a $4 markup on a two cent pencil fair to the customer? Is a $4 markup on a $250 desk fair to Bob?
If you follow this logic EVEN further, you have to start asking yourself what counts as costs. Sure, the staplers cost him $4 each, but what about his rent and payroll and insurance and accountant and on and on and on… is Bob supposed to total all those costs up and allocate a fraction of it to each item in inventory? If so, how much? Same amount for a pencil and a stapler and a desk? Or is it weighted by the suppliers cost for the item?
2. Cosmetic Differences Don’t Matter?
Another school of thought says that the retailer is morally obligated to sell both staplers for the same price (let’s say $8) because they are essentially the same from a functional standpoint. The only difference is the color which is merely cosmetic and shouldn’t matter.
This logic ignores the fact that some people care a lot about color AND that most people don’t use a stapler all day long. The vast majority of the time, a stapler is probably just sitting there, sending out (in this case) either boring taupe vibes or racy red vibes.
Do “vibes” matter enough to justify a higher price when buying a stapler? What about when buying a pen? Or a watch? Or a car? Or a house? Or when hiring a commercial architect? Or an industrial designer? Or a wedding photographer?
3. Who Decides What’s Fair?
Yet another school of thought says that Bob can charge whatever the heck he wants for the staplers because it’s his business.
If he wants to charge $8 for the taupe stapler and $28 for the red, that’s up to him. Maybe nobody will buy the red one, but this is not a question of fairness. It just means that customers don’t see enough value to support that price.
(Faced with this situation, Bob could either decrease the price, or increase the value. But that’s a topic for another day.)
Here’s the thing…
There is no such thing as a “fair price” - a price is either acceptable or it is not. In other words, once a buyer and seller agree that a given price is acceptable, a sale takes place.
Please note that “acceptable” and “fair” do not mean the same thing:
Acceptable—able to be agreed on; suitable.
Fair—in accordance with the rules or standards; legitimate.
“Acceptable” is limited to the parties of the transaction. “Fair” implies an objective third party, like a referee or a regulator or a judge.
Barring illegal activity (e.g., false advertising, extortion, fraud) there is no objective third party who is qualified to determine the fairness of a financial transaction.
Don’t try to figure out a fair price. Try to find an acceptable one.