The Tribune

By SIMON COOPER

Res Socius

CLASSIC economic theory suggests that prices gravitate to an optimum point where demand approaches supply. This is because, in theory, demand goes up as price goes down, and vice versa, as depicted in the graph shown here.

But this is not the entire picture, though. And that is because there's a price point below which it is unprofitable to do business, and an upper limit to demand, too. In other words, neither of these factors is entirely elastic. Nonetheless, it is generally accepted that these principles are as relevant today as they were in 1890, when British economist Alfred Marshall postulated them.

These days, economists tend to take a more pragmatic view on things, as they factor in the understandings we have of human dynamics, or what makes us tick. This article begs the question: "Shall I discount or not" today.

Discounting is an endless temptation that business owners face when trying to optimise cash flow in turbulent times. And that's not helped by increasingly strident demands for discounts from insistent customers. Barring the obvious risk that overall profit may go down, despite increasing sales, there are a few other discounting perils to consider, too.

• Cutting Corners - There's a mean streak in all of us. The resentment factor tempts us to down-spec our goods or services when we are paid less for them. This could be anything from less time to chat with regulars, to cutting back on the quality of materials. I'm not sure who it was who first remarked that "resentment of poor quality lingers long after the pleasure of low price is forgotten", or words to that effect, but it's still as true as ever that cutting corners costs customers as well as profits.

Customer Confidence - Most of us have experienced firms that discount prices on goods that are from an inferior batch, or are in the process of being discontinued. We are savvier than we were in the early days of discount stores, and often regard their 'special offers' these days as warning signals, as opposed to charitable invitations. Business goodwill is an intangible thing. It is far easier to lose it, and impossible to hold it in your hand.

Awaking Tigers - A discounting drive often invokes swift retribution from competitors who regard it as a direct attack. Once prices are lowered, it is difficult to bring them back, too. The last thing any business needs is a downward spiral into loss.

I believe that any business is entitled to make fair profit, which I define as being just below the point that invites new entrants to the market. In my own experience, customers are far more likely to do business with firms where they enjoy the human contact. Thus, genuine, caring service is the one thing businesspeople should never ever discount.

NB: Simon Cooper is a founding partner of Res Socius, a business brokerage firm and businesses for sale directory service. Res Socius is authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses, and provide consultancy services. Contact 376-1256, visit www.ressocius.com or scan the QR code below.

Acknowledgement:

Supply / Demand Curve from http://www.netmba.com/econ/micro/supply-demand/