It started some time ago. Some would say it started during the Vietnam era of the 60’s. Others link it to the birth of the labor movement in the 20’s. Still others find its inception in other times during our history.

Whenever it started, the attack on business success and profit has never been greater than what we see today.

Economic education in America has always been weak. For most of us, high school did not include an economics course. In college, economics was only required if you were pursuing a business-type degree. Some of you may well remember your Samuelson text with its demand and supply curves!

Profit in business is like your personal savings account – it represents the money you have left over when you don’t spend every penny you earn. Profit allows a business to develop new products and services, to weather bad times, and to provide benefits for its employees.

Urban legend suggests that profit only results when a business “overcharges” its customers for the goods and services it sells. The assumption is that the customer has no option but to purchase from that business. Either she is being coerced into spending more than she should or the business is pulling the wool over her eyes. In either case, the business is taking advantage of the customer who is being made worse off while the business is better off.

Sales people know that buyers always complain about price. We all want to buy for less. Buying decisions are made, though, not on price but on value. The greater the perceived value of the good or service, as compared to the price charged for it, the more satisfied the customer will be. So in a market economy, people will pay whatever price they feel represents the value they are receiving. The business owner’s responsibility is to provide that value at the lowest possible cost, not the lowest possible price. The result is a profit available to be used to find new ways to provide value to customers.

Here’s where your Samuelson text comes in. When one business begins making an excessive profit, another business will enter the market to realize a piece of the profit pie. As long as the new entrant can provide the same value, it can demand the same price. If its costs are the same, it will realize the same profits.

However, the new entrant will often accept a slightly lower profit. They will sell the product or service for a lower price. Now the consumer has a choice. If they realize a greater value for the higher priced product, they will continue to purchase from the original business. But if they feel that the value they receive at the lower price is satisfactory, they will change vendors. The price point will go down as will the profit realized by the business.

This cycle continues until the profits realized have been so eroded as to no longer be attractive to new entrants. Economists call this ‘equilibrium’ or ‘normal profits.’ The profit motive drives business owners to continuously seek new opportunities to provide excessive levels of value in markets with few competitors. Providing excessive value means that consumers of the goods or services are receiving more than they pay for – better quality, better service, better results. Profit, rather than being a negative representing an abuse of the customer, is indeed a measure of customer satisfaction.

Successful business owners know that the measure of how well a business is being operated is the profit margin it realizes. The challenge, then, is to become comfortable with a profit margin you desire, and then design products and services that your customers so appreciate that they are happy paying your price.

© Copyright 2010 Bill Gschwind, inPURSUIT Consulting, LLC