Posted by In previous posts, I presented how to think through whether you want to sell products or services. Then I showed you based on what criteria you should price your products or services. Now I want to convince you not to follow colloquial opinions or so-called common sense when setting a price. Often such hints come from customers, not entrepreneurs. They express the needs of customers, not entrepreneurs. However, both sides of the transaction play against each other, and what is good for the customer is not good for the entrepreneur, and vice versa.
Let’s assume that you are planning some fairly simple business. By simple I mean that you can easily embrace it with your mind, understand its operation. Let’s make it a language school. Let’s also assume for simplicity that you will teach only one subject – English in one-on-one lessons. This is a simplified example of a typical language school, but you will be able to understand from it why it is better to sell more expensive and less than cheaper and more.
So we have these parameters of our business:
- service – 1 English lesson
- number of people providing the service – one (you)
- number of people participating in the lesson (your students) – one student
- lesson duration – 45 minutes
- method of teaching – in this example it does not matter
- number of lessons you are able to teach in a day – 6 lessons
- number of days per month you are able to work with students – 16 (4 days per week)
Let’s calculate how many lessons you are able to teach in a typical month (4 weeks on average, some months have a few more days and some less due to holidays, for example):
6 lessons per day x 16 days per month = 96 hours of lessons.
So in a month, you may be able to complete (I am intentionally writing in the passive side) 96 language lessons. This is a lot of hours for such an activity as teaching others, but we will leave aside for the moment the fact that after a few months of such work you will end up in the hospital with severe depression… Anyway, such is the supply of your services you can generate, more is not possible. Less – it would be a bit of a waste of “production capacity”, but if you earned enough, I think you would be happy to relax instead of working?
At this point I must write a few words about supply. In economics we find such a simple definition: supply is the offering of a good on the market. It is simple, but it needs to be well thought out. In any business, there is always a maximum number of products or services (in the sense of a unit service) that we can offer at once to our customers over a certain period of time. More simply isn’t possible for various reasons: a) you don’t have more time in the day, b) you don’t have such large warehouses, or c) your machines won’t produce more products in a given period.
And this volume of supply (the number of pieces) must be well defined, otherwise we can easily get into a predicament I call a crop failure, which manifests itself in the fact that we have so many orders or requests for products that we can’t handle them. This is humanly frustrating, and from an economic point of view, it is a pure loss of revenue. If this occurs, and it’s not just a temporary situation, you need to immediately try to raise product prices, rather than trying to serve too much demand for our supply capacity at all costs.
I will further count the language school example in my next blog post.