The Moon Is a Harsh Mistress

     

    Entertainment pundit John Campea recently posted a video lamenting the increasing cost of going to the movies (ticket prices, concessions, etc.). He worries that it will mean fewer people going to the cinema. The guys over at CarEdge have long been disappointed in the rising costs of car purchases, with similar concerns that Campea has about moviegoing, that higher automobile costs will mean a decrease in sales. That situation may be resolving itself soon, though. Meanwhile, CNBC recently did a report about how Disney may be pricing some families out of visiting its theme parks.

    The aforementioned folks lay out the mathematics of how the economy is supposed to work, that lower prices for goods often means more people purchasing them. A surfeit of consumers means an increase in sales which, depending on the margins, often means an increase in profit. In short, a business should always be looking to expand its customer base. It's capitalism 101, right?

Right?

Or is it?

Is the dynamic changing?

    Maybe more companies are starting to deploy what I refer to as 'The Apple Method.' While it's true that the iPhone is the smartphone used by a majority of people in the United States, Apple's product rarely outsells Samsung when it comes to the global market. The two companies typically duke it out with Xiaomi for the market share in the upper teens and lower twentieth percentile. But that's fine for Apple, because their phones have such a high markup, they can sell fewer product, yet rake-in the dough when it comes to profit.

    Let's use widgets as an example. Company A and Company B both make widgets. And, kind of like smartphones, most widgets are the same under the hood (the software experience on a smartphone is often what differentiates one from another, not necessarily the components). So, we've got 2 brands of widgets, costing approximately the same amount to manufacture (for the sake of argument, let's put it at .40 per widget). Now, Company A decides to sell their widgets to the masses at .90, while Company B sells theirs at a notably higher $1.50 per widget.

    So, Company A is looking at a .50 per widget profit, while Company B is set to receive a whole $1.10 when one of their sells! But, economics being what they are, the less expensive product sells in greater quantity (people tend to like cheap stuff because, well, it's cheap). So, let's say that Company A sells 400 widgets, while Company B only sells 200. Yowzers! Looks like Company B has failed. They don't know what they're doing! They've only sold half of what the competition has. Don't they know that expanding their customer base is the only way to go?

Except...

Company A: 400 widgets manufactured at a cost of .40 each, sold for .90 per widget = $200

Company B: 200 widgets manufactured at a cost of .40 each, sold for $1.50 per widget = $220

    Company B has eked-out a higher profit than Company A, all while selling only half the product. This, I think, may be the wave of our economic future.

    Is it bad that not as many people can afford to purchase their own personal transportation, or take the family to Disney World, or just go to the movies more often? Sure. On a moral level, yes, it's bad to see people priced-out of doing things that were once in their reach. But economics is, unfortunately, often rarely moral. 

    Look, brands like Rolls-Royce and Bentley are proof that sometimes companies don't need a wide customer base to stay in business. They have an exclusive (i.e. very wealthy) clientele. Their products cost a fortune, so that obviously winnows their customer base. But, what they lose in consumer quantity they make up for with the high cost of their cars. And, yes, those brands are probably of higher quality than your average automobile made for the masses, so their production budget is likely higher, but again, they make up for it with what people are willing to pay to own them.

    So, yeah. I don't know if some of the car brands, movie theater chains, or theme park owners are consciously trying to go with the 'fewer customers/higher prices' business model but, if they were, then they wouldn't be reinventing the wheel. Plenty of companies have been doing it for some time, and quite successfully. And I'm not saying I think it's a good thing. Of course there's always going to be a stratification of affordability built into capitalism, but I guess what's sad is when things shift to the point where products and experiences that used to be affordable to the masses are now becoming out of their reach.

Unfortunately, I don't see this changing any time soon. I'd happily be wrong about that.