Small Business Genius

Business Economics

If you have graduated from college you will most likely have taken economics. However if you were not a business major then most of what will be discussed on this page you will have forgotten. If you never went to college then it is very important that you understand the economic principles contained below.

There is No Such Thing As A Free Lunch

You may be asking yourself what does this have to do with economics. Economics is how businesses operate in the market place. Have you ever been invited to a restaurant for a free lunch and a simple presentation to be given afterward? You may say that it was free but was it really. Now think about it what did you give up while getting that free lunch? Now you know that there is no such thing as a free lunch.

Now that you understand this principle you can use this to build your brand and achieve brand loyalty. Everybody loves something free or at least it is portrayed as free. Some of my best clients I have had over the years are ones that I accomplished something for them at no charge. You may think this would be wasting your time or you should charge them something; resist this temptation and you will build a successful business.

Willingness To Pay

Do you find yourself, when purchasing a product, looking for the best price possible? Everybody has a willingness to pay. Depending on the product your willingness to pay will be different than others. You may be affected by brand loyalty so your willingness to pay is higher (if you have not been to the advertising page I suggest you go there to understand the basics of brand).

The hardest part of sales is determining your prospective client’s willingness to pay. This ability will come with trial and error but it will come with experience. The Anatomy of Sales page encourages you to start studying people; this to will refine your abilities.

Elasticity of Price

Elasticity of Price basically, in a nut shell, is the amount you can raise the price of a product before your profit decreases. Yes that is correct it is not a reduction of sales. One year, while working my window washing business, I only worked three days a week and my gross receipts for that year dropped by $55,000. However my profit went up 25% because I only worked the contracts I had that paid the most per hour and contracted out the rest. So an increase in sales does not necessarily result in increased profits. I would not recommend this approach at the beginning of your business.

Have you ever thought that manufacturers should lower their prices to reflect what a coupon deduction would do to the price of the product instead of providing coupons? Elasticity of price is why they do not. Manufacturers know that everyone does not use coupons. So their use of coupons is a demonstration of their understanding the market and some consumer’s willingness to pay.

Some methods you can employ to affect the elasticity of price is to have introductory specials, senior discounts, event sponsorships, or referral discounts or rebates.

Opportunity Cost

This is a commonly misunderstood aspect of business. Most think as long as you are working you are making money. However you could be missing out on more income than you realize. For instance my window washing and building maintenance business was very successful and I had four employees. We all made very good money but I decided one year to break up my business and sell portions to each of my employees. The next year I only worked jobs that paid the most amount of money an hour and only worked three days a week at 14 hours each day. By the year’s end I had grossed less but my income went up 30%. Additionally my previous employees made on average 25% more than working for me and that included making payments to me for their portion of the business. The point is to analyze how your efforts are working out and see if you cannot improve on your opportunities.

Tradeoffs

This area of economics you may not know but you do this every day and is closely associated with opportunity costs. This last 12 months you have seen gas prices go to almost $4 a gallon. When this happened did you start taking the bus, cut down on you consumption of coffee from Starbucks, or let your hair grow an extra week before getting it cut? This is an example of tradeoffs.

Your customers will follow the same path. However it can happen for many different reasons. Adjusting to these will allow you to keep customers when times are tough. Sometimes you may need to lower your prices or reduce the level of service you are providing. If you produce a product to sell you may need to develop a lower price version.

An example of this is what Honda did in 2003. For years Honda sold only 300,000 of its small motors a year. It seemed to them this was the limit of their share of the market. However they decided to make a less durable motor which sold at 30% less than their commercial motor. In 2004 they sold 1,000,000 motors which 300,000 of them were their commercial motor.

Certainly there are more economic principles but for starting a small business these will suffice for now.