Most businesses raise prices in order to raise revenue. But how about raising prices to change your customers’ behavior?
That is what a pair of academics at Stanford University are proposing to alleviate the strain that California’s drought has had on its economy. The proposal of Terry L. Anderson and Henry I. Miller, basically, is that a tax on organic foods would discourage their purchase and, thus, encourage consumers to buy other foods which are genetically modified to require less water.
With torrential flooding this week throughout Texas and Mexico, attention has been temporarily diverted from the challenges of this 4-year drought in California, which produces as much as 75% of the crops in the United States. But this proposal, ill-fated by admission of these two “distinguished fellows” with Stanford’s Hoover Institution, has redirected some media eyeballs.
In the private business world, the old so-called “80/20 rule”, in which generally 80% of your revenue comes from 20% of your clients, naturally spawns the business tactic of raising prices in order to cause the more problematic clients to either take a business service seriously (with less complaining and more dependable paying), or to stop using the services. Since arguably, much of the remaining 80% of the business’s revenue may not be profitable, this can work well for an established brand.
The government companion to this private business pricing practice of changing consumer’s behavior is often called “sin tax.” Government’s idea is to change unwanted behaviors. The government sells this idea of a “sin tax” to the public by promising that the tax will actually be a win-win scenario … taxes on products sustaining the unwanted behavior (smoking, driving your car or, in California’s case, eating organic foods) will be used to fund cures and solutions specifically for the ill effects of these unwanted behaviors.
As we’ve learned by the hard experience of Social Security tax, however, once the government gets its hands on tax revenue, bureaucrats and politicians, like drug addicts, suddenly “need” that stream of revenue. As a general rule, once a tax starts, it almost never, ever, stops.
You know full well that you have some clients who love you and your service. They pay you on time, they rarely, if ever, complain. These clients may bring you 80% of your revenue, and use 20% of your time. You also have other clients who may give you the remaining 20% of your revenue, yet take the remaining 80% of your time. Raising your prices can help simplify your life by encouraging problematic customers to drop. Lesson for your business: Carefully assess which of your clients will take a price increase while still considering you a partner, and which will go elsewhere. Generally, if your increase isn’t draconian, you will keep more clients than you think.