So Is There Such a Thing as a “Fair” or “Just” Profit?
How should the level of profit be determined? This raises a whole hornet’s nest of issues and questions. But it needs to be considered.
The standard way that many determine the level of profit is by working out what the market will sustain. Whatever that is, is considered legitimate. It’s true that generally competition serves to keep prices within reasonable limits. It creates a trade-off between ensuring a successful and rewarding business … and protecting customers by giving them choices of cheaper or different products. However, it’s naïve to believe that the free market can always moderate this tension consistently and justly. For example, where essential services are controlled by a monopoly there is the potential for excessive profit to be made through unjust exploitation.
Usually the people who are hit hardest by unreasonable profitmaking are those who can least afford to pay the extra. This is particularly destructive in the business of lending. The least welloff in society frequently find that money from banks is not readily available to them. That leaves them at the mercy of financiers who exact exorbitant rates of interest. The justification offered by these lenders is that they need to cover bad debts and therefore must charge higher interest rates. But the reality is that many of the poorest will never climb out of debt. They are trapped and often end up with nothing.
New Testament scholar Wayne Grudem argues that profit needs to reflect the value my work has added. He suggests that, “Profit is…an indication that I have made something useful for others.”Such profit should reflect the person’s time, skill and risk. Grudem’s biblical argumentation is based on the mandate of Genesis 1:28; the parable of the talents (Matthew 25:14-30); and its Lukan equivalent, the parable of the minas (Luke 19:13).
Two of Larry Burkett’s basic business maxims are, “provide a quality product at a fair price” and “treat your customers fairly”. We couldn’t agree more – but the problem comes when there is no real handle on how, in practice, these standards might be determined.
Alexander Hill takes a similar approach. Applying God’s justice to the world of commerce, he points out that justice should be the aim for both customer and seller, for both client and service provider. Therefore there’s nothing wrong with expecting to be rewarded for effort made and risk taken. We essentially agree with this “added value” principle. But again, making such assessments is deeply subjective and often based on societal expectations as well as supply-and-demand economics.
Let’s consider the following case, as an example of some of the issues involved:
Barbara, a real estate company director sells a house for clients Gerry and Norma. The price she secures for them is $475,000. It has taken her (and her associates) several days of work to market the property, show it to prospective buyers and eventually do the important negotiation work that happens when an offer is presented. For this service, she charges the client just under $21,000 including GST. When Gerry questions the high commission, Barbara trots out a well-argued line, including the “fact” that she managed to achieve a far better price for the house than Gerry and Norma would have managed by themselves. Her network of contacts, she says, is an incredibly valuable source of potential buyers, and her negotiating skills are second to no one.
In spite of Barbara’s points, Gerry and Norma are obviously disenchanted. Sure, they did sign the contract with Barbara’s company back at the beginning, but they clearly didn’t fully appreciate the implications.
It’s not made much better by the knowledge that when Barbara sold their last house five years ago, her commission was a more palatable $9500. What’s more, Gerry and Norma have also had to fork out over $2000 for pre-paid advertising costs – none of which (apart from a listing on the company’s website) were covered by Barbara’s company.
Barbara walks away from the conclusion of the after-sale conversation a little disturbed. The clients’ unhappiness has caused her to question whether she should re-consider some of the issues involved.
Where might Barbara start? The profit she charged was for “added value” – how should she calculate this in a fair way?
Some of the issues she might consider are:
What risk did Barbara take in marketing the property?
What is a fair payment for the time consumed by Barbara and her staff in selling it? (In other words, what are they worth?) And to what degree should Barbara factor in the time she and her staff consume working on houses that they end up not selling?
How much higher was the price Barbara negotiated than what might have been achieved if the client tried to sell the property without the assistance of a real estate company? Is there any reasonable way of estimating this?
What value should Barbara place on her well-honed marketing and negotiating skills? In other words, how much difference did they make to the eventual price?
What value should Barbara place on the extensive number of contacts and prospective buyers that her company has developed over the years?
What are other companies charging? (See below)
What value do the sellers place on the relatively hassle-free process of getting Barbara to sell their house?
In business, it is often easy for a Christian to just go along with the standard practice. That is, simply set your prices or charge-out rates based solely on how much you can get away with. After all, what your customers will be prepared to pay is usually dictated by what your competitors charge, or what is the industry-accepted practice.
To us, however, these factors (though far from irrelevant) are not enough. There are other considerations in our attempt to love God and pursue profit, such as:
Given that my assessment of the “added value” I’ve produced is subjective, do I feel comfortable that I am charging a fair/just price – one that is fair for me as well as fair for my customers?
Are there any factors that I am conveniently ignoring (or underplaying or overplaying or otherwise using to my own advantage) that are preventing me from seeing the issues a little more objectively?
Is there anyone I should talk with to gain some outside perspective?
Could it be that the particular profit issue I am looking at is a “blind spot” of my industry? (In other words, have we developed well-articulated justifications for our actions that help to support an industry-accepted practice that in other contexts would be difficult to justify?)
Is there anything about the customer’s circumstances that should affect what I charge them? (For example, a client’s ability to afford my services or goods.)
Wayne Grudem, Business for the Glory of God (Wheaton: Crossway, 2003), 41.
Take for example, the case we heard of recently, of a company that makes small volume, highly complex engineering machinery. They have produced a new machine that reduces the manufacturing costs by 70%, giving them a huge profit margin. What is a “fair” price for them to charge? If they determine it totally by supply and demand, they will make a “killing”. Alternatively, they could pass on some of the margin to their customers – but how much? And what about the need to be fair to the shareholders, given the fact that they have incurred costs developing the machinery and now marketing the product, meaning that the company probably won’t be profitable for another 2-3 years?