FROM THE STOOL

HOW DO YOU FIGURE?

We lived through a period of unprecedented economic prosperity with virtually no inflation and full employment for most of the 90's. While the economy has slowed measurably in the last 18 months, and has been rocked by the horrors of September 11th, there is no unanimity that, even now, we are in a recession, and if we are, most feel we will recover fairly quickly. It is hard to figure in this long period of higher productivity and lower costs, some say deflation, that so much money has been made by so many selling us things at prices which in no way reflect their cost.

In fact, the best way to make big money legally is to sell a product or service that most people can't properly value, or to have a captive market like an airport concession.

Jewelry stores pay the highest rents for the best locations, whether downtown or in regional malls, because they generate the highest margins on their sales. How can anyone figure a fair price on a one-of-a-kind emerald brooch, or calculate the real value of a Patek Phillipe wristwatch, when everyone sells the product at the same price.

Cosmetic counters dominate the main entrances of almost every department store as the product sold costs virtually nothing to make, providing unlimited opportunity to cover all packaging, advertising, and distribution costs and still provide extraordinary gains for the owners of the brands and the retailer.

Drug companies make the cosmetic industry look philanthropic as they make obscene profits selling pills at exorbitant prices which people need to survive. They rationalize this unconscionable behavior with the billions spent on R&D, in spite of the fact that their after-tax profits are net of all development costs and their prices often rise even after these costs have been recovered.

Hiring a car in a strange city puts one at the mercy of the driver, often a very expensive trip nearly impossible to figure. A small coffee and a cranberry scone at O'Hare Airport - $4.95. A single chocolate chip cookie - $2.00. How do you figure?

Attorneys bill by the hour, a process which generates massive fees for things like divorce or litigation, bills which defy challenge, as it is impossible to know how much work has actually been done or by whom. Consulting actuaries do the same, but spend the bulk of their time thinking about mathematical problems and then computing how many $300 increments their clients will accept for a solution.

Interior designers believe that their good taste is worth 30% of the value of all goods purchased and work done at their direction. Not a system that is easy to budget and one which discourages the designer to seek out bargains for his client.

All country clubs claim to have some rationale for the membership fees charged. I am not aware of any criteria except what the traffic will bear.

Investment bankers admit to being our most wildly over-compensated service providers, often receiving fees in the $100's of millions for a few weeks work advising corporate captains on the worth of mega mergers, joint ventures, or acquisitions, which are paid in full and fully protected even if their advice is lousy, and the combinations fail. How do you figure?

Relief pitchers command $10 million a year. The swoosh on Tiger's cap cost Nike $100 million. Michael Jordan banked a half a billion dollars dominating the game of basketball and pitching Gatorade and other products. Sly Stallone earns $25 million a movie, even though he sounds barely literate. CEO's like Jill Baraad of Mattel get fired for wrecking the firm, but with a $75 million severance package to soften the blow. How do you figure?

Earl Scheib will paint your car for $249, Squeaky Clean will clean your house for $100, but no one will clean your Rolex for less than $400. How do you figure?

Jiffy Lube will change the oil in your car for $30. No marine diesel mechanic will start the process on your boat for less than $70 per hour. Figure 8 hours at a minimum, plus oil and filters liberally marked up.

When the hot water heater fails, who knows what a new one should cost? When the compressor on the icemaker goes, it is not unusual to face a service charge that exceeds the original cost of the appliance. How do you figure? A five-star hotel doesn't flinch at charging $25 for one egg, orange juice and a toasted bagel, and expects a tip larger than the cost of the same or better breakfast at the deli across the street.

How do you figure a restaurant charging $40 for the same bottle of wine available at your wine store for $7.95? Who decides the price of hotdogs and pretzels at the ballpark, where your only alternative is to go hungry?

While the prices of personal computers and cell phones have declined dramatically, and the average price paid for a pair of women's shoes has fallen, Starbucks has opened thousands of stores selling us coffee for $2.00 a cup. Mont Blanc outsells PaperMate. A single Gillette Mach3 razor blade now costs as much as a month's supply of its predecessor. A small popcorn and Coke at the movie theater exceeds the price of admission. How do you figure? unless we just want to pay more for what we want than for what we need.