Tuesday, July 13, 2010

A Reasonable Rate Of Return (RRR)

Producers should aim to achieve (pursue) a reasonable rate of return that is shared equally within the organisation.

There is a tendency among producers to keep prices high even when costs are covered and demand is easily met. There is a profit maximisation philosophy that is asserted by business professionals and sometimes justified with 'reward for risk' type maxims.

It is a philosophy bolstered and reinforced by the framework of public shareholder investors whose only collective concern is maximising their rate of return.

When a good or service become enormously popular its costs per unit drop, but this does not flow into a drop in price unless there is competition from a competitor with significant market share. Rather the business organisation maximises its income for profits and superfluous, wasteful spending, some of which is even spent removing competitors through buy-outs.

If, instead, a reasonable rate of return was accepted, then as costs per unit drop so the price per unit would fall. Profits levels would be only reasonable and the organisation would engage in no unnecessary spending or have the income to buy-out competitors.

However, if profit maximisation is the ethos, then a business organisation will do all it can to attain an advantage which reduces the ability of others businesses to compete with its product, so that it can gain major market share, which, once gained, tends to maintain itself for the advantages to the consumer of using what everyone else is using, an advantage strengthened by the profit-maximising organisation making it's product incompatible with any new or remaining competitors.

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