When companies talk about increased costs, they talk about passing on costs to consumers. Why is the company taking less profit never mentioned?
When companies talk about increased costs, they talk about passing on costs to consumers. Why is the company taking less profit never mentioned?
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Mentioned how? By who?
A company’s goal is to satisfy shareholders while making the most money possible, so that rarely, if ever happens.
Because corporations are accountable to shareholders, who receive profit via dividends and enjoy a higher stock price when the company does well. If the organization deliberately makes a choice that results in lower profits, the shareholders will fire the current executives and appoint new ones who will put profits above doing right by their consumers or employees.
The purpose of a business corporation is to generate profit, so they don’t choose to do so when they have a choice. Those two also aren’t exclusive though—a company may try to pass a cost to consumers by raising prices, but if less of the product is demanded because of that, the company will also profit less and effectively pay part of the cost. How much ability a company has to do this depends on the kind of cost it is and the kind of product.
A lot of times they do. But at the end of the day a business cannot take losses over the long term, so that typically means that they will have to raise prices. Most places like grocery stores or restaurants run razer thin margins, so it’s not like they have huge profits they can dip in to, if they did someone else would have entered their market and undercut them.
Because the stockholders would burn them to the ground if they did that.
Because greed.
corporations a legally mandated to maximize shareholder returns (ie profits). which is why corporations are inherently evil. they are required to do this over product quality, customer satisfaction, worker wellbeing etc.
Take a first year economics course and they’ll mention that – it’s likely the company will take some losses in an effort to sell more. But it’s not a winning long term strategy.
Small price fluctuations happen all the time. You generally don’t know about them unless you’re digging into the books.
You only hear about it when there’s a large enough increase that they can’t absorb it.
Uh … ’cause of capitalism.
If you can’t articulate the question you won’t understand the answer.
Costs go up, so the boss comes to you and gives you a choice, “raise prices or take a pay cut” which do you choose?
That’s not how the greedy make more money.
The purpose of a business is to make money. You wouldn’t go to work if they didn’t pay you, right? Same thing applies here.
There are plenty of times where costs go up and the business makes less money than they did before. But that’s not the plan. That’s not the goal. You don’t want that to happen. The company is going to try other options first.
If you are an investor in (we’ll say) an electric car company, that means you have put in your money in the hopes the company will turn a profit, and you get more money back. If it’s failing to do that, you just look elsewhere. You could just as easily invest in a company that makes table lamps, or researches cures for diseases, or makes mildly pornographic card games. You aren’t restricted to electric cars. Your money can go anywhere.
A company that says “we’re just going to make less profit!” will see all its investors either 1) get together and fire the company management, or 2) sell their stock and go elsewhere. Either way, the people in charge aren’t going to be around for much longer. Remember that the investors are the people who literally own the company.
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Imagine if your brother-in-law wants to borrow a lot of money. He wants to start a business, and so you tell him you’ll help him out. He wants to start his own company where he pours cement foundations for construction. He just needs the money to buy a big cement truck (as well as some advertising money, and money to pay for cement, and stuff like that). So you put up the money and buy all that stuff for him.
And you say “Randy…” (his name is Randy, because of course it is). “Randy, you’re the President of this company, and you’re gonna run everything. But I’m the owner, because I paid all the money. I’ll pay you a good salary, and I keep the profit. You can pay me back over time, and once you’ve repaid me, you’ll be the owner. Okay?” Randy says okay.
Then six months later, Randy has decided that this is a lot of hard work. It’s a lot harder than he thought it was going to be. Randy thinks maybe he should take a few months off, a little vacation. Maybe take fewer jobs so he’s not working 20 grueling hours a week like he has been. So Randy tells you his plan, that he’s not going to be doing as much work, and you should probably expect to have lower profits until he “gets his groove back”.
So what do you do? Well you either fire Randy and hire somebody else, or you sell the cement truck. It’s your money that makes the company go. You are the one who paid for everything. You didn’t have to invest the money in Randy’s idea. You could have invested anywhere. If he announces that he intends to waste your investment, you are justified in taking action.
It really depends on the company.
Some companies have a standard profit percentage. It needs to make X% on everything they sell. A profit margin. Most have a built-in buffer as certain things are more on the commodity side where prices can vary. When it comes to something like a tariff, that is something outside the normal buffer and they can’t be absorbed.
Others have a responsibility to shareholders to maximize profits. Sometimes, they are both.
Now, there are companies who will absorb the increase, if they can afford it, as they are worried about losing the business to a competitor.
Then again, there are some companies who aren’t as affected by increases in the short term. They may have larger amounts of inventory. However, they may raise their prices now so they can get “free” extra profit.
Because we’ve chosen to craft corporate governance laws to make corporate boards solely responsible to the interests of shareholders, and not to labor, consumers or other shareholders.
If a company executive takes actions that are unquestionably a massive benefit to the entire world, including their customers and employees, but also cost the shareholders value, those shareholders can sue. It’s not within the scope of leadership’s discretion to consider impacts to other stakeholders over the interests of shareholders.
First time dealing with capitalism, huh?
That’s not what capitalism is about.
It’s called a fiduciary duty. Most companies are legally bound to maximize their shareholders value and this often means maximizing their profits
Most companies are not making extreme profits. Companies that have high total profits usually accomplish that by volume with low margins. Taking less profit can frequently crash a company pretty quick.
No.
They talk about increased costs/regulation as reasons for their prices going up. It’s always BS. And increases are based on corporate greed.
Companies try to get the most profit on every transaction. The law of mores.
I mean, it is discussed, but most companies have to maintain certain margins to cover their costs. Small businesses are often operating on already thin margins so a significant increase in cost of goods sold will put them in the red if they don’t pass that cost on. Large corporations in general are under pressure from their board/investors to show record profit every quarter and so they also are not incentivized to absorb a significant portion of these costs.
That the OP asks, and so many people provide incorrect information, shows the need for mandatory economics classes.
There are a lot of oversimplified answers here that contribute no actual information. Corporations are greedy hurr durr.
Ask yourself why companies care if costs are passed onto the consumer at all. If their profits are unaffected, they sure wouldn’t waste their lobbying dollars to moan about “passing costs onto the consumer.” The answer is, of course their profits are affected.
How? It’s simple supply and demand. If prices go up, some percentage of consumers decide their money is better spent on something else, or perhaps they just buy less. The company may make the same amount of money per sale, but fewer sales means lower total profit.
So getting back to your question, if they’re going to make less profit anyway, why don’t they just eat the costs and sell the same amount as before? That’s a question of risk. If you ran a widget factory, would you rather sell 10 widgets that profit $10,000 each or 100,000 widgets that only profit $1 each. Making x1000 more of an item means you have to manage x1000 more supply, x1000 more production lines, x1000 more inventory, x1000 more staff. If something bad happens (recession, supply shortages, etc) and you can’t ship your product, you’re going to have x1000 the problems.
That is an extreme example, but companies are certainly going to optimize for maximum profit while minimizing risk. That’s not to say they aren’t greedy (of course they are), but that is a product of a free market system
a company is found to make money, that’s basically the goal of every company
why would they take less profit ?
There is a difference between making a profit and making quarterly earnings. Run a business as a long term investment and you won’t have to burn it to the ground to make next quarter. If this drives gambler’s out of the market so much the better. The idea of stock was ownership, not casino chips. The company doesn’t get much benefit from higher stock prices and investors, not gamblers, won’t care how much the price fluctuates as long as the value of the company holds and produces steady profit. Maybe we need a 50% tax on assets held less than 3 years.
Because the goal of a company in capitalism is to make as much profit for their shareholders as possible.
The main goal of any business is to turn a profit. It must generate more income than expenses. This is true even for non-profits, which must generate more donations than its expenses. In addition to the other answers, also consider: why would a business put itself closer to risk rather than safely away from it?
Not all companies make insane profits. Anytime these talks come up people seem to always link the Walmarts, Amazons, and Microsoft’s of the world.
Companies MUST profit. No profit = no business. Also just bc some cost is passed onto consumers that doesn’t mean profits aren’t reduced as well.
Jeff Bezos famously said “Your margin is my opportunity!” (or something along those lines…)
Companies see ability to grow (or preserve) market share as a worthy pursuit. So where as one company may choose to pass along the costs, another company may see it as a growth opportunity.
But, it never as straight forward as an additional line item on your receipt that says “Tariff Surcharge” (I read recently some automakers plan on doing exactly that). It could be shrink-flation, reduction of quality, things like that…
Why else would anybody even start a company in the first place, if not for profit?
Most smaller companies can’t afford to take that much of a hit on margin. Many do not make massive profits and don’t have a ton to spare to just absorb a 20% or more tariff.
Legally they could be held accountable by shareholders if that occurs and could get in a lot more trouble than jacking up prices
Corporations are obligated to maximize profits for their shareholders. The company would get sued by the shareholders if they willing made less profit.
Companies often do absorb costs, within reason.
If a company is just losing money on every transaction, then they won’t be a company much longer.
Don’t they have a legal obligation to make as much money as they can for shareholders?
Because they have a legal duty to maximize shareholder profit. Proucts are priced to achieve a certain margin. If input costs go up, the price must go up to balance the equation to maintain the margin.