In my years as an engineer and citizen of the world, I encountered many baffled people who didn’t understand why certain things were expensive. After researching air travel, maintenance operations, hotels, common household items and taking a few marketing courses during my mom’s MBA, I have gathered enough information to tell you why certain things have a hefty price tag.
1. Professional Photography and Other Services
When you think about the perfect salary, most people will tell you they would like to earn six figures. To earn six figures a year doing your craft and using your given talents, one must charge at least $45 per hour. With this money, people who are self employed must pay for their medical health plan, life insurance, malpractice insurance, license fees, bonds and other business expenses. For a mechanic to charge you less, the work needs to be routine, quick or he/she could have inventory that needs to be moved before the end of year taxes on excess materials kicks in. In the case of a photographer or even a doctor or lawyer, their prices include the amount of time it will take them to get through a normal or average client, patient or case which is why the bill is larger than the time they are performing the service in person.
When you go to a Pep Boys, a big box chain store or an Emergency Clinic, all these costs are taken into consideration. Sadly, the professionals performing these services accept lower rates, sometimes even minimum wage, to work there. It may be there first job or they don’t have the resources at the moment to go solo. If you decide to follow them when they open shop don’t complain the prices are too high; no one else is subsidizing their rent or utility bills. This is why I always advice my peeps to not ask friends for discounts but to quickly accept any promotions they come up with to increase their business.
Note: Services like hair styling and spa are cheaper in chain stores but tend to be more costly at professional salons. All of the reasons above are why. Be kind and tip the supporting staff; they may be working for pennies on the dollar because they are trying to get exposure. Some places frown upon stealing customers when a stylist goes solo and will offer steep discounts to get you to switch. Make sure whomever you get assigned to knows your hair type and is certified to treat it. It can end up costing you more to take the offer than to follow your original pro.
2. Airline Tickets and Luggage Fees
Ten years in the airplane manufacturing business has taught me this: airlines base ticket prices on capacity, routes, fuel, maintenance, operating and leasing/buying loan costs. Fares will be most influenced by travel season and fuel prices so expect higher costs when traveling during the destination’s summer and holidays. Amenities and free meals on an aircraft occupy space, add weight to the payload carrying capacity and result in trash that needs to be stored. Airlines would rather have an extra row of seats than a galley complex to store the goods and waste/recycling.
In the case of the luggage fee it comes down to space (volume) and weight. Most airlines serve as couriers of goods for private companies and as United States Postal Service mail carriers. The USPS owns no aircraft and relies heavily on exiting routes and connections to fulfill their needs. The space your extra bag occupies may result in loss of revenue to the carrier as it lowers commercial cargo capacity. Flying cargo pays better than transporting people especially when you don’t have to feed the cargo or keep it at a comfy temperature, much less needs to use the bathroom.
I’ll give you this much though, it has become so lucrative to charge for checked bags that airlines make a huge chunk of their revenue from the service, enough to stay afloat! It subsidizes the loyalty lounge costs and in some cases the millage program, which isn’t cheap either. Your ticket price takes all of these factors into consideration and so should you when determining if cost is more important than loyalty or comfort.
3. Houses, Cars and Big Ticket Items
These items are very easy to explain: Add the cost of materials, professional labor, marketing, licenses, bonds, supporting services, local and city permits and utilities while constructing and manufacturing these items and you will get the sticker price. Usually, manufactures and builders make about 3% to 5% profit after sale which is not bad. Some companies manage to get double digit returns which is not ideal for the economy (it inflates the value of the dollar making more money effectively worth less) and creates pricing models that can seem exclusive to certain social groups. A great product is designed to serve a need and fulfill it at a price and volume that is sustainable; the housing crisis taught us that when you overpriced things you can collapse a market especially when people cannot afford their big item purchase loans or fees long term.
The clothing business is one of those gray areas where profit margins can be ridiculously high. For the amount of hours the staff at Dolce and Gabbana put into their work, the millions of dollars they produce support the firm and give shareholders value. Smaller labels can make just as much but have less capital to deal with issues like labor strikes or material problems. In the end, clothes are overpriced because they are manufactured overseas for cheap and then branded to fit the targeted market. Every step of the supply chain tacks on a cost however, and most companies make money from volume sales. The big apparel and accessories brands rely heavily on marketing which elevates the cost at least 15% if not more.
4. Wedding Planners and Realtors
Although these are roles that belong to the professional services category, I wanted to set them apart because they work on commission. Some planers and most realtors charge a percentage of the event or transaction as a fee for their services. The reason this is an acceptable and sound practice is because these services come with additional risks that involve making payments on behalf of a customer, scheduling multiple vendors or visits, and are available at your beck and call beyond business hours. These pros need to hustle fast and effectively to get your event or sale processed in a set amount of time that can usually not be rescheduled or delayed. You are paying them to secure that everything goes smoothly and as planned. They are your event or transaction insurance policy to an extent.
Commission professionals work in consignment and sales too. If you want a particular deal they can broker it for you for the percentage fee. Like wedding planners and realtors, they make money off every transaction which may be limited physically or by law to a few per month. To ensure their livelihood every service rendered comes with a price tag that meets their needs based on the low volume of sales or events. Keep this in mind because people assume a commission pro is working at a high volume rate all the time when the opposite is true; they dedicate more time to fewer clients and provide a higher quality of service. If someone asks for a high commission check to see if they are worth it since they may get you better returns or put together a better event or offer for you that works with your budget constraints.
5. Government Contracts
A lot of my friends complain that for the cost of the space program we could feed all of the people in the world for a year. The problem with this thinking is that it doesn’t take into consideration how those billions of dollars help out own economy grow and that the money feeds thousands of USA families and even other families around the world tied to the supplier base. When you add the cost of research and development to the professional costs, materials, manufacturing, certification and salaries, a fighter plane squadron will end up costing a couple of million dollars each. You can argue that if we invested in peace talks and programs we wouldn’t need defense contracts and armaments but the reality is the rest of the world doesn’t think that way. In this case it is better to be safe than sorry.
Some if not all of the technology developed for government contracts has been used to better humankind. Radios, RADAR, LAZER, and Kevlar are a few examples of things we use every day that came out of military and defense applications.
6. Perfumes and Body Sprays
People complain about paying $2.19 a gallon but they are willing to shell out $20+ for a bottle of perfume or body spray. Considering that the average perfume is 3 oz or less, these scents in a bottle are amongst the most expensive liquids in the world. People pay thousands of dollars for Channel perfumes, imagine that!
Aside from the manufacturing and R&D costs, perfumes are expensive because of endorsement deals, marketing, licensing, transportation (they are flammable) and shelf life. Inexpensive brands use lower quality products but produce similar knock off scents. Still, at a bargain price, they are more expensive than gasoline which has more practical uses.
7. Business Franchises
When a business explodes and wants to go national or global fast, most corporations offer business franchises to expand quickly. Each new franchise pays fees to get rights to the name and to get supplies that are representative of the brand like packaging or local/national advertising. Because the corporation only makes money from the franchise licenses and fees, and in some cases small cuts of the sales, the franchisee acts like a middle man and in some cases, like gyms or day care, they are solely responsible for any liability claim on their business. Therefore their prices or membership fees are moderate and sometimes a bit more expensive to be profitable and allow the franchise to thrive.
For example, chain day care facilities pay licensing and franchise fees. Local day cares tend to be a bit less expensive because they don’t have franchise fees. However, the chains tend to be thought of as having a better reputation which is why people pay the premium price. If you hired a nanny and paid her what you pay the daycare facility you could be better off if you have more than one kid. Talk to an accountant to figure out if this arrangement will work best for you tax wise. It has worked out for some of my friends.
8. Resale Tickets
Look at Stubhub, Ticket master or any ticket resale outlet and you will see that the average price for an offering is at least five times the original price. Why? The reason is because of offer and demand. People assume that if you want to attend an event you will be willing to pay whatever it takes to get a ticket. Add on the resale fees which can range from 5% to 10% of the sale price and you get an inflated cost right off the bat. The sad part is you can buy bulk tickets for an event, sell one or two for an astronomical price and not feel bad that the others didn’t sell. Scalpers or last minute discounts from resellers usually occur a few days to the day of the event if tickets didn’t sell. I’ve gone to many concerts where there are empty seats because they never sold, but my purchase subsidized the entire row. Maybe because resale is not a guaranteed profit scenario, the concert promoters and the like haven’t gone after the market. I can’t wait until that day comes though.
9. 911 Calls
Believe it or not emergency calls come with a cost. Depending on the city and state, activating a fire department unit complete with fire truck and ambulance can cost about $15,000. Dispatching police is rated at about $2,000 to $5,000. This is the reason why home security companies warn that false alarms will cost you money after a certain number of incidents and it is the main reason why the company calls you first before dispatching responders (except when fire or smoke is detected).
Although we don’t pay first responders as well as we should – some earn minimum wage and a vast majority are volunteers in smaller cities and towns – the equipment maintenance, dispatch teams, operators, utilities, specialized materials and tools make responses expensive. Think about this the next time you wonder what happens to your local property tax money; a fire truck costs thousands of dollars to purchase and thousands to maintain, and that doesn’t include the cost of the vehicle and responder insurance to cover malpractice, accidents or wrong doing. Oh, also remember that they work 24/7, 365 days a year. That’s a lot of cash spent on personnel and medical emergency supplies to ensure public safety.
10. Text Books and Enciclopedias
I have heard many students complain about the price of a text book and I don’t blame them. Considering classes at a university level are either quarterly or last a semester, shelling out $150 a book, on average, is a burden. However, the knowledge contained in the books comes from many professionals and organizations who don’t offer their services for free. To pay those people, organize and edit the content, release the rights to the publisher, and print and ship the books, each copy has to be priced accordingly. In the case of encyclopedias, the cost of each tome adds to the ticket, and even in the case of electronic copies, the price of the research and information processing warrants the price tag. This is why Wikipedia is now asking for donations as running a website with live content comes with a cost. Security and server space for storage, for example, aren’t free.
Next time you see an item with a big price tag think about all the reasons discussed above. Evaluate if the risk of purchasing the item at a premium price is worth the reward. Like my mother said to me, only sponsor those products you want to keep around. When something doesn’t meet the demand or is too pricey or of low quality it will fail and go away on its own. This applies to celebrities and music styles too. 😀