In defence of profit

I was recently at a lunch where the discussion turned to some subscription service that a few of the people had tried. They compared their favourable experiences and then one of them said the best thing about this service was that they didn’t make a profit – they just reinvest the money back into the business. Everyone around the table thought it was indeed the best part.

It upsets me that profit is such a dirty word in my circle of friends. I know it’s sort of hip now to profess to hate ‘greed’, but some people do it to an extent where it seems they think that any time somebody profits financially from something, it’s evil. But profit-making is actually one of the morally best things you can do, and more people should be trying to make a profit. First, let’s look at when making a profit really is immoral and greedy.

When is profit bad?

Profit is bad when somebody is profiting from extortionate prices that people must pay because they can’t get the product anywhere else for cheaper, and it’s something they need to survive (say, a monopoly on clean water or baby formula). There aren’t many real-life examples of this, but plausibly a scenario like this could rise in some really bad totalitarian state. Note how that’s different from, say, Prada, putting extortionate prices on their products. Prada products are not essential to life and everyone who buys them is making a choice between keeping their money versus having a luxury handbag, or whatever.

The other ‘bad profit’ scenario is if you’re profiting from criminal or fraudulent activity. Selling a bogus cancer cure, selling a product you never deliver or getting people to invest in a pyramid scheme.

I’ll take nominations for other ‘bad profit’ cases, but those two are the only ones I can think of. ETA May 2017: A friend has nominated academic publishing, which I must say is quite a good candidate for evilness. They publish research, which is often funded with public money, and charge pretty astronomical sums for journal subscriptions that institutions perceive to be essential (which may be true). Operating margins of nearly 40% are not unusual – for an interesting contrast, I’ve just been looking at luxury fashion for a project and there operating margins are around 15%. This comes close to a monopoly situation and it’s particularly aggravating that access to academic research is so important to society at large.

But what about unfair prices?!

Yes, hello, what about taking advantage of people by marking up your prices when the demand is greatest? For example, Uber putting the prices up when it’s raining, or holiday destinations charging more during school holidays. Not evil, I’m afraid. Not even really unfair. In the same way as buses sometimes have to stand at a stop for a few minutes to regulate the service, surge pricing is annoying, but actually makes it better for everyone.

A good illustration of what happens if you don’t surge-price is the Paris catacombs. The usual state of affairs there is such that you must queue for at least 2 hours and up to 5 to get in – they are, after all, enormously popular, and a fascinating site to visit. The tickets are €5 for everyone at all times, meaning that nearly everyone can afford them. And everyone does. Half a million people visit every year. I think the tickets are wildly underpriced for what you get – a rare, memorable and desirable life experience – and the result is, there is so much demand that most people who visit come away feeling tired and annoyed, having had to queue for hours. Imagine what would happen if they hiked the price up to €50 during peak hours. Much shorter queues, and people would come away thrilled and still feeling like it was great value for money. As an added bonus, the catacombs would probably last longer as fewer people trampled through them.

So why is profit good?

I’ll get to the point, already. Profit is good, because:

1. It is a signal that you’re producing something people value. Is a company that barely scrapes by ‘more moral’, even though people obviously don’t want the things they sell? No – I think it’s better to make something that people do want! Making a profit is like a map that leads you to a wonderful place where you have more money and your customers have things they want.
2. It enables growth. Take hoovers. William Henry Hoover invented a machine that made loads of housewives’ lives a lot easier, enabling them to spend more time on something that made them happier. Maybe they were able to take classes or get a job outside the home. Happiness, education, employment are all obvious social goods. But what if Hoover had lowered the prices so low that he made no profit out of every hoover sold? He could never have expanded, never built more factories, never hired more staff, and only a handful of housewives would have been able to get the benefits (and there certainly would have been queues!). Profit leads to growth and that leads to more people getting the benefits of your product.
3. It makes you wealthier. And before you think it – it doesn’t make other people poorer. Think of the fact that nearly everyone in today’s society is better off than nearly everyone a hundred years ago. The rich have become richer, yes, but the poor have become richer as well. One’s gain is not the other’s loss. And why is more wealth better than less? If you’re in paid work you can probably answer that one for yourself.

So… if you were having lunch with me when that subscription service/profit/bad discussion came up, this is what I wanted to say. You know how you never think of the right thing to say until afterwards?

You might also like an older blog post: To publish good books or profitable books, that is not the question