> However, if you're offering a luxury, customers can simply choose not to buy if they don't think the price is worth it.
Right, but the market price usually isn't exactly the same as the maximum price customers would be willing to pay, because competition between suppliers forces suppliers to set their prices lower than that. This is referred to in economics as the consumer surplus[1]. So that is where the "magical" 20% comes from: from the consumer and producer surplus.
OK, but that effect assumes significant competition in the market, and we were talking about monopolies.
I think the point I'm trying to make here is that you are characterising businesses having such competition as being the norm. I'm not sure that's a valid assumption in the market today. Contrary to various traditional economic theories, it's pretty obvious by now that there are plenty of niche markets in the online/digital era that can support a viable small business but where competition will not automatically follow.
I have businesses that do things that, as far as I'm aware, no-one else is trying to do in anything like the same form. There are some services that we in turn use that also provide unique abilities where as far as I'm aware there's no-one we could readily switch to offering a similar facility in a similar way that provides direct competition. In effect, their competition is that if they become too expensive or too much trouble to use, we will do it ourselves instead of outsourcing.
I'd say this sort of situation is not particularly unusual today, at least in some "broad but shallow" sectors. The pricing we set (and, I have to assume, that the services we use set) is based on experimenting with what our customers are willing to pay. As such, we know that we couldn't just increase prices by say 20% to cover higher overheads. And even if we could reduce margins by 20% of revenue to absorb the cost instead, that would have a crippling effect on growth.
More fundamentally, we would probably never have started some of these businesses in the first place. The risk of losing our money before they became established enough to cover their costs would simply have been too high.
Right, but the market price usually isn't exactly the same as the maximum price customers would be willing to pay, because competition between suppliers forces suppliers to set their prices lower than that. This is referred to in economics as the consumer surplus[1]. So that is where the "magical" 20% comes from: from the consumer and producer surplus.
[1] https://en.wikipedia.org/wiki/Consumer_surplus