Monday, July 13, 2009

The Economics Of Wealth Envy

My mother has decided she needs hearing aids. In the process of gathering information she asked me to look online for details about Lyric Hearing Aids. It's basically a disposable hearing aid that fits completely in the ear canal and which you leave in until it's time to replace it with a new one. They have to be replaced approximately ever 120 days when the battery runs down and they have to be inserted by a trained professional. Consequently you don't buy a hearing aid so much as a yearly subscription which provides a set number of replacements per year, 5 or 10 depending on if you need hearing aids for just one ear or both.

Curious about the pricing as well as what people were saying without the information being filtered through Lyric's marketing department I Googled them and found a message board where people were talking about Lyric hearing aids. Reading the thread two messages just sort of jumped out at me, both by the same person:

I think the 3000 dlrs per year is a robbery. I'm ok with a 3000 initial pay and then a lower yearly payment, like 700 or 800. They are really not targeting the common person and the middle class. This is for rich people.
This was followed a few messages later by:

Fair? at least not for the working class wallet. As I said earlier, it would be ok to pay thousands for an initial fee, and then... 500 per year sounds reasonable... But do you know the toll it takes on us the consumers to spend such amount? 3,500.00 per year is what you spend yearly on a car payment. By 5 years, you'd make this doctor/thief $17,000.00 richer. I repeat, this product is being sold to suburban high-middle class yuppies, not to anybody below that social/economic class.
Two things are fairly obvious from these posts. First, the poster has a case of wealth envy. Second, he has absolutely no clue the economics of running a business.

Notice that he believes that at $3,500, which is the price for 10 Lyric hearing aids a year, you'll make your doctor $17,000 richer over a period of 5 years. Given the fellow's obvious poor grasp on economics I can't tell if he's just rounding the $17,500 subscription fee down or if he actually believes that 50 (10 hearing aids per year x 5 years) Lyric hearing aids will only cost the doctor $500 or $10 per hearing aid. The alternative, if he's rounding the subscription fee down, is that he believes the doctor gets the Lyric hearing aids for free.

I'd really like to know his rationale for charging a high price for the first year and then radically dropping the price in subsequent years. What aspect of this program makes the first year so much more expensive than the following ones? The only difference that I can see is that before you get your initial set of hearing aids, you'll need a hearing exam and the price of that exam isn't included in the price of the subscription. It's a completely separate item that has no effect on the doctor's costs for providing the hearing aids.

This is something that the poster and other members of the wealth envy crowd don't seem to understand. Businesses have costs. If they sell their product or services for less than it costs to produce them, the business loses money. If the business loses enough money it goes bankrupt and fails. For a business to survive it must charge at least as much as it costs to produce its product. For a business to thrive it generally must charge more than production costs so that it will have money to look for ways to improve its products and services.

So what sort of costs would be involved with providing a subscription for Lyric hearing aids? Well for starters how about 10 hearing aids? I mean the doctor isn't just pulling the old hearing aid out of your ear, replacing the battery, and putting it back in. No, he replaces the old hearing aid with a brand new one that incorporates any new technological advances that have come out since the old hearing aid was inserted. Dividing $3,500 by 10 yields a price of $350 per hearing aid. That's a pretty good price for a hearing aid.

The price can't go down in subsequent years because the costs don't go down. You're still buying 10 hearing aids a year. If you can't afford to buy 10 hearing aids per year then maybe the Lyric hearing aids aren't for you. That's not really Lyric's fault or the doctor's fault. That's just the reality of the thing they're selling.

Sorry that the poster can't afford to spend that much money on hearing but that's just life. We can't always afford the things we'd like. I'd like to drive a Lamborghini Reventon, eat lobster for dinner every day, and have a personal staff that takes care of all the drudge work that I don't want to do but I can't afford any of that stuff. That's life. Fairness has got nothing to do with it.

People with more money than you, and there will always be people with more money than you, will always be able to afford nicer things than you just as you will always be able to afford nicer things than people with less money than you. Deal with it.

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