By Ted Chan, MIT Sloan School of Management
Pricing a creative product is one of the great challenges in life, and is itself an art form. Getting it right requires an understanding of finance, behavioral economics and social psychology. Pricing contains a number of paradoxes that can prevent you from maximizing your profits. This article provides some food for thought as you consider how to price and market your good.
- Pricing at 00 and 50 is the only option for luxury goods. An experiment performed in an art studio revealed that high-end art with prices ending in 00 and 50 sold far better than anything with other numbers. Art is an acquisition where people want to feel they are buying quality rather than getting value. Ninety-nines and 95s are good for conveying value and might be effective for lower priced goods such as mass market clothing, simple prints or small photographic works.
- Understand your costs. One thing I’ve noticed about creatives is that they think very little about costs. Paints, materials, packaging, transport, framing and just about everything else you can think of are expensive. There’s also overhead — a studio, electricity, display space rental and cost of sales. Don’t forget studio fees as well. It’s important to lay out the costs of the entire ecosystem when assessing what price point is sustainable for creating quality art work.
- Avoid double marginalization with downstream sellers. Something that isn’t even understood well in Fortune 500 companies is transfer pricing. Double marginalization is the concept that if you overcharge your downstream sellers (distributors, such as art resellers and studios) they will charge a price that is sub-optimal to the end consumer. This means everyone’s profits will suffer, and your art will be less price competitive. A better way to approach the problem is to figure out with your downstream seller what the optimal price would be to the end buyer, and create a revenue split that you think is fair.
- For some goods, raising prices may increase demand. An example was a brand of fountain pens in Britain that raised prices and expected a drop in demand. However, demand actually increased for their high-end metal and wood pens. Demand decreased for their plastic pens when they raised prices. This is likely to be true with many luxury and creative goods where perceived quality is more important to a buyer. It’s really important to study what matters to your customers.
- A higher price impacts those who enter your network. For service businesses, a higher price signals exclusivity and can act as a gatekeeper to ensure high quality. For instance, a millionaire dating service that charges men $25,000 for an annual membership will keep poor college students out and attract women who are pre-qualified to be interested in meeting such men. This applies to creative services or networking groups as well. Be wary of anything that’s free. You often get what you pay for in terms of the quality of the constituent base.
- Luxury goods are not just about conspicuous consumption. People once thought that luxury purchases were related to the desire to show off conspicuous consumption. A more nuanced understanding includes self-perception and milestones. The feeling of “I can buy this, I’ve made it” is also a key part of the luxury good purchase. Make your high end customers feel that way and you will be in better shape.
- For gift items, a low price may not be desirable. One must think carefully about the purchase process for their goods. When giving a gift, a low price is not always desirable. This is the case in Asia with alcoholic beverages often given as gifts, such as scotch and brandy. People generally know the prices of these goods, and pricing your brand/goods higher may actually increase price. This, of course, implies that pricing information would be assumed to be available to the gift receiver. If you own an art studio, this especially applies when a millionaire brings his rich boyfriend/girlfriend in searching for a gift!
- When you do put things on sale, 30% saturation is about the max. With sales, too much removes the perception that a buyer is getting a good deal. Research at MIT indicates that above 30% “sale saturation” in your store or website removes the effectiveness of this sale topic.
- When pricing, give three options. Many interesting studies reveal that adding a ridiculous third option can make a second option more appealing. Originally, the Economist sold an online subscription for $59, and print/online bundled subscription for $129. The split in sales was about 40% for the $59 online subscription and 60% for the $129 subscription. They then added a $129 print only subscription option. You would think that it the new split would be 60% online, 40% for the bundle and zero for the print only. Instead, zero picked the print only, but 80% bought the $129 option.
Another example is adding an extremely expensive (2x or 3x) third option that is only slightly better than the second option. This leads users to choose the middle option rather than the cheapest option, leading to significant increases in revenue. This is a common strategy for companies like HP and Xerox to get you to move up from a low-range product.