Seth's Blog : Understanding pricing

Understanding pricing

The money we exchange for a service or item isn’t based on how much it cost to make, how hard it was to produce or how much the producer likes it.

That’s hard to hear, because when we make something, we spend most of our time thinking about those very things.

Price is based on the purchaser’s worldview and situation, not the producer’s. The price paid will always be less than the value it creates for the purchaser. And the price is never more than the amount the purchaser can exchange.

If the price tag asks for more than that, no purchase happens.

A painting that cost $4 to produce in 1880 might sell for $40,000,000. That’s because the buyer believes they gain more than that amount in status, satisfaction or future asset value. If they didn’t feel that way, they wouldn’t buy it.

A donation to a worthy cause doesn’t happen because the cause needs the money. It happens because the donor believes the story they’ll tell themselves about the donation is worth more than what the donation costs.

And a life-saving medicine that costs $4,000 won’t be purchased by someone who doesn’t have the resources to exchange for it.

This is one reason why it’s so profitable to sell luxury goods to billionaires who seek status. They regularly over-invest in their quest for standing, valuing it more highly than most people would, and they have the resources to spend on it. It doesn’t matter that the banana and duct tape artwork was cheap to produce or easy to replicate.

At the other end of this spectrum is a trained artisan, or a vendor at a craft fair. They show up, do the work and care a lot about what they’ve produced. But if the shopper doesn’t internalize a story about the product, or doesn’t have the resources to allocate, the sale won’t happen.

There are two valuable lessons here:

The empathy we bring to imagining what our customers need, want and dream of is always part of our work.
Mastery of a craft does not guarantee its commercial viability.