July 5, 2017

When value based pricing is NOT a good idea

I previously tried to answer the question on how much artists should charge for their work.  It’s a complex question really, as so many artisans and fine artists offer different services, and different projects require varying amounts of work and resources.

No matter how much (or how little) you enjoy your work, you’ll have to make a living from something.  Therefore, it makes sense to charge enough so that the income you receive can cover your expenses, as well as enough money to live on, and enough to pay a fair wage to anyone who is working for you.

In other words, artists are just like anyone else.

When people think of artists, however, they don’t always think of the craftspeople and artisans that make up the majority of the profession.  Some art may be commissioned and negotiated, others may go to auction, others may bring in royalties.  Value based pricing is one way of making sure you get what you’re worth on commissioned work.  When you’re selling to end users, however, your products tend to have a fixed price.

In the developed world, the end customer is not going to negotiate over a single print of a DVD, a single print of a poster, or a single print of a book.  If you get an identical product, you expect to pay an identical price.

I bought Disney’s Robin Hood a couple of years ago for about £7, and anyone else who went to the same shop that day paid the same price for the same DVD.  Just like everyone who bought a bunch of bananas pays the same price I did.  You might have a special edition DVD for those who want to pay more, but you’re not going to print a different set of features on each DVD for each customer.  (Okay, so maybe someone will invent that soon, but the robot that does so will probably charge a fixed price per feature.)

When everyone gets the same goods, it doesn’t really matter how much it is worth to the end user.  A bar of chocolate is a bar of chocolate, regardless of how much I want it.  Fixed commodities tend to have sticker prices which are set before you know who your customers will be.

I know that high-value products like cars and houses are sometimes negotiable, and sometimes you pay less than the sticker price… BUT I wouldn’t expect to pay more than the sticker price for any fixed end-product.

A hypothetical, but rare, exception might be if a shopkeeper admitted to making an honest pricing mistake, and the product obviously was mislabelled. With inflation, of course, prices might go up, but two people buying the same fixed item at the same time would normally pay the same fixed price.  If they weren’t, then something fishy would be going on.

With work, it’s the same but different.  You normally pay people a minimum amount per hour, week, month or year.  Not just because time is valuable, but because people need something to live on.  But, two different projects involve a radically different amount of work.

A lot of what we consider “artistic” work is in the development of prototypes, not the mass creation of end products.   If a scientist bought three hundred test tubes, those would be fixed products.   Perhaps there would be an economy of scale if many test tubes were purchased, with a lower price per test tube for bulk orders, but the scientist would not expect to buy the tubes at more than the price it cost to produce them.

If the cost of buying quality test tubes is too high, the scientist will find a way to do the work with fewer test tubes, or raise more money, or use a cheaper kind of test tubes.  You don’t drive a Porsche if you can only afford a Skoda.

But, if the scientist were designing a new kind of test tube, then the cost of the research might vary depending upon time scale, materials needed, materials the tubes were meant to hold, and so on.

Cleaning a building can also have variable pricing.  If the building is made of delicate material, it may cost more to clean per square inch than a building made of common material.  Intricate shapes can also add to the complication.  And location can be a factor too.

Doing things more quickly, or to a higher standard, also tends to cost more.

When different customers ask for different things, the price varies.   When the product or service is the same no matter who uses it, however, it makes sense to use fixed pricing.

But, not all glass tubes, not all DVDs are equal in price, why?  Well, there is such a thing as an economy of scale in the development of a product.

If it cost 30 million to develop a product, it will only be worth selling if over 30 million can be made in return.  The riskier the market, the higher your interest rates will be paying off any creditors, and the harder it will be to raise funding.  Then there are marketing costs, distributor shares (retail clerks have to get paid), taxes and licensing fees, materials and a lot of other expenses to consider.  Soon, your product that cost 30 million to design needs to bring in over 200 million to cover expenses.

So, you do a feasibility study.  You find out the cost of the product, the costs of distribution, the size of the market, and a large number of other factors to see whether it is worth developing at that price.

You may find that it is easier to make a profit with a 250 million dollar superhero sequel than it is with a three million euro academy nominated German art film.   (The typical German film costs 5 million, but I heard that Toni Erdmann had a lower budget.  This is probably because the director took on multiple roles, and it took over three years to make.)  You’ll also find that the customers of the art film will have more disposable income, and the perception of quality of the cheaper-to-produce film will be higher.

You’ll probably find that while the superhero film can make a profit from selling DVDs for only 4 widgets each, the art film needs at least 15 widgets per DVD to break even.  Distribution, marketing, printing, and other expenses are that much more per DVD for the smaller art film.

Despite all this, if two people buy the same two DVDs, they’d expect to say the same price.

At Ptara, we now offer feasibility consultancy for creative projects.  If you have a lot of large projects in development, and you’d like a neutral observer to help decide which are most worth pursuing from an economic perspective, give us a call.