Why Is Pricing So Hard to Figure Out?

Banksys painting was worth $1.4 million. Then it got shredded. Now its worth more. In a world this crazy, how can you ever hope to nail your pricing strategy? ---------- TRANSCRIPT: Selling for 860,000 [bangs gavel] [Security Alarm] It's not just you. Figuring out pricing is hard work. And often feels more like art than science. Take this Banksy art piece as an example. It originally sold for $1.4 million. Then, it got shredded. Now, dealers think itll be worth even more. Where did the original price come from, and how can it possibly be worth more after its been destroyed? No matter what youre selling, there are three key things you should always consider before you put a price tag on a product.... First, cost of production. Theres a famous parable about a woman approaching Picasso in a park and asking for a drawing. Picasso took out a napkin, doodled for a moment, and asked her for $5,000. The woman complains that it took him only thirty seconds to create - to which Picasso replies, No, it took me 40 years. When pricing, account for costs like Picasso. Calculate ultimate price based on all of the investment youve put in up front sales and marketing, R&D, engineering, all your overhead, altogether. Second, there's scarcity. What do diamonds, fine Bordeaux's, shredded Banksy paintings, and good Nic Cage films have in common? They're really rare. In other words, one of the most fundamental rules of pricing boils down to basic economics: Limited supply drives up your price. Many B2B services are not scarce - they have standard costs, and high competition keeps prices fairly consistent. Same with many B2C products. Before you sink a ton of money into creating a new product, make sure youre being realistic about how much youll even be able to charge in the long run, and work backwards to calculate how much you can afford to invest. and ultimately price. Finally, there's brand. What's the difference between Banksys graffiti art and regular street art? One is from a recognized brand that represents status, while the other is an eyesore. More accurately, Banksys art has a superior perceived value as a product. Look at Coke versus RC Cola, Rolex versus Timex, or Macbook versus Chromebook. All of them are functionally identical - but one has a much higher perceived value than the other. Creating a strong brand thus gives you some wiggle room in what you can charge versus the value you actually create. The most important quality of pricing is that it's fair, honest, and transparent.While it might take a little of informed guesswork on your end, pricing should never be a surprise to your customers. Nail this, and you can walk away with happy customers - the best salespeople a company can ever hire.