by Hannah Lewis
They can both teach you how to make more money. Let’s say that we have a particularly twisted friend who lays out ten 1-dollar notes on the table in a row, and tells you that I, and I alone, can decide how to split it between you and me. The twist?
You can decide whether to reject the offer I make, and if you do we both get no money. Let’s say I offer you an 50/50 split of $5 dollars each. That’s fair and you’d accept. What about if I say I’ll keep $6 and give you $4.
Well, I have more power than you, so you’d probably take it. If I keep $7? $8? $9? $9.99? At what point do you tell me where to go? At what point do you “spend” money to punish me? I’ll tell you. But first, let me tell you a story.
The other day I was at a craft fair in London, full of nice jewellery and beautiful ceramics. I was with my mum, who has just turned 70. Age has not quenched her lust for nice silver necklaces. Or bracelets. The event had over 100 stalls. And the maker of the craft was on each stall.
Now, I feel for stall holders. Because at 16 years old I told my parents that school was a waste of time, I was done, and I launched my entrepreneurial career with a stall in London’s Camden market selling jewellery I’d made. I’d like to report this was a raging success. It was not.
People are rude about your work in front of you, they haggle. Some politely, some not. Like a cheapskate at a strip club, they will wax lyrical about your talents, and walk away without spending a penny. And irony will bite you – the tiny earrings you hate making will be the ones which sell. You will learn to hate making tiny, low-profit earrings. Because you committed the first sin of pricing: You priced the tiny earrings low, because a) they were small and b) contained only one expensive bead. Alas, so much pricing advice is terrible and tends to be "HOW MUCH DID IT COST YOU TO MAKE? ADD A MARGIN!"
I should have priced like this: Cost+Time+HATE-IT-TARIFF. At the time I assumed that the tiny earrings were my entry-level product – that they were what people could afford, and startled by my creative genius, they could not leave my stall without purchasing. Obviously now I realise that a lot of people just like tiny earrings. Hey, even I like tiny earrings these days.
Our emotions get in the way. We worry about what is ‘fair’. That if we price too high we’ll be punished for being greedy, and that the Gods-Of-Online-Commerce will come smite us in the night with broken web links and a non-functioning checkout cart. Remember that friend with the 1-dollar bills? That’s a psychological experiment called the Ultimatum Game which was designed to test at what point we pay to punish others – it tests how rational we are. Realistically, you should take any sum you’re offered in the game (any money is better than no money), but in reality, people do punish unfair offers, by rejecting it altogether. So the question is not so much “How to I price my products” but how you offer a price which seems fair for what you are offering.
We have a built-in need to appear fair. Or at least those of us who fall on the non-stabby side of the psychopath spectrum do. It turns out that psychopaths are more likely than normal people to take a deal when the offer is only 1 dollar, as their lack of connection to their emotions makes them more rational. So in order for you to FEEL right about what you’re offering, you need to both feel that the ratio is right between you and the customer is right. You want your offer and your price to be equal to what the customer thinks is fair. How do you find that balance? Well, the long way to do it is via trial & error. The short way is to get help.
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