Saturday, March 14, 2015

Pricing the Priceless

I had a sweet business when I was a teenager. All this business consisted of was a grey sports bag and regular replenishment from the wholesalers. It started as part of an accounting project, but the extra pocket money was attractive and I saw an opportunity to take advantage of my parent's 'Marshmallow Rule'. If I could save half, I could buy a rather fancy HiFi set I had my eye on.

Even though the school had a tuck shop, what I offered was convenience and adjusting what I bought to what people wanted. There weren't many costs other than my time. Well, I didn't really factor in the many trips my mother made with me to lock and reload my supplies. Poor Moms never get the recognition they deserve. This lack of costs came to the attention of one of my buddies who moaned about my pricing. He later helped me get through my accounts exams and was a good counter of beans. He pointed out that I should be much cheaper than 'Handy's' (Handy Green Grocer's was the corner store close to the high school) since I had much lower overheads. I didn't pay for electricity. I didn't pay rent. Prices should be a product of effort. Clearly the biggest effort I had to put in was simply stopping people from liberating the sweets without me noticing.

Astros were a strong favourite

I didn't really have an adequate answer for my friend other than it wasn't worth my while to sell stuff for less. I have often thought about this discussion as my business studies progressed and as I have followed discussions on other areas of social debate. There is a big disconnect between what we naturally think things should cost and what they do cost. Should is based on effort, cost and a moral intuition of right and wrong. Pricing is actually very hard. It is a simplification of reality down to a single number that ignores everything other than two factors. Supply and Demand.

What you get paid isn't determined by inherent value. This is partly because our taste buds, desires and aspirations vary so widely it is impossible to get to a consensus on what things are worth. A good business or a good job isn't necessarily determined by the thing that does the most good. It requires barriers. A competitive advantage that somehow allows you an element of control over Supply and Demand. If you offer something that others don't or can't, and that someone else wants - you can set a price. Business relies on a price to monetize solving a problem. Businesses aren't good at solving problems that can't be monetized.

So trying to price childcare, for example, is very problematic. You can argue that it is a combination of teacher, psychologist, nutritionist, policeman, zookeeper, cleaner, beautician, personal trainer, coach, politician and clown. The problem is there is limited supply. Most Moms and Dads are only really interested in raising their own kid. There is also limited demand. Most kids have a strong preference for spending time with just a handful of people they trust. Trying to price childcare doesn't help. It is priceless.

Prices don't have emotional value. They can't. They don't carry the value to an individual. They can't. While input costs and worth may help approximate a starting point, they don't really matter. The only things that matter when pricing something are supply and demand. The price is just a clearing point for exchange. By trying to price the priceless, we can devalue the things that really matter to us and only us. 
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