Many entrepreneurs come to us with a fixed, predetermined value proposition for the product or service they are developing. They feel they have chosen the best distribution channel, they know the competitive prices, and they have some understanding of their margins. Your business plan is based on these assumptions. They are usually wrong.
Price is determined solely by what a buyer is willing to pay for goods or services. The mistake we see most often is that the entrepreneur does not adjust to the realities of the market. Product valuations are often determined by an ever-changing set of circumstances, rapidly changing supplies and raw material costs, disruptive new products and technologies, and general economic conditions are just a few of the determining factors. that should be considered when setting the price of goods and services. services.
If you collected impressionist art, how much would you pay for an original work by the Spanish master Pablo Picasso? The fact that such pieces are extremely rare would certainly affect the valuation of the painting. The implicit claim in the art world that a Picasso piece is invaluable, no matter what period, subject or medium the artwork is used for, ensures a stratospheric supply for the piece. Entering the transaction, any informed buyer understands that the cost of walking away with the image will be very high.
In 1932 the Winter Olympics were held in Grenoble, France. After the closing ceremony of the games, a group of the most famous sports writers of the moment decided to spend one last night of frivolity before returning to the United States. American sports page luminaries like John Tunis, Ring Lardner and Grantland Rice were among the group determined to say “goodbye” to the games with one last party funded by expense accounts.
At that time credit cards did not exist. International travelers used bank transfers to pay for their expenses. This method of payment required the use of telex machines and correspondence between specific banks in the traveler’s itinerary. With vast distances, time zones, and language barriers, this system was cumbersome and quite often failed. The group of sportswriters had chosen the Auberge Napoleon for their evening. This is one of the oldest and best restaurants in all of France. They started having a good time. In the 1930s, sports writing was a prestigious desk in any newspaper. The leading scribes of the day were widely celebrated and well known for their propensity to enjoy good grog and victuals at the end of a hard day covering games.
Dinner at the Auberge Napoleon was quite long. Hors d’oeuvres and brandy were followed by foie gras and champagne. The group was quite consumptive, and as they drank more and more, the tab went higher and higher towards the sky, though none of the boys were paying much attention.
Finally, well after midnight, they asked the maitre d’s for the bill. At the time of introduction, they gulped, the bill was astronomical, more money than they had between them as they searched through their wallets to find the amount needed to cover their bill. Banks and telex offices were closed, so they had no way of accessing additional funds at this late hour.
When the sportswriters admitted to the maitre d’ that they could not cover the cost of their lavish meal, the owner of the Auberge Napoleon was summoned. At the time, failure to pay a restaurant or lodging bill in France was a criminal offense often remedied by immediate imprisonment. The difference between the amount of cash the group could pay and the amount of the check was substantial. The atmosphere became tense, fueled not a little by the strong alcoholic intoxication that most of the writers had inflicted on themselves.
In a corner of the nearly deserted restaurant sat a small, dark man wearing a knit cap. The man was enjoying dinner with a beautiful young woman. They watched with some alacrity the confrontation between the owner of the Auberge Napoleon and the brash American sportswriters. The man took a linen napkin from a table, took out an ink pen from his jacket pocket and proceeded to draw on the napkin.
He called the owner of the restaurant over his table. Picking up the linen napkin, she proceeded to speak French to the owner and this seemed to calm and relax the agitated innkeeper. The owner took the napkin, bowed to the little man, and returned to the table of clearly embarrassed Americans. He smiled wryly and told the group that they could go, his obligation had been fulfilled.
“What just happened?” Ring Lardner asked. The owner of the Auberge Napoleon raised his linen napkin and showed the sportswriters the picture the little man had drawn. “This is the ‘Dove of Peace’, original and signed by the very master Pablo Picasso. It will be hanging in my restaurant for all my customers to enjoy for years to come,” said the owner. “Monsieur Picasso has satisfied his check with his thoughtful gift.”
A napkin, an image, an original, signed by one of the most famous artists of all time, had satisfied a simple restaurant bill. How much would such an image have been worth if it had been sold in a gallery? Certainly exponentially more than the price of a meal at a fancy restaurant.
Pablo Picasso was the greatest businessman. He gladly marketed his work, his image and his legend until the day he died. He attained fabulous wealth and incredible fame. His place in the pantheon of great artists is assured. Decades after his death, his work remains among the most sought after and valued in the art world. However, at the beginning of his career, Picasso lived in poverty. His work was not commercial. He valued his work based on the perceived market value for an unknown artist.
Many elements must be considered when establishing value propositions for new products. Preconceived pricing models must be based on real, real-time market assumptions that can be quantified. Whether a new offering is commercially successful in the mass market or in more limited distribution will be determined only after weighing all applicable costs and production issues.
