How much is that little piccie in the window? Why product doesn't determine price
In 1989 this tiny oil painting of the Virgin Mary was valued at some $9000.
On November 29th 1991 it was worth $180,000.
A day later, on November 30th, it was valued at between $36 million and $54 million.
The valuation proved accurate. In 2004, the UK's National Gallery bought it for some $50m.
What changed in those 24 hours? Clearly the physical painting didn't change. It had the same brushstrokes and the same paint made from the same chemicals. It was painted with the same degree of technical skill. The subject matter was the same. It was as pleasing to look at after as it was before. It was no better a painting on November 30th than it was the day before.
The one factor that pushed the price up overnight to a staggering $540,000 per square inch of paint was the word of a single man. Nicholas Penny, a curator at the National Gallery, announced that this painting was not, as had previously been thought, by an unknown artist. It was, instead, an original Raphael. In Penny's opinion (and this is only an opinion, and a disputed one at that), the science - the infrared scans, the microscopic analysis of the under drawing and the pigment analysis - proves it.
This is fascinating. The price that people (both the National Gallery and the Getty Museum in Los Angeles who made an identical bid) were prepared to pay for this painting wasn't determined by the physical painting. It was determined by something else - a belief; a mere perception of value. One day, the perception was that this painting was worth under $200,000. The next, the perception had changed and the painting was worth millions. Tomorrow, somebody yet more expert than Penny might announce that it is not, after all, a Raphael. Our perceptions will change and its value will plummet.
Whether you're selling paintings, apples, bottled water or word processors there's a valuable lesson here:
Your product's fair price is determined not by what your product is, but by what your customers think. The two may not be linked.
I will explore this more in a future blog post. For now, you can follow me on Twitter or download "Don't just roll the dice: a usefully short guide to software pricing" (it's a free eBook)
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Good post. I hope you don't mind, but I used the post as support for an ongoing theory of mine that the concept of Fair Value is inherently flawed. I think this exemplifies my view as well as anything I've read. Thanks.
Posted by: Geoff | February 04, 2010 at 10:04 PM