In 1920s a fashionable Parisian lady went to a famous milliner to order a hat. The designer picked out a luxurious piece of cloth, fixed it on the lady’s head with a dozen of pins, straightened a few folds – “et voilà, would that do, Madame?” “Lovely,” murmured the lady admiring herself in the mirror, “How much will it cost me?” “A thousand francs, Madame.” “ A thousand francs?! For a mere piece of fabric???” the lady was shocked. The milliner calmly took the pins off, one by one, undoing his fabulous creation. He folded the piece of cloth neatly and offered it to the lady: “The fabric, Madam, is free.”
I envy the old hat maker. He had no fears of losing his clientele. He held his moral ground high between the shifty worlds of business and artistry. He relied on some set of common sense pricing rules that still make most people take his side when they hear this story. He also did not know that in a few decades women would stop wearing fancy hats.
I sometimes wonder whether in contemporary business reality most pricing models are created on the go, on a hunch, or out of the blue. Last September eBay paid 2.6 billion dollars for a small company with a large number of subscribers and no discernible profits. What made Skype worth this much? What makes another company, a profitable one, worth a fraction of that amount? Was it Skype or was it Hype? And if it was hype, who was the marketing genius behind it?
At a different shopping level, I was at Starbucks the other day and noticed lovely plastic tumblers that would have looked nice on my terrace. I was about to pick them up absentmindedly, then glanced at the price tag as an afterthought and almost dropped the load – a set of four would have cost me a 100$. It may have been a decent price for, say, a set of antique champagne coupes – but purple tumblers with “Starbucks” imprinted in giant letters? Yet someone will buy them, because Starbucks, yet again, is a brilliant marketing concept around a McDonaldized version of your local coffee-shop.
When you operate in the brave new world of digital economy, and you have to determine the price of a movie, or the cost of a service, or the salary of someone with blog design credentials, how do you go about setting the number? In college they taught us that no matter where you start, the rules of the free market — the Smithian “invisible hand” — would eventually bring the pricing to equilibrium. But what if the only invisible hand these days is that of a marketing genie grinning at us behind every financial success? What if high-end prices are born from marketing buzz and the human tendency to follow like sheep whatever becomes universally accepted? The key to success may not be in creating a competitive product or a great enterprise – it may be in hiring a brilliant head of marketing and in setting the price as high as feasibly possible.
In my personal attempts to master the logic of new media pricing, I am beginning to adhere to the advice of another hatter — the Mad Hatter from Alice in Wonderland. “Take some more tea”, someone suggested to Alice during the Mad Tea Party. “I’ve had nothing yet”, Alice replied, “so I cannot take more.” “You mean you can’t take less,” said the Hatter, “it is very easy to take more than nothing.”