Following on from the last post which touched upon the tendency of
people to follow others, I want to bring this topic around to how that
can affect pricing. Given that involves money, let’s use a financial
example to begin with.
In financial markets, people can be more willing to buy as prices rise
and sell as they drop. Even if the fundamentals don’t support buying
or selling, that’s what they’ll do. Regardless of the objective
underlying quality, people will subjectively value expensive assets
more than they value cheap ones.
Add in people’s tendency to follow the herd and you understand why
asset bubbles develop on the way up and we get crashes on the way
down. This type of asset price volatility is one of the problems that
macroeconomists could not explain until they looked to behavioural
Which brings us to Sir Isaac Newton.
One of the most infamous asset bubbles in history is the South Sea
Bubble of 1720, when stock in the company rose by 1000%. Sir Isaac
Newton was investor in the company just as its price began to rise,
buying before the bubble took off and exiting into it with a very nice
profit. Just a few weeks after he sold though, the price continued to
rise. It must have been frustrating to see those additional potential
profits he left on the table, so he bought back in heavily at a higher
price. The price soon collapsed. Sir Isaac Newton then sold and lost
an absolute fortune.
If even the guy who first described gravity couldn’t see this case of
‘what goes up, must come down’ coming, then you know it’s something we
all could get caught up in.
So that’s pretty good proof that rising prices can attract interest.
When it comes to pricing what your business sells, you don’t need to
follow the bubble trajectory but it is worth considering what items
might look more attractive if a premium was in place.
Some goods experience higher demand the higher the price gets. These
are called Giffen goods, and are commonly found in markets like high
fashion. Sticking with the European history lesson though, it’s worth
noting that during the Irish potato famine potatoes displayed the
characteristics of Giffen goods. As they rose in price people still
wanted them, and paid highly for them leaving less money to buy
anything else, including other food.
Giffen goods aren’t all that common. Most things are subject to
standard price elasticity. Increase price and you’ll sell less.
But it’s really important to consider where you want to position your
business in terms of volume and margin.
Don’t be afraid to increase price if what you’re selling is good
enough. It would be great to find that you end up selling more. Even
if you sell less though, you’ll obviously make more per item. If the
fundamental value supports the desire of buyers, there need not be any
subsequent crash – just make sure that what you’re selling delivers,
whatever the price.
Remember the tendency of people to follow others and see value when
it’s highlighted to them.
Discounts look attractive but a race to the bottom never ends well.