Saturday, November 01, 2014

Easy Does It Usain

A reason that capitalism has been so successful in an industrial age where making stuff has been the biggest driver of growth is that it helps with the pricing problem.

Money isn't a thing in and of itself, it is just a useful way to exchange goods. That's why 'investing' in cash isn't actually investing, it is waiting or sleeping. When it is used, rather than just exchanging one good for another, it frees us up to spend or invest as we choose. Assuming free information of what is available, the supply of what is being offered and the demand will figure out the price for us. Raise the price and fewer people will demand it. To find the 'fair price' the seller needs to raise the price high enough so that no one who didn't get to buy the goods feels hard done by (because they would rather use their money elsewhere). In theory, this makes the philosophical question of 'what is fair' disappear. We don't need to know how much time, opportunity costs, training or effort went into making the product.

Beyond the Industrial Age the pricing problem isn't really solved. As a hammer to smash poverty there was no other system that could work as well. The thing is what happens when we start valuing the 'time, opportunity cost, training and effort' above the goods. Pricing for them is harder. How do you price happiness?

We are stuck with great things which we are trying to monetize - which is a fancy way of saying we don't know the price. Not only don't we know the price but we don't know how to charge on a regular basis. A business like Colgate is brilliant. Their main product is toothpaste. It costs almost nothing, you use it twice a day, and there are billions of people who can still benefit from using it. Years and years of experience in distribution, marketing and relationships with dentists have given the business a very stable stream of cash to reinvest or give back. They are almost literally making money as they make each new tube. No pricing problem. No problem.

Some businesses got to hide in the Industrial Age. The true demand wasn't known because of how difficult it was to get the message out. That problem is getting to be close to being solved, which is good for those who have things to sell. But capitalism drives costs down ruthlessly and transparency cuts both ways. Ask yourself:

1. If everyone knew exactly what I am doing and how I am doing it
2. There were no transaction costs
Would I still have a business?

What do you offer beyond stuff? Why should they come back to you?

This introduces another pricing problem. If you know how to solve a problem people have, but in telling them, the problem is solved forever (full transparency, no transaction costs) - how do you price? This is a problem with our current model. Instead of aiming for the best solution, we aim for solutions that create work. Even if the work just keeps us busy. This is because pricing is easier for incremental solutions. Usain Bolt doesn't aim to smash the world record by as much as he possibly can each time. He aims to beat his own record as many times as he can.

Easy Does It Usain

Examples of Pricing Problems
1) Teachers - one piece of advice, once course, one coach early on in someones life can completely change their course. There is no way you can price that because of the length of time it takes, the fact that little Johnny doesn't have money to give Mr Keildson, and the fact that the impact will be different for every child.

2) Parents - you can't price what parents do because the supply is very limited. In most cases (barring dotings grandparent, uncles, aunts or close friends) no one else wants to raise your monsters. Comparisons to the comparable skills of (coach/ nutritionist/ psychologist/ /chef /teacher /accountant /prison warden /night-club bathroom attendant) therefore don't help.

3) Advice - If someone introduces you to someone else who can solve your problem, they may add a lot of value over your life. It may be worth a lot over a long period of time. You won't be able to afford to pay them upfront but after a few years you will wonder why you are paying them at all and it will cost you nothing to say they aren't the one doing the work.

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