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Archive for November 25th, 2008

What Is the Value of Your Product? What is a Picasso Original Worth?

Tuesday, November 25th, 2008

by: Geoff Ficke

Many entrepreneurs approach us with a predetermined, fixed value proposition for the product or service that they are developing. They feel they have chosen the best channel of distribution, know competitive pricing and have some understanding of their margins. Their business plan is built around these assumptions. They are usually wrong.

Price is determined solely by what a purchaser is willing to pay for goods or services. The mistake we see most often is that the entrepreneur will not adjust to market realities. Product valuations are often determined by a set of circumstances that are in constant flux, rapidly changing supplies and costs for raw materials, new disruptive products and technologies and overall economic conditions are only a few of the determining factors that must be considered when pricing goods and services.

If you collected impressionist art, what would you pay for an original work by the Spanish master Pablo Picasso? The fact that such pieces are exceedingly rare would certainly effect the valuation of the painting. The art worlds implied assertion that a Picasso piece is invaluable, no matter the period, the subject or the medium he chose to utilize for the artwork insures stratospheric bidding for the piece. Entering the transaction, any knowledgeable buyer understands that the cost to walk away with the picture will be very steep.

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 day decided to have one last night of frivolity before returning to the United States. Such luminaries of American sports pages as John Tunis, Ring Lardner and Grantland Rice were among the party determined to say “au revoir” to the games with one last expense account funded party.

At that time credit cards were non-existent. International travelers utilized wire transfers to pay their expenses. This method of payment required the use of telex machines and correspondence between specific banks on the itinerary of the traveler. With great distances, time zones and language barriers this system was ponderous and quite often broke down.

The group of sportswriters had chosen the Auberge Napoleon for their soiree. This is one of the oldest and finest restaurants in all of France. They commenced to have a fine old time. In the 1930’s sports writing was a prestigious desk at any newspaper. The lead scribes of the day were widely celebrated and well known for their propensity to enjoy fine grog and vittles at the end of a tough day covering games.

The dinner at the Auberge Napoleon was quite an extended affair. Hors d’hourves and brandy were followed by foie gras and champagne. The group was quite consumptive and as they imbibed more and more, the tab mounted ever more skyward, though none of the boys was paying much attention.

Finally, well after midnight, they asked the maitre d’ for the check. Upon presentation they gulped, the tab was astronomical, more money than they had between them as they scrounged through their wallets seeking to come up with the amount needed to cover their tab. The banks and telex offices were closed so they had no way to access additional funds at that late hour.

Upon the sportswriters admitting to the maitre d’ that they could not cover the cost of their luxurious meal, the owner of the Auberge Napoleon was summoned. At that time non-payment of a restaurant or lodging bill in France was an offense that was often settled with immediate incarceration. The differential between the amount of cash the group could pay and the amount of the check was substantial. The atmosphere grew tense, fueled not a little by the heavy alcoholic imbibing that most of the writers had inflicted upon themselves.

In a corner of the mostly deserted restaurant sat a small, swarthy man wearing a woolen cap. The man was enjoying dinner with a beautiful young woman. They watched with some alacrity as the confrontation between the owner of the Auberge Napoleon and the American sportswriters unwound. The man took a linen napkin from a table, removed an ink pen from his jacket pocket and proceeded to draw on the napkin.

He called the restaurant owner over to his table. Holding up the linen napkin, he proceeded to speak in French to the owner and this seemed to calm and relax the agitated innkeeper. The owner took the napkin, bowed to the small man and returned to the table of the clearly embarrassed Americans. He smiled wryly and advised the group that they were free to go, their obligation had been satisfied.

“What has just happened”, asked Ring Lardner? The owner of the Auberge Napoleon held up the linen napkin and showed the sportswriters the image that had been drawn by the little man. “This is the “Dove of Peace”, an original and signed by the master Pablo Picasso himself. It will be hung in my restaurant for all of my patrons to enjoy for many years”, said the owner. “Monsieur Picasso has satisfied your check with his considerate gift”.

A napkin, an image, an original, signed by one of most famous artists of all time, had satisfied a simple restaurant tab. What would such an image have been worth if sold in a gallery? Certainly, exponentially more than the price of a luxury restaurant meal.

Pablo Picasso was the ultimate entrepreneur. He marketed his work, his image, and his legend with gusto until the day he died. He gained fabulous wealth and incredible fame. His place in the pantheon of great artists is assured. Decades after his death his work continues to be among the most highly sought after and valued in the art world. However, at the onset of his career Picasso lived in poverty. His work was not commercial. He priced his work to the perceived market valuation for an unknown artist.

Many elements must be considered when establishing value propositions for new products. Preconceived pricing models must be based on real time, real 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 expense and production issues.