How To Price an Elephant
Friday, June 5, 2015
Throughout the years, I've pondered about the pricing of many things ranging from houses to software and even salt. That said, there are some items that I've never attempted to price. One example: an elephant.
In Asia, elephants have long been worth quite a bit of money. Both intelligent and powerful, they are perfectly suited to perform work and create value for their owners. While most are grey, a very few are born with white pigmentation. These light-colored pachyderms have historically been revered by the local populace. Would you expect the price a local person would pay for such a creature to be higher or lower than for its more common siblings?
The truth might surprise you.
In actuality, few would be willing to pay anything at all for a white elephant. In fact, you'd have to offer a negative price for anyone to consider the deal voluntarily. That's right. Despite the teachings of many economists, items can have negative value when one considers two types of costs:
In the case of the white elephant, this beautiful animal is famously forbidden from performing mundane work. As such, the elephant has no capacity to produce value, yet its costs remain high. It must still be fed, washed and cared for.
As local custom forbids the "re-gifting" or murder of such gentle giants, the white elephant has become the poster child for mispricing. Legend has it that the King of Siam would gift white elephants (aka sell them at zero cost) to those whom he disfavored. This "free gift" would then drag the recipient into financial ruin.
While few in this country worry about receiving white elephants, metaphorical white elephants abound. Folks often forget to consider taxes, financing charges, insurance premiums, storage costs and other expenses when deciding to make major purchases. They simply conflate the upfront price of an item with its total cost. As a buyer you should be careful to avoid this mistake, lest you find yourself with your own white elephant.
Want to learn more about how to price your software? Then you'll certainly want to read my book or contact me for a pricing consultation.