Danger Of Discounting

Here at burningpants we like to spend a little time paying homage to long dead economists, men who through long hours of study, glib turn of phrase or simply blind luck have entered the lexicon of great thinkers.

Right now we are thinking hard about the idea of pricing and in particular how financial advisers price their time and their service packages to deal with the looming legislative change which will force planners to sell their time.

This isn’t necessarily a bad thing and will force those planners that are indifferent about their offer and what value they add to spend a little time thinking about how they describe it; something we have long advocated.

But there is a trap for players in all this. One of the ideas that might be playing on the minds of planners is the idea that if they are cheap, or at least cheaper than the planners around them, it might be a good way to grow their business.

Let’s be blunt here; it isn’t. That’s not really how people think and after eight solid years of researching purchasing patterns and engagement drivers for financial services we know that the price of the service being offered isn’t in the top 5 purchase drivers.

More curiously an increased price appears to actually be a driver of perceived value. In fact, within a pretty fine tolerance – the more you charge, the more valuable your service is seen to be, which brings us all neatly back to the ideas of long dead economists.

This week’s long dead economist is Thorstein Veblen, the first economist to marry sociology and economics in his 1899 masterwork “The Theory Of The Leisure Class”, where he pointed out that there are goods that are valuable to humans simply because they cost more.

It was this simple observation which made Veblen a permanent fixture in the firmament of star economists, because these goods which have value simply because they are expensive became known as Veblen goods all around the world.

There are in fact numerous industries around the world which exploit this particular wrinkle in the human psyche, but our favourite example is the wine industry.

Recently burningpants was in Adelaide attending the Abacus conference where your correspondent was speaking about the idea of how the concept of service is changing and started thinking about the wine industry.

A bottle of wine, on average, costs about $1.60 to get to the wholesalers. That’s all wine. The biggest cost, believe it or not, isn’t the wine or the land that it’s being grown on – on a per bottle basis it’s actually the bottle.

Now here’s the rub – in Adelaide you can buy a very pleasant bottle of red for $14 and you can also buy the same variety of grape at $600 a bottle.

So let’s examine this – it’s the same grape type, from the same area (the Vineyards in this case were some 16 kilometres apart), they both had the same alcohol content and in blind taste tests no one could tell them apart with significant results, but if forced to say – all of the people your correspondent was talking to said the expensive wine was the more valuable one.

Given that they both cost about $1.60 to get to the table and one cost $14 and the other nearly $600 it wasn’t clear which is more valuable, but it was really clear which is more profitable.

So here’s the challenge: can you build a financial planning business which doesn’t grow by discounting but actually grows by using the other drivers of price and value which exist in the minds of consumers?

Can you make your services scarce (and therefore expensive); can you make your services a status good (like a Mercedes) and therefore expensive and is it possible to build your financial services brand into one which has luxury status?

All these questions remain unanswered in Australia (we hasten to point out that they have been very well answered in more mature financial markets around the world) and the developments of the next five years will effectively sort the wheat from the chaff.

However, as you go about structuring your offer for the next five years make sure you don’t negotiate too much on price, because within pretty fine tolerances in the mind of most humans price isn’t a barrier to value, it actually determines value.

When you provide advice you go through the same training and processes as everyone else – it’s up to you to determine whether or not you’re able to charge Hill of Grace prices for it.