HBX Final Reflections: Economics for Managers — Economic Consent and Willingness to Pay or Sell (#BusinessyBrunette HBX Week 10)
Welcome to #BusinessyBrunette! I am currently studying Harvard Business School’s HBX CORe, their online pre-MBA program teaching the fundamentals of financial accounting, business analytics, and economics. Every week I‘ll write up what I’ve learned — making it meaningful & accessible for artists, activists, geeks, nerds, fans, and anyone else who doesn’t fit the MBA Mould. I’m learning as I go, so feel free to critique, comment, tell me if I’ve messed up or did well, mash up, and share! [See the rest of the series here]
This is the final month of HBX CORe, so all the subjects are on their last modules. So from here on out I’ll be writing short reflections on each subject as they close out.
Economics for Managers: Final Reflection
It’s been a while since I’ve faced a school subject that made me want to yell at the screen a lot.
Economics, on its own, is a fine and fascinating subject. It was a really good opportunity to really understand what people — particularly those in the business world — mean when they talk about “the markets” or “demand curves” or “monopoly”. Often these terms are highly-charged — especially in activist spaces that grapple with and fight against capitalism — and their original intended meaning is lost. I hadn’t expected to find it interesting, but now that I’d completed the HBX CORe course, I wanted to know more.
However, the course — and possibly a lot of conventional economics education — was missing an important concept: there was a lot of talk around Willingness to Pay or Willingness to Sell, but not enough talk about consent.
Willingness to Pay or Sell tends to be presented really simplistically: what’s the highest any particular customer is willing to pay for your product? What’s the lowest any particular supplier is willing to sell you their materials for? Map that out into a demand curve, find the happy medium, figure out how to either raise WTP or lower WTS, you’re golden. Yet what counts as “willing” doesn’t get explored enough — especially when it comes to coercion or desperation.
One of the examples discussed in the course involved the sale of building materials in the wake of Hurricane Sandy. Home Depot had kept their prices low, but independent contractors had bought out Home Depot’s inventory and were reselling it to people in need at very high markups. The guest speaker discussing this example asked why it seemed like it was more “okay” for these independent contractors to charge high prices compared to Home Depot, and he concluded that Home Depot probably felt like their future reputation was as stake, while the buyers likely wouldn’t see the contractors again and thus don’t really care about reputation. The contractors saw a high WTP, because people’s houses were in disarray, and they took advantage of that with the approval of the buyers. Because hey, if it was more than their WTP, they wouldn’t have bought it, right?
That analysis completely left out any considerations for desperation and vulnerability. There was no thought given to the idea that many of the buyers may have felt forced to pay those high prices because they got to Home Depot too late and now it’s either Pay Up or No House For You. The contractors are clearly exploiting the buyers, and sure, the buyers’ WTP in that moment may be high enough to allow the exploitation to happen, but why should that exploitation be happening in the first place?
Similarly, look at the infamous surge pricing tactics of Uber, especially during high-traffic times such as New Years. People are enough in need of a safe ride home (especially if they are inebriated, it’s late, they’re alone, etc etc) that they’d be “willing” to pay the surge price — and then they get the sticker shock of thousands of dollars worth of fare.
This happens every year, and the excuse is always “well it’s a very busy time” along with something about encouraging drivers to get out there and take passengers. But why the ridiculous surges? Surely there are a ton of pricepoints or pricing systems that do not involve charging customers the equivalent of a cross-country flight for a 20-min car ride?
Let’s then look at Willingness to Sell — which includes employees as suppliers of labor. One of the main ways in which companies cut costs is by cutting labor — whether by cutting salaries or by eliminating jobs altogether. Sometimes that’s absolutely necessary, but too often the employees that are the most affected are the lowest-paid employees — those already in a precarious economic state. Hey, if they’re not willing to sell their labor for that low, they can just leave and go find a job somewhere else, yeah? Or they can always tell their boss No, yeah?
Nope. The job market is such that even the lowest-paying jobs are hard to find, let alone any that pay fairly or well. Negotiation is difficult if you’re vulnerable — you’re a lower-rung employee, you’re a minority, you have problems with your colleagues and managers (that aren’t necessarily even your fault — for example, harassment). You may not be “willing” to sell your labor for such low pay, but if your options are either Low Salary or Starve, or even Bad Company with Decent Salary or Starve, you’ll most likely go for the option with any salary. Being able to say “fuck you, pay me” is admirable but often a privilege — not everyone can afford to enforce their salary needs.
How different would our thinking around economics be if we added consent into the equation? If we stopped assuming that someone who paid a particular price did it of their own free will? If we consider the constraints that coercion, desperation, and vulnerability place on our economic choices?How can we craft situations so that people’s Willingness to Pay or Sell arise from full, informed, active consent, and that they have the freedom to seek what they need at the price they can and truly want to bear?
Active consent is not just a concept valuable in sexual rights and feminism. It’s also highly important to consider in all areas of our life — and economics could really benefit from taking consent into account.
Bonus: Here’s a rant I posted on Tumblr yesterday about their propensity to shame small businesses and independent creators for selling above cost:
So I just came across a Tumblr post where someone was attempting to call out Relatively Internet Famous Person (won’t say who, if only because this happens to multiple people) for being “scammy” because they were selling their work for significantly higher than the cost of the individual components.
that is LITERALLY how business is MEANT to WORK
If you sell something exactly at materials cost, you’re losing money because you’re not including the cost of your time, overhead, marketing, postage, etc etc. Even if you do take those costs into consideration in your pricing, you won’t be able to earn enough to reinvest into your business, which means that unless you get the rest of your money elsewhere (e.g. loans, equity from someone else, mysterious benefactor, etc) you’re not going to be able to grow or improve your business, e.g. by using higher-quality but more expensive materials or getting more training.
People tend to assume that Price = Cost + Some Arbitrary Markup, as though that’s the only good way to price something. But there’s also a thing called Willingness to Pay, which is basically the highest amount your customers are willing to pay for your product. There isn’t just one number, it’s a curve, and you’d want to hit the price in the middle of the curve because that gives you the most profits overall — too high and you don’t get enough customers, too low and you don’t earn enough. Look up demand curves for more info.
Anyway. WTP is why you often see things with a high markup — because customers are willing to pay a lot more for a product that costs relatively little to make. You find that out through research: learning what similar products are priced, how much your ideal customers earn, how much they tend to spend on similar things, etc etc. There’s a lot of techniques. And what you’ll find is that while there are going to be tons of people that want something for free/below cost/cheap, there will still be quite a few people that’ll pay you quite a bit more than what it cost you — and it could actually benefit you to target those people.
Think about it. Suppose you make art, and the sort of people who buy the kind of art you make are willing to pay around $50 for a piece of your caliber (and honestly, a lot of y’all out there make work that could be priced a hell of a lot more). The art costs you $15 to make all up. Youcould sell it at $15 but that doesn’t help you in the long run. You could sell it at $50, then you get maximum value out of that customer and that’s still fine. Hell, you could even sell it at $30, you make 2x profit and the customer feels like they got a hell of a deal.
Could this be exploitative? Sure, it has been for some things. But that’s why you research! You learn what your costs are. You find out what similar things are priced. You find out what your ideal customers earn and what they’re willing to pay for something like yours. You find ways to either bring costs low enough so you can compete, or find a way to differentiate yourself so you can justify a higher price (not just “I’m better!”). You think about your future goals with your income — do you want to take more classes so you can make better things? Do you want to be able to afford a holiday? Do you want fancier material? Do you want to spend time in another city so you can be more inspired? Do you want to exhibit at a local convention? And then you price accordingly.
Maybe your customers are generally underpaid students who genuinely cannot afford anything more than $10. That’s cool — if it doesn’t cost you more than $10 to make something then you’ll still be doing ok. Maybe you have a significant number of people who’d pay you $50, and concentrating on them by charging, say, $45 would earn you way more money than charging $10 even though charging $10 got you more customers. Maybe you believe that having your product or service be accessible even to the lowest incomes is your highest priority, and that’s totally fine too! Just make sure you’re resourced enough to be able to take care of yourself and keep going. It’s up to you and what you research.
There’s nothing wrong per se with a relatively high markup. It all depends on your market, your strategy, your costs, your goals. If your market can afford to, if your market wants to throw money at you, why not let them? You could put that money to such good use and your customers will still feel like they got great value. You don’t have to stick to pricing at cost — dare to ask for more, if that feels good to you. You and only you can decide what your trade-offs are.
#business #i am sure someone is going to yell CAPITALISM at me #which would be fair #but i wonder how many people are being taken advantage of #or struggling to get by #because they’re worried about doing something that seems capitalistic #as though that has to be a terrible thing #so many struggling artists on tumblr who could stand to charge more #and ok that means quite a few people will be less able to afford your art #so you decide what the trade-off is #more affordable art for more people or more expensive work that supports you financially? #or you could find a happy medium that both helps take care of you and is affordable by your customers #RESEARCH RESEARCH RESEARCH
Other Economics for Managers posts in this series:
The Willingness to Pay for Porn
The economics of porn consumption and how that affects sex workers’ livelihoods
Bid It Now, Buy ’Em There: Let’s Talk Auctions! (#BusinessyBrunette HBX Week 5)
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Welcome to #BusinessyBrunette! I am currently studying Harvard Business School’s HBX CORe, their online pre-MBA program…
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