The Price of Blown Glass: Opportunity Cost and Demand Elasticity

A puzzle. My nephew has switched to making art glass full-time, and I think his work is gorgeous. His problem, though, is figuring out what price to charge. Among other things, he blows gorgeous candlesticks, which he thought of selling for $70 a pair. I say he should charge $250 a pair. He says no, because he thinks he can sell many more at the lower price.

He assumes it takes one hour of his time to blow a pair after he’s done the first pair, and incurred the fixed cost. So I guess his decision depends on the opportunity cost of his time and the elasticity of demand for his product. Clearly, there is a set of combinations of the cost of his time and the expected change in quantity sold that would make him indifferent between the high and low prices, with a higher opportunity cost requiring a higher demand elasticity if the price is lower.

Given the two prices, what is this set? And what do you think the demand elasticity actually is in this case?  (HT to SEH)


Eric M. Jones

I hope he keeps his day job.

Sara

Well, since it's a luxury good, might as well stick with $250 or even $2500.

Jimbo

I agree with you, charge the higher price - since it takes an hour to make a pair, there's not much benefit to producing in volume. Additionally, price is a signal to consumers that indicates quality. If there is not a lot of competition -and I assume there is not- he should try to position himself as a premium product. Does he include a unique signature somewhere on his candlesticks? Doing so would move his product from a commodity/mass-produced product image to an artisanal product image, which will allow him to charge more, and probably be happier. Dale Chihuly prices not based on volume, but on perceived quality, and that's a great market niche to be in. If one produces based on volume, eventually you will fall into a price war with someone who has a cheaper cost structure.

Charlie Riley

From the sociologist's pov: People who have money to spend on such things will pay $250 and more for hand-blown glass. People who don't will get candlesticks at the dollar store, if they bother with candlesticks at all. He's shortchanging his own work AND the work of other artists if he sells his candlesticks at mass-production prices. The price shouldn't be for his time, it's for the skills and ability to do this work that 99.99% of people don't have.

Gary L.

The picture is pretty small, so I can't tell for sure, but that doesn't look like a candlestick to me...

Warren

Can he sell in two different markets at high and low prices and compare the results?

Mike B

Of course he should charge whatever the market can bare. To find that you start off at the lower price and if the good flies off the shelf you raise the price until you can no longer sell what you make. Working the other way, starting high and dropping the price, only encourages people to try to wait you out in a microeconomic form of a deflationary spiral.

That being said I would hope that the price ends up being the lower one as hand crafted art is ridiculously expensive. People who pay high prices for decorative an artistic goods are only subsidizing someone's poor life choice. Being an artist is a signal that someone has no skills that the labor market actually values and therefore they have a very low opportunity cost of their time. If consumers were to behave rationally they would simply wait out the artists until the artists' rent came due or they got hungry and the artist would be forced to sell at a price that actually reflected the marginal cost of the materials and the justifiably low value of their time.

I actually know a lot of part time artists who sell their work and I find it economically offensive how the pricing often has no relationship to the time the art takes to create, or the quality.complexity of the work being created. It's like they are throwing darts at a price board and I have absolutely no idea how they manage to stay in business. Like I said I blame consumers who will plunk down more for a painting than they will for a flat screen HDTV. HELLO...a TV can show ANY PAINTING EVER....a painting will just show ONE THING FOR EVER. I'd actually support WalMart finding a way to put downward pressure on the price of hand crafted art. After all, they did it for hand crafted organic food.

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Imad Qureshi

The question is what will make the price more elastic or less elastic. Of many factors, one of the things people would be looking before paying $250 is the brand value. So brand value contributes towards price elasticity. Good brand value will make price less elastic. He can charge $250 if he is sitting in Murano island (Venice) without marketing his product as premium but in Austin, Texas or in most places in US not famous for their glass work, he needs to convince people why his product is premium and why is it worth more. This will require some marketing budget which I assume he lacks. So the price to maximize profits probably lies between his $70 and your suggested $250. But let him start with $70. See the demand of the product and then adjust the price accordingly. Unfortunately, its going to be trial and error but even Apple had to go through it (remember $600 for iPhone with two year contract).

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Rick

IME the price people say they will pay for something can be wildly different than what they'll actually pay, and you can't reliably determine the latter from the former.

jonathan

I know a lot about this area. Much depends on his channels for sales. He may, for example, go to one of the large craft shows aimed at retailers. He needs to understand their pricing needs. He may sell directly, at a store, at craft shows. It is not uncommon for price to differ significantly from sales channel to channel with craft products.

Looking at the candlesticks, he may be thinking of them as a calling card product, one he can get into stores, one he can sell regularly. That is the kind of thing a craftsperson needs: something to pay the bills at the basic cash flow level. You then build a business on top of that: more elaborate pieces, larger works, more "artistic" pieces.

This is a typical process for a crafts person. It isn't "what you can get" for a piece but what that piece means for your business.

Mike

I think fancy hand-made home decorations are going out of style. My parents had tons of expensive, high quality, handmade china, glass, and artwork, and it was impossible to sell.

vitruviano

1. It depends on what is the opportunity cost of his time and what other benefits he can get from one hour of his time. However from my perspective this shouldn´t be considered the most relevant matter in your nephew´s pricing tactic.
2. This is clearly a unique piece of art, so pricing strategies in this cases tend to be very subjective and driven by being part of a group of 'cool' fashioned customers. I wouldn´t charge a premium price but certainly not $70 a pair either.
3. Testing different prices in different stores could be the most reasonable path to reach 'the right price'. I would test the following prices: $149, $179, $219, $249, $299, and $389.

David Clayton

My immediate suspicion was that your nephew's talking wholesale pricing and you're talking retail, which would make the two prices not really that far apart. Bump the low price a bit, add the costs/risks/profit of a retailing function, and you're in the neighborhood of the high price.

However, if this is simply a semi-hypothetical economics problem, well, it's complicated. I know, you're trying to make is simple, and you can derive tradeoffs based on various labor costs. But in reality opportunity cost would be variable, as it's the flipside of the utility curve for spending time designing new products.

I suspect that in general demand here is fairly inelastic; we're talking about high-end stuff and those consumers tend to be less price-conscious, and these things are sold as sets - you won't sell three by lowering the price. But I think there would be price points where elasticity changes dramatically. And the elasticity is probably a bit lower overall for a famous maker like Simon Pearce.

Thanks for the brain exercise.

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David a

I have a cousin who is in a similar business, pottery. He produces two series of goods.

One market with the lower prices that he sells in the local craft shows places in the area.

The other is a different series, that he markets through higher end shops in Boston area, which is about 3 hour drive away. He sells on consignment, and his income is about 25% higher per piece. Therefore the final sales price to the purchaser is much more per piece figuring in the % to the consignment shop.

His difference in cost to produce the two lines is about zero. The only other expense is a once every few month drive to Boston area with a truck full of pottery to deliver.

Mike Fuellbrandt

Given that this is art, there is another consideration. The following blog post explains it far better then I, but the crux of the argument is this: Pricing is Marketing.

With an economist's knowledge of anchoring, it's easy to understand that if you price handmade art (especially for something as unique as pictured) at a lower price, then people will see it as worth a lower price (having a lower value). Price it higher, and people see is as having a higher intrinsic value.

http://blog.craftzine.com/archive/2011/08/how-to_price_your_handcrafted.html

James

Also, if he sets the price at $250, that leaves room to bargain the price downwards.

rehajm

Explain the Veblen effect to your nephew- he may reconsider the $70 price point when you explain the higher price may actually increase his candlestick's desirability...

Joshua Northey

I think he will want to price discriminate wildly based on who the customer is, where he is selling the product, et cetera.

BeakersBro

Depends on how he is selling - at shows/fairs, retail, or wholesale.

My glass artists friends seem to end up selling either at fairs or out of their own stores - wholesale ends up giving up too much margin and control of product for a small shop. Larger production shops can survive on wholesale well.

The trick at shows is that there are really two markets - the "art" market and the "trinket" market. The trick is to have higher price point objects like this candlestick next to lower price, easy to produce items at $20-$30.

One of my friends makes beautiful bowls and vases at the $200 and up level, but also sells $25 glass irises for the trinket market. Her revenue per show is usually close to split between the products - fewer higher priced items sell and a large number of lower priced items. The higher price items have a halo effect on the more production oriented work.

Jeff Remson

I think it depends alot on the size of the candle sticks. I always said that glass is sold by the pound and have meant it only half jokingly. Chihuly, the great glass marketing genius, sells pieces from $3k to $300k depending on the size and complexity. This scale changes depending on who the artist is. One hour to make these two pieces is a pretty fast production rate for a glass blower. I doubt they'd sell for much more than the $70 per pair unless your nephew is a famous artist. I don't think he is. So much of what you can sell art on depends on who made it. If Josh Simpsom made these he could get $250 for them.