The right price the first time

The way you price expensive transactions is going to train your partners and customers in how to behave.

When selling a book to a major publisher, it’s common for the publisher to offer an advance against royalties. In fact, the advance is the most significant tool that publishers use to get a coveted author to pick one house over another–royalties and most everything else are fixed.

It turns out that if an agent offers a hot book to multiple publishers at the same time, the advance offered goes up, often dramatically. Obviously, the publisher was capable of offering the higher advance without the auction, but it was the risk of losing the book that got them to pony up more money.

This trains agents and authors to be disloyal, to shop around and to create an artificial game to raise the price.

Or consider the real estate developer who calls up an electrician to re-wire a building. She uses this electrician often, and the estimate comes back at $18,000. The developer shops around and finds a similarly talented electrician for $14,000. Loyalty is great, but that’s a huge difference. She switches to the higher value choice. Indignant, the original electrician says, “why didn’t you tell me! I could have beaten that price.”

The answer, of course, is, “well, why didn’t you quote me that price in the first place?”

You might leave money on the table if you reward people for being loyal (and don’t make them shop around each time). I think it’s money well spent, because loyalty is worth more than a little more margin. If you train your partners to shop around, expect them to shop around.