the economics of gifts: it’s all about how you wrap it
This is a guest post by Catherine Caine of Cash & Joy.
Unless you work for a mint, or in the high-risk world of currency forging, you don’t make money.
You receive money.
And the people you receive money from receive something from you, too: the work they’re buying.
Some people call this an exchange, which would mean that both halves are equal – the money is worth the same as the offering it is purchasing.
Unless you’re buying something with very direct equivalence (like $50 of casino chips), it’s not really like that. It’s more like simultaneous gifts.
And so now I get to write something rather delightful.
The economics of gifts
To be successful, a gift needs to provide more value to the recipient than it cost the giver.
It’s frustrating as hell to give a gift where this doesn’t happen – like when a toddler gets much more satisfaction from the $1.35 wrapping paper than the $38-no-batteries-included toy it held. (“Why did I bother? I could’ve just bought her a cardboard box!”)
We feel like we’ve been played for suckers if we spent more than we received. (And we are receiving something: in the case of presents. It’s usually the experienced or imagined delight of the recipient, plus the social status benefits of being an excellent gift giver.)
As the example of the toddler demonstrates, we’re a bit irrational about this. We should be happy that the baby is enjoying our gift, because they are! But it feels wrong to us anyway, because they aren’t valuing it the same way we did.
Ideally, what should happen is this:
Giver spends x on gift.
Recipient feels and expresses x + 2 satisfaction. (Or better, x + 5. Or 10 times x!)
Giver is satisfied and proud of themselves for giving an excellent gift.
So if most business is a mutual exchange of gifts, what does that mean?
There are three assessments of value that matter deeply in your business.
I bet you want to know what they are, right?
What you get compared to what you give.
There are two ways this can go awry.
One is the province of extortionate sellers, who charge as high as the market will bear and devote most of their effort into selling the bejeezus out of a mediocre product. No-one reading this falls into that category, so we’ll go to the other problem:
Making an offer you’ll regret
Low-charging business owners often end up resenting the hell out of their clients.
A new coach, Steve, makes an offer: one hourly session every week for ten weeks, for $500. For the first few weeks it’s wonderful. Money in the bank! Clients! Hooray!
But after six weeks the money has long gone to pay the mortgage, and Steve starts feeling put-upon. “One more month to go? These bozos are grinding me into the ground!”
It doesn’t matter that he initiated the offer. He still feels like he’s being taken advantage of, and he resents it. Zillions of client relationships have been damaged or destroyed this way.
How it should go
What you deliver should feel like it costs less than what you get. This is best expressed as, “All I had to do was…”
All I had to do was three hours of consulting and I got $500!
All I had to do was assemble this necklace and I made $95!
All I had to do was spend a weekend to write this resource and people are paying $27 for it!
You feel blessed and energised when you make a successful offer like that. Everyone wins when your most blessed and energised self is doing the work.
What they get compared to what they give
The same calculation happens in your buyers’ mind. They hate being taken advantage of just as much as you do, and they want to feel like they made a smart decision.
They balance the cost (the money they pay, but also the time, emotional investment, awkwardness and switching costs) against the outcome. Notice I didn’t say “the thing they bought”, because in their mind they’re not buying the resource as much as they’re buying the outcome they think it will deliver.
There are two ways this can go awry.
Sucka got played
The buyer handed over their hard-won money for what sounded like a beakerful of pure, undistilled awesomeness, and it completely failed to meet those expectations. This can happen because:
- The marketing of the offering was better than its delivery
- The seller wilfully or accidentally overpromised
- The buyer had their own misconceptions about the outcome
In all of these cases, the buyer feels exploited. (You’ll note that in the last example, this isn’t in any way the seller’s fault – it’s entirely due to the buyer’s internal assessment. The seller will still get blamed.) Even if the offering delivers some of the outcome, or a different outcome, the buyer will not feel like they got value for their investment.
Guilt and resentment
The buyers handed over their money and received an incredible amount of value in return. So much value, in fact, that they feel like they’re taking advantage of the seller and thus feel in debt to them.
Reciprocity is a huge trigger in our behaviour – it is actively uncomfortable to owe someone. It’s manageable when you have a shifting dynamic: if your friend pays for parking, you buy the popcorn and the balance is achieved.
But in many businesses, the sale is the end point – after the sale, there are few opportunities for the buyer to give something important enough that they feel like they no longer owe anything. The buyer will generally try – by recommending potential leads, or sending long and loving testimonials – but they will still feel like they owe the seller.
And then they start to resent them.
Again, it’s a weird quirk of human nature: “How dare you give me so much in exchange for so little! How dare you!” But still: an unaddressed balance that can’t be resolved will create suspicion, guilt and resentment in your buyers.
How it should go
The buyer receives an amazing (but not overwhelming) amount of value in exchange for their investment. This is easily expressed with “All I spent was…”
All I spent was $95 and my feet have never been so comfortable!
All I spent was $800 and my business vision has never been clearer!
All I spent was $5 and this gelati is om nom nom nom…
Your buyers can happily sink into the outcome they’re purchasing when they feel they got a great deal, and will happily tell others about the wonderful resource they’ve found.
The fair deal
So the third assessment of value is comparing the two: whether the buyer feels they got the best of the deal, or whether the seller feels they they got the best of the deal.
Ideally, the answer is: they both do.
Because they’re not comparing the same things, this is totally possible. The seller is comparing the simple, worthless act of creating something they can do quite easily against the very very valuable food-purchasing money they made for it. The buyer is comparing the imaginary, come-and-go worthless money against the very very valuable outcome they received.
And so you can have both parties walking away feeling like they came out just slightly ahead of the other. Not so much that they feel like a scumbag, but just enough that they feel rather smart.
It’s a lovely way to do business.
If you’re looking wistful at this point…
…because it does sound, indeed, like a very lovely way to do business and you wish that you could experience it, then here’s how.
If you feel like you’re getting screwed over
Raise your prices.
You can do this by simply adding a bigger number to the price tag, or by offering less for the same amount: like three laser-focused sessions instead of five, or the necklace without the matching earrings.
And revise the outcomes to ensure they’re clear and concrete for your buyers, so it’s easy for them (and you) to see the value in this deal.
If your buyers send you long emails saying, “It’s frustrating, I wish I could pay you back for all you’ve done…”
Raise your prices, and/or offer premium versions.
Offer a premium upgrade to the people who send you those emails so they have an opportunity to redress any imbalance they perceive. They get to give you more money, and you both feel better. WIN.
If you’re not getting many sales
Don’t drop your prices – clarify your outcomes.
Actually, increasing your prices might help if you’re woefully underpricing yourself – your potential buyers might be feeling that mismatch. (“All the information I need for this important outcome for $12? Suuuuuuure.”)
One thing to keep in mind
You are not calculating the value in the same way your buyer is. You cannot set the price according to what YOU would pay, because you’d pay nothing – you already know how to achieve the outcome they want.
So set the price in line with the outcome, and find ways to deliver it so you’re proud of how easy it is to make the money. That way you and your buyers both benefit.
Catherine is an expert on business magnificence. She writes fairy stories about marketing at Cash and Joy, and offers a free 30-minute Marketing Check-Up to her readers. The volume of insight she crams into one of those sessions defies all known laws of thermodynamics.