In this episode, we talk about how Veblen goods differ from normal goods.
When I was younger, I spent a lot of money building up a home music studio and I remember for me to be able to do this, I had a nice car at the time and I downgraded just so I can buy the studio and I don't miss the car at all. But I definitely miss the music studio.
When I started this music studio, I figured, you know what, I should try to make some extra money for it from it. So it would be like an asset and it would justify spending all this money on the studio. So I went out to Craigslist. This was like a long time ago when people still use Craigslist went out to Craigslist and put a bunch of ads up for studio time and the time that I put for studio time, I figured if I put a low price, I can actually start getting some users and then word would spread and this would be like a good way for me to start this music studio service.
So I put a price of $20 an hour and I left the ads running and I tried to market it as much as possible, but no one bit, not a single person called me to do any studio time, etc. People were just, we're not interested. So instead of taking off the ad, I kind of just lost focus, but I told myself, you know what I'm gonna do, I'm gonna just going to raise the price and just leave it up here and I raised the price from $20 to $50 an hour.
And when I did the $50 an hour, guess what happened? I was booking the studio like um we were completely selling out the studio, we were booking out every single hour just because we had this higher price. So what was happening is people that look at the ad for $20 an hour. They said, "Oh, if a studio is that cheap, then it must not be good". That's how people were thinking.
And the higher that the price went up, the more demand for that product went up. So this is called the Veblen good. Veblen good, they behave a little bit differently from a normal good, from what you might be taught in a regular economics class. In a regular economics class, you're taught that the lower the price of something is, the more there would be for demand. And as you increase the price, demand would fall off because you would have people that couldn't afford it, it would be out of their price range, so demand would fall off. This is for a normal good.
However, for a Veblen good, what happens is as the price goes up so does the demand for the product, so does the desire to buy that product? So Veblen goods are pretty much luxury goods. So if you think about a Louis Vuitton purse that's selling for $10,000 versus a Similar purse, that's selling for maybe $1,300. Well, the $10,000 one seems to have a better perception of value, seems to be more quality and because it's a luxury good because it's a Veblen good, there's more demand for it as the price goes up. So the same thing was happening with me with my music studio. And the reason that I mentioned this is if you are starting your service for the very first time, you were an early-stage startup founder, and you were thinking about pricing, how do you price your product?
One of the things that you should stay away from is pricing it way too low. Because what will happen is people might not actually trust in your product. They might not believe that your product can deliver all of its promises because the price is so low. What you would do instead is, let's say you do want some industry people coming into your community and buying your product converting into your product. Then what you would do is you could have a very high price And then you can just offer discounts so people will close immediately and you give them a reason to close immediately.
So I can say yes, this product, it's $100, but If you buy right now, I will give you 20 off and you can have it for $80. So this is what the Veblen in good is available in good is a luxury good. It's a good that where the demand increases, when the price increases. So what kind of battling goods do you buy? What kind of Veblen goods do you sell? Let me know, email@example.com. This is Robin. Boom. Bam. I'm out.
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