What's the price of prestige? 

For New York City's elite auction houses--Sotheby's, Christie's International and Phillips--it's exorbitant.

Over the next two weeks, all three houses could auction as much as $2 billion in art, according to the Wall Street Journal. Here's the problem: All three houses have found themselves bidding against each other, in their attempts to obtain prestigious art from the estates looking to consign it. 

"We shouldn't lose our shirts in the process, but that's what’s happening," is what Jean-Paul Engelen, Worldwide Head of Contemporary Art at Phillips, tells Kelly Crow in the Journal. "It's gotten quite cannibalistic."

For example: To win the $83 million estate of Belgian banker Louis Franck and his wife, Evelyn--which includes Vincent van Gogh's "Landscape Under a Stormy Sky"--Sotheby's agreed to accept a flat $1 million fee and turn over all remaining proceeds to the Franck estate, reports the Journal. That is a fraction of Sotheby's typical 12 percent commission.

Bragging Rights

Why would the auction houses behave this way? The first answer is competition. If your estate has paintings that belong in the pantheon of prestige, then it's likely at least two of the houses will compete for it. This year, it happened with the collection of A. Alfred Taubman. As the Journal reports, Sotheby's and Christie’s "each offered to guarantee the estate for around $450 million in August." Sotheby’s final offer guaranteed the estate for more than $500 million.

Here's the next question: Is any item in your inventory worth its prestige value, if you end up giving that item away for bragging rights? The answer here is nuanced. It depends on the prestige of the item, the branding goals of the seller, and the emotions of the leaders making the decisions. 

Time and again, though, you can find examples of companies who've overspent for the sake of a prestige, branding, or emotional benefit they were gaining in the process. Three quick examples:

  • Playboy CEO Scott Flanders has noted that the magazine's U.S. edition loses about $3 million a year. He views this as a marketing expense. "It is our Fifth Avenue storefront," he told the New York Times
  • The National Basketball Association (NBA) does not make a lot of money on the Women's National Basketball Association (WNBA), in which a majority of the 12 teams are not profitable. But for branding reasons, it's important for the NBA to support a women's league. 
  • When Pope Francis visited Philadelphia in September, the rarity of the occasion rendered most businesses happy to be there--even if they felt underpaid. Scott Mirkin, founder of ESM Productions, accepted $450,000 to orchestrate the Mass--less than half of what he'd hoped to make. "He was willing to sacrifice pay to be part of a historic event," notes the New York Times.

So the auction houses are hardly alone in their willingness to pay a premium for the branding benefit of prestige, scarcity, or reputation.

You can understand where they're coming from: They are, in point of fact, dealing with works of art. And study after study shows people value art because it possesses an aura of authenticity. In fact, professors at the Yale School of Management demonstrated customers will pay more for a chair if they believe the chair is a work of art, rather than something made on an assembly line. It doesn't matter if they are the exact same chair. All that matters is the customer's belief that one of the chairs was made by an artist. 

This is also why someone paid $3.4 million in an auction last year for the piano used in the film Casablanca. The piano was a meaningfully differentiated, one-of-a-kind original--impossible to replace or find anywhere else. Through its affiliation with a landmark work of art, the piano itself came to be perceived and valued as a work of art.

Did the piano sound any better because it appeared in a famous movie? No. Was it in pristine condition? No. There was a wad of chewing gum stuck to the underside of the keyboard. Moreover, it's not even the piano you hear in the film. The point is, it ceased to be a mere piano the moment Casablanca achieved pantheon levels of prestige as a film.

Pricing for Prestige

What's the entrepreneurial lesson here? Mainly that if you can get your customers to perceive your products as art, they will pay premiums. Last year, the rap group Wu-Tang Clan announced it was attempting a strategy like this with an album. Most albums are sold and distributed in mass quantities, for sub-$20 prices. By contrast, Wu-Tang Clan announced it would release only one copy of an upcoming opus, selling it for a multi-million dollar price to a high bidder--but only after a promotional museum-gallery tour.

Essentially, the Wu did with an album what the Yale experiment did with the chair: They increased its value, by communicating to people that it was "art," rather than the ordinary product it seemed to be.How can you harness these strategies for your own entrepreneurial products? Mainly through pricing. Consider how differently a consumer perceives a $100 bottle of wine versus a $10 bottle of wine. 

Charles Revson, the marketing legend who built the Revlon cosmetics empire, was a master of this tactic. As pricing guru Ron Baker has pointed out, when other nail polish products sold for 10 cents during the Great Depression, Revson's products were 50 cents. His lipstick sold for one dollar, compared with the 49 cent price of competitors'.

The reason? Revson aimed to differentiate himself from his competitors, all of whom treated makeup like an ordinary consumer product. In Revson's hands, makeup was a vehicle for romantic hope. In positioning his product this way, Revson was acting like an artist. His lipstick was more than mere lipstick. In the same way an artist's chair isn't just a highly replaceable piece of furniture. In the same way the piano in Casablanca isn't just a piano.