Parking accusations that the whole thing was a publicity stunt riding off the sudden explosion of interest in the billion-dollar NFT art craze, many observers of the traditional art world are still puzzled over why someone would pay so much money for a digital piece of art.
Typically, we might assume that producing expensive art is a process of sacrifice by the artist, who slaves in a dark studio over many weeks or months to gift the world a unique expression of their individual genius on canvas. In many cases, it is. But there are also thousands of artists all over the world that are (more?) talented and, at best, their art sells for a three-figure sum. Most never become famous or sought after. Hence, effort and talent – manifested in the “product” – are not the main drivers of value here.
So how can we explain the price point that one Indian blockchain entrepreneur was prepared to pay for Beeple’s work? A closer look reveals that this art sale has all the ingredients employed to market (and justify the prices of) the most desired luxury products.
To fully grasp correct luxury pricing, we need to understand how it is done typically versus how it should be done. The approach many brands apply is to simply benchmark with competitors and category conventions, while making the desired margin on cost the key decisive factor. In other words, if you are in the business of selling a luxury car, you probably start with your production cost, then add your desired margin and see if you are above or below your closest competitors.
This approach is practically always wrong when it comes to luxury. The strategy only works for mass market brands where the reference price theory gives us indications on the willingness to pay. Luxury has completely different, counterintuitive rules. Hence, intuition with regard to luxury pricing will almost always misguide you. The US$1,000 (S$1,347) starting price for Beeple’s artwork is a great example. Even an experienced auction house like Christie’s was seemingly completely off.
Instead, what luxury brands need to do is estimate the added luxury value their brand delivers. And this value does not depend on the product or the competition, it depends on the perceived value the story creates. This is another counterintuitive element: in luxury, the story always creates more value than the product. This is why luxury is so elusive and difficult to manage. And this is why most luxury brands price wrongly and often leave millions, in some cases billions, of dollars in profit potential on the table.
One question luxury brands should ask themselves: what if everyone else in the category is wrong in terms of their pricing? You then benchmark yourself against brands that may be undervaluing their value creation. As a result, you are wrong, too.
This is what drove the original US$1,000 (S$1,347) price. Virtual art, like Beeple’s, never captured significant price points, so the initial pricing seemed as intuitive as it was wrong. This artwork is different: it is the first entirely digital NFT-based artwork ever sold by a major auction house – an example of Christie’s shrewdly jumping on a suddenly emerging trend for NFT art, an abbreviation for a non-fungible token. As cryptic as it sounds, it uses the same blockchain technology that cryptocurrencies apply, making it possible to turn anything virtual into a collectors’ item that cannot be duplicated.
This is a critical component. Before the use of NFT, anyone was able to copy any digital art, making it practically impossible to create lasting value to a buyer. Even if you had paid for digital art, anyone else could claim that they had the original, too. In the “real world”, this is what fake artworks are. However, given the ease with which a digital artwork could be copied, there was no way to create an artwork of extreme value virtually. NFTs change this.
This brings me back to the added luxury value (ALV) created by the story. We have a digital artist creating the first NFT-protected artwork sold by an auction house to a blockchain entrepreneur, live-streamed in a virtual auction followed in real-time by people around the world. This is a story that cannot be copied. The first NFT artwork sold in a fully digital setting is a story that the second or the third of its kind cannot beat. When you benchmark other categories from personal luxury goods to luxury experiences, this is the principle implemented by brands that were able to create the highest value.
Value multipliers exceeding 10,000, 100,000, or even a million times are not unusual for the most value-creating brands in the world. Take Hermès’ most exclusive Birkin bags, Bugatti’s La Voiture Noire, or a stay at Richard Branson’s Necker Island for inspiration. All of these extraordinary examples have unique stories similar to Beeple’s work.
The buyer of the digital artwork, according to Channel News Asia, said: “This is the crown jewel, the most valuable piece of art for this generation.” The extreme value created by the story explains why it now ranks third among the three most valuable artworks ever sold by a living artist, after pieces by Jeff Koons and David Hockney.
This should make luxury brands reflect in several dimensions. First, you are probably pricing your brand wrongly, leaving millions of profit potential untapped – just think of the magnitudes of profit difference from the US$1,000 (S$1,347) initial pricing and the US$69 million (S$92.93 million) paid. What if your pricing is fundamentally wrong? Second, your brand story is your most important asset, and you are probably not doing enough to create extreme value. Third, you are probably underestimating how critical relevance to Gen Z, their digital desires, and their digital lifestyle, is. In this aspect, this record for virtual art should make you challenge your strategy.
