The Fair Price: an Ancient Argument, a New Approach

Imagine this: The year is 400 BCE, and you are a grain trader in the mediterranean. Moments ago you have moored your boat in the Rhodesian harbor. A thin armed dock-worker with sunken cheeks slowly ties your boat to the pier. "What do you have on board?" he asks. "Grain," you say. His eyes light up. Why is dock worker excited? A famine plagues the people there. And you are the first boat to arrive with food to sell. What you know, but the people of Rhodes don't yet know, is that behind you, more boats loaded with grain will arrive in Rhodes. You're first to market. What price do you charge?

This question, and implications of fairness about disclosing knowledge in sales, is an ancient dilemma. The debate is still relevant today. Through my work in SaaS sales I have found new insights to share to the debate. This article is meant for anyone who works in sales or a customer-facing (front office) function or price setting function.

As far as my research shows, the discussion goes back to the ancient stoic philosopher Cicero. He writes about it in book II of On Duties (and it's outlined nicely here). Basically two philosophers are arguing about this grain trader I illustrated above. They are asking about what is the fair price to offer the starving Rhodesians. Diogenes is arguing with his student, Antipater of Tarsus.

Diogenes holds a more ruthless opinion: he says there's no need to tell the Rhodesians what the trader knows about the other boats destined for Rhodes, so sell for the highest price you can get. Contrarily, Antipater sympathizes with the starving Rhodesians. He says the trader is obligated to share the knowledge about the other merchants, and then set a price—in every instance in every sale. The contemporary philosopher N.N. Taleb sides with Diogenes in his book Antifragile. In practice I think there is a middle ground. Go with Antipater's perspective: disclose the information, but get a fair price (the trader is first to market, right?), and in return, get some good-will as a trade off. Why take this approach? Look at the outcome of the opposite, selling at the highest possible price, the most exploitative one. If the trader doesn't tell the Rhodesians about the other ships on their way to Rhodes, if the trader doesn't care about reputation, and sees no future prospects in selling to Rhodesians over a longer period of time, then sure, a one-time transaction is the best decision. Because this will be a one-time transaction. The trader will only be able to sell to the Rhodesians when they are desperate. They will consider this trader an exploitative scoundrel. They will only conduct business with that trader when desperate.

If the trader does intend to sell grain to the Rhodesians again, disclosing the information about the other approaching ships is like sharing valuable market information, for which the trader can justify a premium for a higher price, rather than an exploitative one. In result the Rhodesians will respect the trader for demonstrating honesty and fairness. Simply put, people like to do business on a recurring basis with people they trust. This is the missing piece in the debate, or the missing downside of the approach of Diogenes and the hidden upside of the approach of Antipater. I argue that even N.N. Taleb outlines a version of this in his work Skin in the Game: the idea is that people who have to bare the consequences of their actions (like administrators in local communities) tend to act with more fairness and justice.

The trade off is thus simple by using Antipater's approach: trade some profit now for sustained profits later. That is, if the trader seeks a long term contract with the Rhodesians, then being honest is the best value, because it's better for his business. Upon closer evaluation, we can find another upside to this approach: if the trader were forthcoming with the Rhodesians, that relationship with them becomes like an insurance: the trader sells not only grain at a "bargain," but buys the goodwill of the Rhodesians (how to do that is worthy of another post). For example, the trader could cash in on this "insurance" in this instance: imagine if other markets become closed off to the trader, because of sanctions, pirates, plague, etc. Thus, the trader can "cash in" his insurance of goodwill with the Rhodesians when he needs a favor. It's like an ongoing contract. Perhaps that can be a condition of sale, in fact.

Now, stepping back from the hypothetical and into real-world applications, I sense that we can compare the approach above to SaaS (subscription) business models. In these models, retention is a leading KPI for the business. Drawing from this, I suppose the recurring nature of subscriptions and lock-in is why investors love a SaaS/ARR business with low churn, because if the company, product, and people working there are fair and honest, then it makes sense to keep doing business with them for a long period of time. They are trustworthy. They are reputable. They honor their commitments. In the example above, the trader could even do a little marketing of the moral high-ground, claiming to the Rhodesians, "I could have sailed anywhere, I could take any price I like from you, but I am honest and committed to you as friends. Thus I moved with the greatest urgency, arrived here first, so I can end your starvation the earliest, and I want to sell you a contract to buy grain from me for the next year."

To me, this reasoning sounds like how ARR and SaaS businesses manage their sales and customer success functions. Anyone working in sales or CS will comprehend my logic intuitively. For example, when I first joined Cobalt.io, a SaaS-enabled platform that offers "Pentest as as Service", the management team weren't yet sure where they were going to put me: either Customer Success, Sales, or some combination of those two roles. As they sorted it out, one of the founders and Chief Customer Officer of Cobalt gave me the book Customer Success to read. The point of this book is simple: organizations that prioritize long term customer relationships (i.e., all software-as-a-service or ARR B2B organizations) tend to focus on fair and transparent relationships that add exceptional value to the organizations, while fitting into a reasonable transaction. Simply speaking, their business model depends on it. For me, I've found that being forthcoming is better for business. As my customers tell me, cybersecurity is a small community. Primarily my customers need to know if I am honest, and if the organization I represent honors the commitments we make in business. When everything goes well, we have the chance to do business for years.

Game Theory seems to correspond to my supposition above. In the work of Ken Binmore, Game Theory and the Social Contract, Vol. 1: Playing Fair, finding the optimal fair price is the best practice for ARR businesses (especially if they are trying to avoid churn), because it extends the "game" of customer/seller relationship, and using Binmore's theories, seems as if more "turns" in the "game" can map to ideas from political science, where social cohesion is an ongoing dynamic requiring many plays. If you're into technical discussions on game theory, go for this book.

To conclude, I want to add one caveat. I am not sure how to map my argument here with what I have learned in The Challenger Sale or the teachings from The Black Swan Group. I suppose that is for another blog post. My supposition? Focus on value and a fair, yet higher, price. Either way, at the time of writing this article, it was the fourth quarter, busy season, so now I've finally had time to add my final edits and get this out to the world. I'd be grateful for your insights and thoughts on this ancient debate.