8 Economic Forces on the Art & Design Sector
We've all heard ideas on how we can increase art & design sales but have we looked at the more abstract economic factors at work here? In basic economics for any industry there are several forces that increase profit. What are the market forces that could drive up revenue or decrease costs for art & design sector? Here are eight of them. Some of them are more obvious than others, some of them are more worn out than others, and some of them just might work.
#1 INCREASE THE TARGET MARKET SIZE
An increase in market size for art & design is obviously good for art & design companies. But let's unpack what it really means to increase market size. Are we talking about that market as a whole? Record sales at auction houses mean nothing to small potato artists. A rise in sales at Ikea does not necessarily correlate to high end furniture design. Still, the argument is true that if more people are demanding art & design products then the amount of successful companies will grow. However, if you have a niche product, that particular niche needs to grow in market size too. In other words, this growth has to be in what you are specifically producing and in the specific markets you're selling in.
#2 PROMISE TO RAISE THE FUTURE PRICE
We're all familiar with this claim about high end products, "It will increase in value!" High design, fine art and well-made products are assumed to be in good company with the few purchases in life - like gold, stocks, collectibles, real estate, etc. - that can hold or accrue in its financial value over time. This value is appreciative as opposed to domestic electronics and cars which are assumed to depreciate over time. Well-made, intelligently designed products are assumed to increase emotional, cultural or personal value over time as well, adding an intangible benefit to buying now versus later. In short, if value consistently increases over time, speculative buyers will buy earlier. Investment theory holds that when potential buyers know that the value of their purchase will stay the same or increase over time (or at least not break due to shoddy materials or construction) they are more likely to purchase.
#3 INCREASE THE INCOME OF THE BUYING MARKET
Every small business has heard this, "I wish I could buy ______ but money is tight right now." So, what if your clients had more income? This economic argument assumes that if the market that already wants to buy your product had more money then it would purchase more often or at higher prices. It stands to reason that if your wannabe or low volume customers had better revenue (better paying jobs, better sales or padded bonuses) then there would be more purchases.
#4 DECREASE COMPLEMENTARY PRODUCT PRICES
Complementary products are those things that go together, for example batteries and battery operated toys are linked in value. If the cost of batteries goes up too much, the sales of battery operated toys will go down. Conversely if the cost of batteries goes down, sales of battery operated toys should go up. For example, if you’re a gallerist the selling price is indirectly affected by framing cost. If you're an online retailer, your customer's price includes the shifting cost of shipping (vis-à-vis oil price, stamp cost, freight industry shifts, etc).
#5 INCREASE SUBSTITUTE PRODUCT PRICES
Here's a sneaky one. By increasing the cost of direct competitors, one would hope that sales will go up as the market chooses your product as a substitute for their first choice. If the cost of all plastic outdoor furniture goes up, your renewable resource patio chairs could become more tenable as it closes the gap in cost.
However, the substitute must truly be a reasonable alternative to the buyer's first choice; for example a movie-goer, a concert-goer, a football fan, a scifi novel enthusiast must prefer to switch their first choice to purchase your entertainment offering. If other entertainment options increase in cost until it equals your product both in cost and perceived value to the buyer, it stands to reason that the purchase could go either way.
#6 DECREASE COST OF PRODUCTION
Every art production company already does this in some manner: lower your costs to increase profit. By buying bulk, using cheaper materials or processes, bundling (or bartering), you will be spending less and therefore make more of a margin. One major issue with this tactic is that production companies have already been employing this to diminishing returns since industrial manufacturing already toppled craftsmen and many trades. In many industries, cutting prices by decreasing the cost of production is known as "a race to the bottom". Indeed, factories keep increasing efficiency to lower their prices but as the trend continues industry wide there is a tendency for only the largest scale operations to stay in business and pushing out smaller operations who cannot afford the small margins. Fine or high end producers are already working in very small operations with little ability to streamline their production. Still, any ability to reduce overhead equals more profit.
#7 DECREASE TAX AND REGULATION OR INCREASE SUBSIDIES
With this tactic, we're looking at the government to adjust the market through tax cuts, subsidies, programs and regulation. The US government has not always paid much attention to the art and design industries so regulation is not likely to affect much except intellectual property. Since many art & design companies operate as small businesses they should take a hard look at tax planning. The company that can reduce their overall tax burden stands to benefit. Imagine if 1,000 design firms could save $1,000 a year on their tax return. That's $1 million for design partners nationwide.
#8 DECREASE NUMBER OF FIRMS
Probably the most controversial tactic for an art or design business is to knock out their direct competitors. The art & design industries are different from many other industries like major manufacturing and retail where monopolies or oligopolies battle for turf. Art & design companies are a little more interwoven, at least on the regional scale. The phrase "a rising tide floats all boats" is often used to describe the strategic dependence that designers, artists, publications, art retailers and other organizations share in order to bolster their region's art market as a whole. Regionally, the market structure for art usually functions as a "perfect competition" where market share is widely distributed.
If I had an economic short list for art & design companies to focus on it would be:
- Promise your customers that your product will accrue in value. Make that promise come true.
- Look for materials or processes that will become more affordable as technology matures.
- Have an annual tax plan in place. Keep it simple but understand the impacts of income and expenses.
- Look at what is trending globally. And then ride a wave that is bigger than your company could ever create on its own. Find future demand and follow it.