This is a short story about the history of value and pricing.
Between the shores of modern day Denmark and Sweden, there is a slim body of water only a couple of miles wide. Hundreds of years ago, merchant ships sailed to and fro between the Baltic Sea and North sea, carrying their cargo to ports and trading cities along the coastlines.
These waters were the trading routes for one of the most successful trading bodies in history – the Hanseatic League, which dominated trade in Northern Europe for hundreds of years up until the 1800s.
In order to pass through this gulf with their ships, the King required that Hanseatic merchants dock at the trading port of Elsinore, and pay ‘one English noble’ (a gold coin minted in England) which was a popular and widely accepted unit of exchange at the time. The King had the right to demand taxes on the basis that, just like any modern Government today, he had a monopoly on the use of legal force, which he could use to extract taxation.
The price of the tax, however, was deemed to be ‘unfair’ by the merchants, since there were all sorts of ships and all sorts of cargoes, and the English Noble was required regardless of the size of the ship or its cargo.
After Frederick II took over the throne in the 1550s and went on an inexpensive war spree for multiple years, Denmark was badly in need of resources and the income from taxes no longer sufficed. The taxes (by now 3 English Nobles!) were still unfair and increasingly complex. So how could they generate more income? To help, they sought the help of a financial wizard – Peder Oxe. He proposed that merchants pay a fee as a percentage of the value of the cargo in the ship. Therefore ships carrying less valuable cargo would pay less.
How could the King ensure that the merchants accurately valued their cargoes? The King also decreed a pre-emption – i.e. the right to be the first to buy ship’s cargo. If the merchant valued the cargo at too low a price then the King could buy it at its declared value and the merchant would be out of pocket. And since no-one would overestimate the value of their cargo and pay more than is necessary, this strategy encouraged merchants to price their goods at an accurate value.
This was the first known use of value based pricing.
These days, many companies are value driven companies (especially in the digital sphere) whereby the price of a product is derived from assessing its value to the consumer. This is opposed to companies and industries that traditionally priced a product according to how much it cost to develop, produce and market the product.
The pricing strategy based on value increased the volume of trade and tripled the income of the Kingdom. As a result the King built a castle in Elsinore where we lay our scene for another Danish royal; Hamlet.
Based on
‘Hamlet’s Castle and Shakespeare’s Elsinore’ by David Hohnen