Understanding The Difference Between Price And Value; Product And Benefit

from the let's-try-this-again dept

Earlier this year, in response to yet another editorial somewhere where someone insisted that if something has a price of zero, it means that people don't think it has any value, we pointed out that price and value are two different things. Price isn't determined by value -- it's determined by the intersection of supply and demand. Value plays into that, by determining what the demand part is. That is, if I value widget X at $10, then I'd be willing to pay anything less than $10 for it. If the intersection of supply and demand prices widget X at $5, it doesn't mean that I value it at $5, but it does make it likely that I'll buy it. The same is true if the market prices it at $0. It doesn't mean I place a $0 value on it. It just means it's worth getting at that price, since it's below what I value it at.

In the past few months, this discussion keeps coming up again and again -- and it's good to see folks pushing back and pointing out the difference between price and value. The latest is Amy Gahran, over at eMedia Tidbits, where she takes a journalism professor to task for asking whether journalism should even be done at all if people don't "find value in what we as journalists do." First, Gahran makes the point that, historically journalism has always been more supported by ads than people anyway, and then makes the price/value distinction:
just because people aren't willing to directly pay cash for something does not necessarily mean they don't "find value" in it. For instance, when was the last time you personally chipped in for a clinical trial? And how are you paying for that air you're breathing right now?

Some benefits are assumed to be part of the environment in which we exist. That's what it means to have an environment. If a benefit grows scarce to the point that people feel they must directly pay cash from their pocket to keep getting it, there's probably a far more dire calamity at hand than that single point of scarcity. Most people will almost always seek other free sources of a benefit first.
She then goes on to make another favorite point: too often, those in dying industries mistake the product they're selling with the benefit they're selling. The horse carriage makers mistakenly thought they were in the horse carriage business (product) rather than the transportation market (benefit). The best way to succeed is not to focus on the product, but the benefit you're providing your customers:
I think it's important to bear in mind that people value benefits, not necessarily forms. The key benefit that journalists and news organizations have provided has been relevant, timely, accurate information that helps people make decisions, take action, and form opinions. For over a century we've established an ad-supported business model around packaging that benefit in a form known as "journalism." But that's not the only form this benefit can take, and many parts of the "American public" (and the advertising industry) are figuring that out.
Good stuff.

Filed Under: benefits, economics, price, products, value


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  1. icon
    Blaise Alleyne (profile), 21 Aug 2008 @ 7:39am

    Re: And your point is?

    Let me get this straight, price and value are different but value affects demand which affects price? So in effect, value affects price. So they aren't as different as you make them out to be.

    I feel as if this is an obvious example, but... do you value oxygen? Do you pay for it? "Affects" doesn't imply that they're the same thing.

    Yea, something may be priced lower than its value, but usually the price will rise to match its value.

    No, price approaches the marginal cost of reproduction, it doesn't rise to match a products value. Whatever that is. Price can be the same for everyone, but everyone doesn't place the same value on everything.

    More importantly, you ignore the role supply plays in determining the price. That would explain the oxygen example. Sure, value is high (we all need to breathe), but the price doesn't somehow "rise to match its value" because the supply is infinite.


    I'm not going to accuse you of poor reading comprehension, but I think you're refusing to understand the basic economic distinction here because of preconceived notions and a misunderstanding of the arguments being made here ("it is also used to argue that stealing music is ok..."). The argument is not to "steal" other people's music or news articles or whatever, but to encourage creators to adopt business models that recognize the economics at play so that they can be more successful in a digital age. Confusing price and value is a barrier to understanding these business models.

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