HideTechdirt is off for the long weekend! We'll be back with our regular posts tomorrow.
HideTechdirt is off for the long weekend! We'll be back with our regular posts tomorrow.

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


Reader Comments

Subscribe: RSS

View by: Time | Thread


  1. icon
    Mike (profile), 21 Aug 2008 @ 5:04pm

    Re:

    Assumption: That people can determine value.

    Hmm. Actually, I think the statement that's implicit in your statement is that there is some sort of "universal" value that they can determine. That's not the case. Value is different to everyone -- and, yes, they CAN determine the value to them. They make that decision every time they make a buy/no-buy decision, as they decide whether they value the good more than the money or less than the money.

    So, yes, people can determine the value *to* them at that moment, and they do it all the time.

    I know of many cases where the exact same product was put in several different bubble-wraps, each with a different brand-name. Then it was sold for a wide variety of prices (the most expensive was 3x the price of the cheapest). It was the exact same product, produced by the exact same company, people were purchasing based on brand.

    Again, you're assuming value is universal constant. People "value" things in different ways. If they *value* the brand name, then they're willing to pay more for it. That may seem silly to YOU, but it's perfectly legitimate to them. They value the brand. That's not so crazy.

    There is a force at work that alters the simple economic view of supply and demand. I'll call it "marketing." Marketing attempts to affect the opinions people have of the value of something. It has been my experience that they wield more power on economics than a simple view of supply and demand.

    Marketing impacts demand. It's not outside of supply and demand, it's a part of it.

    You suggest that competition would drive down the price of a chocolate cake. It would... if there were no marketing. A marketing person could put out an ad that says: "Made from FRENCH chocolate, unlike those cheap $9 cakes." (or something much smarter, I'm not in marketing).

    No, that fits exactly with the model, because the MARKETING is creating a DIFFERENTIATION, so that the competition is no longer of equals. That's exactly what should happen. That's innovation at work, increasing the benefit. People who are willing to pay more for that French chocolate get *increased benefit* by knowing about it.

    That's a good thing.

    It is an interesting truth, that people tend to think that they are logical, and make rational decisions, but the vast majority of our actions are determined a great deal more by emotion than based on facts

    That's all taken into account. Again, we're not talking about a universal "value" that is concrete. Value fluctuates on a variety of factors, including *perceived benefit*. The marketing you describe is just increasing perceived benefit. But if that increases the value to the buying individual, what's wrong with that?

    Premise: The idea that price will fall to a point that is marginal above the production cost is over-simplistic.

    Hmm. I think you're saying that price = marginal cost is false, not "marginal above production cost" which means something entirely different?

    But, this is where it helps to delve a bit more into the economics. Price will be driven to marginal cost when there's perfect competition (identical products, identical benefit). What innovation is about is creating a differentiation where there's no longer perfect competition -- so that you CAN charge above and beyond the marginal cost. You need differentiation to do so. THat differentiation CAN be a newer, better product, or it CAN be a *perceived* benefit. Perceived benefit is a real benefit to the user. So if they value French chocolate, they're willing to pay more for it. It's a differentiation, and they are willing to pay above the marginal cost.

    That's a good thing. That's a part of the model and fits right in with basic economics, as opposed to what you claim.

    I would suggest that fads, fashions, or "what's cool" will have as much (if not more so) of an influence on the "value" that people associate with a product (and thus the price they are willing to pay), as do the engineers that create the features.

    Again, that's completely factored into basic economics. It's only a problem if you assume that there's an intrinsic concrete value. That's not true.

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here



Subscribe to the Techdirt Daily newsletter




Comment Options:

  • Use markdown for basic formatting. (HTML is not supported.)
  • Remember name/email/url (set a cookie)

Follow Techdirt
Techdirt Gear
Shop Now: I Invented Email
Advertisement
Report this ad  |  Hide Techdirt ads
Essential Reading
Techdirt Deals
Report this ad  |  Hide Techdirt ads
Techdirt Insider Chat
Advertisement
Report this ad  |  Hide Techdirt ads
Recent Stories
Advertisement
Report this ad  |  Hide Techdirt ads

Close

Email This

This feature is only available to registered users. Register or sign in to use it.