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. identicon
    Anonymous Coward, 22 Aug 2008 @ 2:38pm

    Re: Re:

    Mike I think you misunderstood some parts of my previous post about the idea of price being driven down to a marginal cost as being over simplistic. "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" I do agree that values will vary from one person to another. This point is obvious. Now, let's say we take all of the values of people, paint then in a big spectrum of opinion, and then group them into something called "market segments." The idea is that for a given market segment the "values" are relatively the same. Even between market segments, we have a lot more in common as far as values than most people will admit. Price is a common value, for example. There is very few people that price doesn't matter to. "Life, liberty and the pursuit of happiness" are other values that I would suggest that we all hold in common. Thus by definition any given market segment does share the same values. "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." You state that people "CAN determine the value." That people can make a decision, I agree, but that THEY decide for themselves or by themselves, or even logically... that is where we might disagree. My point was that THEY do very little of the deciding. (A lot less than they think they do). "Again, you're assuming value is universal constant. People "value" things in different ways." Nope, not assuming a single person's values or even a group as a collective are a constant. People change their minds (or at least I hope they do). "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." Some people do value brand names, but I'm assuming that is only because they believe it means higher quality (or "value"). If they knew that it was exactly the same product but with a different sticker painted on the outside would they still buy it? "Marketing impacts demand. It's not outside of supply and demand, it's a part of it." Thus the statement that the price will be driven to a marginal cost in a competitive situation is oversimplistic, it doesn't take into account things like... 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." Marketing didn't create a difference, it only caused people to have a perception of a difference, thus marketing was altering peoples values. And no, I don't think marketing is "innovation at work," I (a nerdy engineer) reserve the word innovation for an actual change in a product. I also disagree that marketing was "increasing the benefit." Assuming that they were the same cakes, they were causing a change in perception. The only increased benefit to the customer in this fictional example was an intentional misleading of the customer. What is French chocolate? Is it better than German? "That's a good thing." For whom? For the company selling the $10 cakes, yes. For the company trying to sell a cake that was just as good but was $1 less... no. For the ultimate customer who was not getting as much actual value... no. "Hmm. I think you're saying that price = marginal cost is false, not "marginal above production cost" which means something entirely different?" This is probably my mistake in not using the same terms. 'Price = marginal cost" didn't make as much sense to me, as there are typically several layers of "marginal cost" as something passes from the point of creation to the point of consumption. 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). Well said, I agree. "when there's perfect competition" = you're simplifying in order to illustrate. "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." Again the use of that word "innovation." I'll admit, it takes some great creativity to come up with 'spin' for how to present the exact same product. Since this is cheaper than actually changing the product, it seems here you agree that this happens, and as such, the price will not be just slightly above marginal cost.

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