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
    Mike (profile), 24 Aug 2008 @ 4:06pm

    Re: Re: Re: Re:

    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).

    I'm not sure what you're getting at? That people are influenced by marketing? So what?

    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?

    So what? That's a marketing issue. You are being elitist to claim that someone is wrong for valuing a brand name over a nonbrand name. If it's such a concern to you, then go educate people that the products are the same. Btw, that "education" is *marketing*. Just because sometimes it happens in a way you dislike doesn't make a difference.

    Marketing didn't create a difference, it only caused people to have a perception of a difference, thus marketing was altering peoples values.

    Same thing. It creates a difference in how someone values a product. That's exactly what I said. You seem to have this "ideal" that doesn't exist.

    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.

    Ok. While plenty of engineers think that, it's wrong. It's also why so many brilliantly engineered products fail.

    Don't be an elitist. Learn why marketing is important.

    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.

    If the customer values it more, then, yes, there IS a benefit. The customer has made a decision, and he or she values it more. Who are you to say they're wrong?

    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.

    Yes, for the customer, because they MADE THE DECISION. They FELT the value, otherwise they wouldn't have made the purchase.

    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.

    Yes, if marketed properly. The problem is that you seem to believe that marketing something properly is somehow outside of normal economics. It's not.

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