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
    Xanthir, FCD, 21 Aug 2008 @ 7:16am

    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.

    Let me explain this in very simple terms, because it's obvious that you have reading comprehension problems.

    Price and value affect each other. Price and value are not identical.

    See? That wasn't hard!

    Yea, something may be priced lower than its value, but usually the price will rise to match its value. Basically this argument is just splitting hairs.

    Wrong. In the presence of competition, price will lower to the marginal cost of producing the item (that is, the cost of making a copy). It is only when there is insufficient competition that price is allowed to rise until it hits the value ceiling.

    This is easy to see. Let's say someone values a chocolate cake at $10 - that is, they'll pay up to $10 for it, but no more. There's only one company making chocolate cakes, and they charge $5 (the cost of making the cake). The person will buy a cake for this amount. The company tries out some price increases, raising it to $6, and the person still buys it. So the company continues raising the price until it exceeds $10. The person stops buying chocolate cake (it's gotten too expensive) and instead buys ice cream, so the company lowers the price back to $10 and equilibrium is achieved.

    Now, you decide to start a company making chocolate cakes as well. You see that the other company has stabilized on $10 cakes, and you *could* copy them. Alternately, you could enter the marketplace charging $9 for a cake. People will flock to your cakes (assuming they are of equal quality), because they're cheaper. You make more money than the other company, even though you're charging less.

    Of course, now the other company might decide that it needs that business, and drop their price to $8. In return you lower your price, and this continues until both of you either reach the marginal cost of making a cake ($5) or you both decide that it's not worth it to undercut the other (you stop directly competing). Of course, if you take the latter option, you're just opening up the market for a third company to come in and make even cheaper cakes, thus stealing the customers from both businesses.

    As long as you can charge less and still make money, someone will charge less, because it gives them an easy upper hand. The price only ever rises above the marginal cost when competition disappears.

    It is also used to argue that stealing music is ok but that is another issue.

    There was absolutely nothing about infringing on the copyright of musical pieces in this post, and this blog has never said that infringing on the copyright of musical pieces is okay. Mike has specifically stated over and over again on this blog that he does not infringe on the copyright of musical pieces specifically because it is illegal.

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