Price, Cost and Value

As consumers and business managers, we often confuse price, cost and value. 

  • Price is what customers pay for a product or service. 
  • Cost is what it costs to make or offer. 
  • Value, the most abstract of the three, is what customers "get out of it". 

Value is a harder concept because it is subjective for every customer depending on their life, needs, moods and perceptions. An avid art collector may significantly value owning an original Picasso, whereas for it may not mean anything for a regular person. Value also changes over time as the customer and environment changes. 

As consumers, deciding if a product or service is worth $X is a hard question because we need to compare a tangible price to an abstract and unquantifiable "value". So we tend to make mistakes - like passing up on a good purchase because they seem cheap to make (food at a restaurant) or because the value is hard to quantify (hiring a career coach for $100/hour), or by purchasing cheap but worthless products. 

The abstract and subjective nature of value also makes it difficult for businesses to set prices as well. For most low-touch or consumer sales, prices are the same for all customers even though some value it more than the rest. Many businesses make pricing decisions based on costs or don't focus on increasing value/perceived value and therefore, don't capture as much margin as they could. 

Here are some tricks to estimate value: 

  • Does it save you time? Value in $ = Time Saved X How much is your time worth*
  • Does it help you perform better? Value in $ = By how much and what's that worth?
  • What would you swap for it? How much is that worth?
  • For investments, what's the projected market cap, revenue or cashflow in 5-10 years?

Consumers should make decisions based on their benefit (Value - Price) and businesses should set prices based on their short or long term profit (Price - Cost). More often than not, both businesses and consumers can make a margin and benefit in a free and competitive market.  

*Side note: Not all your hours are worth the same. I value my first 40 hours per week (or whatever is needed to meet my basic financial requirements) lower than my remaining hours (as I need it to enjoy life and relax)