Understanding The Difference Between Price And Value; Product And Benefit 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:
Cost-Based Pricing
Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions are such that the going competitive price is under the price floor, the company may price at the floor or attempt to lower its costs to lower the floor. But ideally, the company should price somewhere in between the floor and the ceiling, according to the McDonough School of Business. Many companies that produce in masses use this pricing strategy, such as companies that produce textiles, food products and building materials.
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:
Cost-Based Pricing
Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions are such that the going competitive price is under the price floor, the company may price at the floor or attempt to lower its costs to lower the floor. But ideally, the company should price somewhere in between the floor and the ceiling, according to the McDonough School of Business. Many companies that produce in masses use this pricing strategy, such as companies that produce textiles, food products and building materials.
Value-Based Pricing
A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy.
A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy.
Focus
Cost-based pricing focuses on the company's situation when determining price. In contrast, value-based pricing focuses on the customers when determining price. A value-based pricing company develops a means by which to calculate the potential value their product or service may bring customers and prices accordingly. Some companies use computer software to determine the value a product or service can offer.
Cost-based pricing focuses on the company's situation when determining price. In contrast, value-based pricing focuses on the customers when determining price. A value-based pricing company develops a means by which to calculate the potential value their product or service may bring customers and prices accordingly. Some companies use computer software to determine the value a product or service can offer.
Prices
When a company uses cost-based pricing, it prices between the price floor and the price ceiling. The market conditions dictate where, between the floor and the ceiling, the company sets its pricing. If it uses value-based prices, the company sets its pricing in a range determined by what customers are willing to pay. Generally, the value-based price is higher.
When a company uses cost-based pricing, it prices between the price floor and the price ceiling. The market conditions dictate where, between the floor and the ceiling, the company sets its pricing. If it uses value-based prices, the company sets its pricing in a range determined by what customers are willing to pay. Generally, the value-based price is higher.
Benefits
Cost-based pricing generally results in competitive prices. Companies that use this strategy may attract consumers who are looking for inexpensive products and services. Value-based pricing companies often earn high profits on each item sold, but some consumers may not be willing to pay the high price and purchase from a competitor.
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.
Cost-based pricing generally results in competitive prices. Companies that use this strategy may attract consumers who are looking for inexpensive products and services. Value-based pricing companies often earn high profits on each item sold, but some consumers may not be willing to pay the high price and purchase from a competitor.
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.
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