Price Versus Value

In everyday speech, price is the quantity of payment or compensation given by one party to another in return for goods or services. Economic theory says that in a free market economy the “market price” reflects interaction between supply and demand. The price is set so as to equate the quantity being supplied and that being demanded. So what’s value? Value is defined as the worth of a good or service as determined by the market. Said another way, value is how much a desired object or condition is worth relative to other objects or conditions. Getting clear about the difference is essential because when these ideas get confused, we make big mistakes.

Let’s say there are two people running small businesses that each want to grow. They both recognize that they need new websites. Mr. A decides he can afford a $5,000 templated brochure-ware site. He has cash constraints and his RFP turned up a vendor who will give him more pages than anyone else for that price point. Well, he’s only out five grand but since the end product doesn’t really differentiate his brand, his REAL value is essentially $0. On the other hand, Ms. B opts for a unique branded online presence, some great original creative design, a CRM system and a good CMS (content management system) so she can keep the content fresh. The work is priced at $30,000. She looks at her end goal and adds a modest expenditure of $3,000 per year on some targeted e-mail lists, and she drives $100,000 in additional revenue every year for 5 years. Her REAL value is $455,000 ($500,000-$45,000). Ms. B made a better deal even though it was at a higher price.

REAL value should be measured in units of outcome, or potential for outcome instead of units of payment because outcome is the real goal. Focusing on price by itself, or even price/quantity is often a sucker punch. Among other things, this is why the initials RFP should actually stand for “Recipe For Plain”. In what we call “world 4.0” the noise factor is extreme. Driving a decision to the middle based on price may still be a good way to buy paper towels (and I’m pretty sure not even that) but it’s a losing tactic on high-order solutions.

So, instead of “What’s it gonna cost me?” I encourage you to ask “What’s it likely to get me?”. Once you know that answer, then you’ll have the right framework for decision-making. Remember that in addition to the price, you have to factor in your time, and the opportunity cost of a low priced solution failing and needing to be repaired or scrapped and re-built and whether or not the solution offered at ANY price-point is truly comprehensive (this avoids the pitfall of a low base cost followed up with death-by-change-order so common in the creative trades.) That gets you to your cost. Best of all, using a value-based approach you still leverage the power of the market and you can easily see the point of diminishing economic value. I suspect even Ms. B passed on the $200K solution!