Tuesday, September 25, 2007

Go ahead, make your product as expensive as you want to

Price vs value - the battle rages within each one of us... I'm fascinated by it for a number of reasons [I previously worked in a corporate finance department, being involved in valuation work amongst other interesting stuff; and one of my top projects at the moment is finding a way to cement shareholder value in a creative environment where share price is a big deal]

We all inherently understand this concept of price vs value, but few people seem to consciously grip the fundamental basics of this.

Price is an objective amount assigned to something which represents what the seller believes that something is worth to the buyer.

Value is the buyer's subjective view of what something is worth [with worth being measured in many ways, both tangible and intangible].

Take a simple example - would you rather pay R150 or R1,500 for a pair of sunglasses? Take a pair of Bondi Blu sunglasses costing R150 and Ray-Ban's costing R1,500. Gerrit sees the value of a pair of sunglasses as 'UV protection + comfort = about R120' and he reluctantly pays R150 for the Bondi's. Adele sees the value as 'UV protection + comfort + I look awesome = R2,000' and she gladly pays the R1,500 for the big guns.

Even my own vehicular predisposition - R2.5 million for a Lamborghini = "Where do I pay??", whereas R2.5 million for a Ferrari only adds up to "No thanks, just looking". Even though the cars could be very similar in terms of shape, size, performance, colour, whatever - it all boils down to perception and what my take on value is.

But I digress - back to business and Vinny Lingham touched on this in his recent article on the value of facebook where it's very nicely summarised: "At the end of the day, valuations are really about willing buyer, willing seller, and perceived value to the buyer".

What great businesses do is manage to appeal to what their customers really value - and that is certainly not always easy.

BMW [back to cars, but just for this outstanding example which really highlights the case] has somehow managed to bridge the price / value gap with its amazing 3 series range - Wikipedia states "The 3 Series is the best selling luxury sedan in the United States — 98,000 vehicles were sold in 2005". Sure, our local figures are a lot lower, and you may say what about the Merc C-class, which outsold the 3 by about 3x in August 2007 - but you're missing the point.

My point is this - how many BMW 3's do you see on the road? I know many people who won't buy them simply because they don't want to have the same car that "everyone else" is driving. BMW have successfully taken a luxury car and sold it to the masses. Ten years ago, many people aspired to have a BMW. Now, many people do have one [and even with car prices at the levels they are now]. They managed a 'Henry Ford'-scale revolution with a luxury, high-price [and assumedly high value] item. UNREAL!

The Wiki author's comments are spot-on: "From its sporting origins, the 3 Series success has led BMW to become one of the most recognized brands in the world, in league with Coca-Cola, IBM, The Four Seasons, and American Express. Being an accessible prestige-badge car, the 3 Series' reputation grew from its humble beginnings, winning numerous awards and honors throughout the automotive world. By the early 21st century, the E46 3 Series was the best-selling car of its segment (premium middle class cars),as commonplace in Asia and America as in Europe, while maintaining its prestigious brand and image."


1 comment:

Work Radical said...

Warren Buffet quote: "Price is what you pay. Value is what you get"