Tag Archives: what determines value

It’s all about value.

Question: Our business wants to increase sales, but is having a difficult time because there is a lot of competition in our town. A consultant told us that customers did not perceive our business as providing as much value as our competitors. Our prices are already the same or lower. What can we do?

A: Value is more than just a lower price. For some reason, your competitors’ products or services are seen by customers as offering more value even though they cost more. If your competitor has a website and allows comments spend some studying why their customers like that business. Likewise, review your own customers’ comments. If you don’t have a website allowing comments consider starting one. You may also want to survey your customers using comments cards. Also, raise your prices to at or near your competitor’s levels. The recent Sauve/Evause case illustrated why many customers perceive there to be a relationship between price and value.

Q: What is the Suave/Evuas case?

A: Earlier this year the company that manufacturers Suave shampoo, one of the cheapest (and one of the best?) products in the category, launched a campaign for Evaus shampoo at a price in the range of the most expensive shampoos. There were comparison tests with the most expensive shampoos, marketing messages and more. Users were then told they were not in fact using some new expensive shampoo, but were using Suave instead. By the way, I checked the price at a local drug store last week – $1.00 for a 12 oz. bottle. Most users in the tests rated the Evauas as equal to or better than the expensive shampoos in the test. What does this mean? Obviously, it disproves the saying that you get what you pay for. Indeed, research shows that seven out of ten women think that expensive brands work better than inexpensive ones. Check out more at www.EvausIsSuave.com. Way to go Suave.

Q: What creates value?

A: In general, the four things that are the components of value are:

Demand – the market is willing to buy the product or service;

Utility – the product or service provides something that is useful, i.e. can be utilized;

Scarcity – there is a limited supply; and

Transferability – ownership must be given from the seller to the buyer.

For example, a house would have no value if no one wanted to buy it, or it had smoke damage and was unlivable, or if plenty of houses were available or it could not be sold because of deed restrictions.

In another example, a newspaper would have no value if there were no subscribers, or the newsprint was unreadable, or there were plenty of free similar newspapers or newspaper sales were illegal.

Q: What is market value?

A: The most common definition is the one used in the real estate appraisal industry. It goes like this: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each axcting prudently, knowlldegeably and assuming the price is not affected by undue stimulous. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a resonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto: and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales conscessions granted by anyone associated with the sale.”

Q: If market value is the most probable sales price, what would be the highest price?

A: I suggest that sentimental value is probably the highest price a product would bring. For example, my first car was a 1968 Chevrolet Camaro. If I could by that specific car I would be willing to pay more than market value. Nostalgia has a way of influencing value. If I could buy my grandparents’ homestead I would pay more. What would the wedding ring my great grandfather gave to my grandmother be worth to me. Probably a lot more than to anyone else because of its sentimental value.

Q: What would be the lowest value?

A: The lowest value of a product or service is one that involves the need for a quick sale. It’s often called liquidation value, such as a true going out of business sale. If the seller is desperate to sell the product or service, then the price will be lower. Hence the adage, “You make money when you buy, not when you sell.” Most of the successful investors I know say they never pay market value.

Q: Is it possible that there is something that has no value?

A: I would argue that everything has some value. However, using the definition above it is logical to assume that everything has a price. And yet it would be difficult to purchase the USS John C. Stennis aircraft carrier or the Crown Jewels of the United Kingdom because at this point in time their ownership is not transferable.