I have recently started thinking about value a lot. This was prompted by a specific purchase I made very recently for a product I used years ago. Let me explain.
In 2011 I was looking for a way to learn programming a framework called Ruby on Rails. I had tried a few video courses and a free guide, but these did not really help me. It wasn’t until I found The Rails Tutorial by Michael Hartl and started working on the problems in the book that things started to fall in place in my mind. I slowly worked through the book, which included some well designed exercises and my competence started to take off. The interesting part of using that resource was that the online published version, which I used, was free. There were paid options, but I was happy to work off of the online version, so I just went with that.
After almost 10 years of making a living from software I can safely say that Rails Tutorial was a pivotal resource for me, which taught me all the right basic pieces I needed to start really understanding software development. Sure, I did a lot of hard work to make a career in software possible, but that book was the keystone. By my reckoning, that first steps put me on a path that led to more than $700k of salary and consulting revenues over the last 10 years. As I approached my 10th year as a software consultant, I decided to purchase the full version of the book as a symbolic gesture.
One of the things I found mind bending was the amount of value that I derived from this post facto purchase, relative to the price of $30. To me it seemed like the bargain of the century. A whole new career, with the lifestyle I wanted for a mere $30. Do people not sometimes pay $10 000s or even $100 000s for this kind of training and enablement? This in turn got me thinking about value. In a market economy we tend to think about value in terms of price and the price should generally reflect the value of something we buy. But clearly this was not always the case, and in some cases products/services are priced completely incorrectly for the value derived from them. Here are some ideas that I find puzzling:
Value seems to be highly context specific. Some entities (people, institutions) will derive great value from a purchase, while others will derive very little from the same. When we go to a hyped-up movie we often have a strong expectation that we will enjoy the experience, but there must be a few individuals in each performance who don’t. If I live next to a coast with a coral reef I am likely to get a lot of value from my scuba diving gear, when compared to a diving enthusiast with identical equipment living a thousand kilometres from the ocean. We know this already, but we seem to forget this when we make the purchasing decision, probably due to the influence of sales and marketing messages (see more about this below).
Value is retrospective. Only after you use a product or service will you know whether the price was fair, a bargain or a ripoff. Sure, you can rely on various sources to determine the possible value you will get, which will help to a greater or lesser extent. For services and labour especially, the value you derive seems to be more personal and context specific, and therefore very difficult to predict.
If the above is true, pricing is clearly only a rough guideline, a likely value derived by the average user. Purchase of labour nicely illustrates this. Often during my working life I have often encountered employees at the same level and at the same general pay scale, where one is totally incompetent and another is a superstar, at least 3 times more productive. The second employee probably gets a better performance bonus, but it is unlikely that his/her salary is 3 times higher. The first employee is a ripoff and the second is a bargain, because the market will not allow their price to be adjusted to reflect their true value.
Once you see prices as an inaccurate, you may soon begin to suspect that the influence of promotion or marketing is likely to be a major cause for this. This is because these activities assist sellers in obscuring value from the purchaser, or causing them to momentarily suspend disbelief about value long enough so that they can conclude an exchange with you. We should likely all be deeply suspicious of marketing.
Another likely cause for incorrect pricing is that we probably have strong socialised expectations of what things should cost, and we seem to become quite suspicious when something violates these beliefs. A lawyer that charges us a nominal fee?? There must be something wrong with his abilities! Cars are expensive, take-away food is cheap, books, whether they are life-changing or light summer reading, should be fairly cheap.
You might be thinking that I am going to provide you with some great answer or principles for navigating this problem, but I don’t have any good ones yet. The only thing that strikes me when thinking about all of this is that I should probably be slow and methodical when making large purchases and not to make them unless I really have to. It is likely not worth it to overthink a single $3 coffee, but any single item or category of purchases that costs more than 10% of your monthly salary or company costs probably needs some careful thought. From a business point of view, as a service provider, this is applicable to me when appointing employees and sub-contractors, which are my biggest operational cost.
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