The Common Sense of Affordable Value

If you publish an article like this, complicating otherwise simple, intuitive logic, you should expect some push-back. Here it is:

The article’s subtitle is “All Value is Subjective”. Of course it is. If it weren’t, no one would pay for The War of the Worlds when they could download it free. No one would license MS Office when they could use free open source alternatives. There’s more:

The article’s theory #1 is a straw man: [cost-plus pricing = Labor Theory of Value]. Ordering things thusly — Product » Cost » Price » Value » Customers — we start with a product, calculate its production cost, assign and mark up a price, then send it in search of customers. If labor comprises time, materials, and overhead, that might be okay. But who creates a product for which there’s no indication of a market (demand)?

Its theory #2 is the intended clincher:

. By ordering things this way — Customers » Value » Price » Cost » Product — we assign value to the product by assessing demand, calling demand value, assigning a price to that value, ensuring production costs don’t exceed margin (though cost is subordinate to value), then making the product, which sells like hotcakes because it has value.

Though #2 certainly makes value subjective, is it a sound way to determine value? It seems a more plausible way to assign price, especially in light of the given example:

When Lee Iacocca developed the Ford Mustang … Rather than giving his engineers carte blanche to develop a sports car and then marking up the resulting costs to arrive at a price—as GM did with the Corvette [$3,490]—he solicited the opinions of potential customers as to … features … and what … they would be willing to pay … Iacocca wanted the price to be low enough to entice the potential sports car enthusiast. He then went to his engineers and asked if they could manufacture a sports car, with the desired features, sell it for no more than $2,500, and still turn an acceptable profit.

But sports car, potential customers, price, sports car enthusiast, and desired features are undefined. Definitions would help define markets. And the markets for the Corvette and the Mustang were different.

The Corvette was a more stylish and substantial piece of machinery. And while the Mustang outsold the Corvette (introduced 11 years earlier), few people interested in a Corvette were likely to settle for a Mustang, which was — in contrast to the Corvette’s solidity and rakish lines — a flimsy, boxy body on a Ford Falcon chassis. (The Corvette also used an existing chassis and power train to cut costs. GM hardly gave its engineers carte blanche.)

What’s the upshot? It’s this. It’s simple. And it’s self-evident:

Value is, indeed, subjective. But it can be a red herring. More people shop on price than shop for value. That’s why God invented marketing — to create perceptions of need and to convey value in fulfilling it.

The First Law of Marketing is not All Value is Subjective. The First Law of Marketing is Real Value Has To Be Affordable.

That’s just common sense.

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By Common Sense Media (Common Sense Media) [Public domain], via Wikimedia Commons.