Seth Godin in this post ‘Labor and value‘ reminds us of the various historical theories about value. In particular, the Marxist ‘labor theory of value‘ stating that value is proportional to the amount of labor (cost) gone into it. This theory however still provides a kind of moral limit to the value (price) we propose.
Having an estimate of value independent of cost is difficult to understand in business: I still have a tendency when I sell a product or service to believe that its value (price) should be somewhat correlated to the effort (cost) that has gone into it. This consideration is almost a moral statement: it is based on the consideration that it would not be fair to charge for significantly more than the direct effort gone into the item or service.
However, this thinking is quite wrong, for three reasons:
- Value lies in the eye of the beholder, or the client (informed by the market / competition and its own needs). What I propose may have much more or quite less value for it than the effort that has gone into it. Selling for a large value (price) something that has taken not so much effort to build will pay for other services or products that I can’t sell for such a high price (such as new innovative product that are looking for their proper form to produce value for clients)
- In addition to the direct cost or effort, we must consider that our product or service is also the result of years of practice and learning, and that a large part of the value is actually indirect value of this significant investment, and not just direct effort (this is particularly visible with new clients where we can often deliver huge value for very little effort just by bringing to bear our knowledge)
- If we don’t sell at the right market price reflecting actual value, we will be in a weaker financial situation compared to competitors, thus impeding our capability to develop innovative products or services (still, it is good to sell slightly less that competitors to increase market share!)
In the end we should overcome the moral imperative of linking value with effort. Everyone values things differently, and this diversity is promoting innovation.
