The principle of value is the foundation of the whole concept of exchange. When a transaction takes between two people, it is an exchange of things that each party deems valuable. So when you buy a car for $50,000, there is an exchange of value. The car is valuable to you, and the money is valuable to the car dealer.
Money is the store of value, the means of exchange. The value of a product is the price the buyer and seller are willing to exchange it. There is a sense in which the value of anything is not objective. Rather, value depends on the evaluation of the parties involved in the exchange. So if you think a car is worth $30,000, but the car dealer thinks it is worth $50,000, a transaction will not take place. One of the parties will have to change their valuation. Even though you may be convinced by logic and economics that the car is not worth more than $30,000, if you want the car, you will have to pay the $50,000 or look for another.
It is in this sense that the value of goods and services are not objective but subjective because we base it on the mutual evaluation of the seller and the buyer. Take freelancers and consultants as examples. They may do a project for $200 for one client and do it for $500 for another client. What is the real objective value of that work? It cannot be determined. At the time they do the work for $200 for client A, the value of the work is $200. Conversely, at the time they do the work for Client B, the value of the work is $500.
Evaluating Value
We base every purchase decision we take on our analysis and evaluation of the value of the product we purchase. When we go to a store, and we see a product with a $300 label, we begin to evaluate in our minds if we agree with that valuation. We begin to ask questions like: how long will it serve me? What benefits will I derive from the product? What is the Opportunity Cost? How essential is it to my current lifestyle? How does it compare to other things I have purchased?
When we do this, we are trying to see if the valuation of the seller matches our valuation of the product based on the benefits we expect to derive. This is why you can buy a car for $50,000 but not a pen, a house for $300,000 but not a tennis racket.
Comparative Value
In our efforts to evaluate the value of a product, we tend to go beyond the value of the product itself and compare different prices of the same product as sold by different sellers. This is the crucial point when it comes to the evaluation of value. When a car dealer quotes $50,000 for a vehicle, you don’t just buy immediately. A good student of personal finance will compare prices and explore some other options. In the world of e-commerce, we have a more significant opportunity to compare different products across different metrics.
[bctt tweet =” When a car dealer quotes $50,000 for a vehicle, you don’t just buy immediately. A good student of personal finance will compare prices and explore some other options.”]
So for the same car, a brand might quote $100,000. Another brand may quote $120,000 while another quotes $80,000. We probably find ourselves in this scenario now and then. The question then becomes, how do we decide on which of these three cars to buy? Should we buy the least expensive brand or the most expensive brand?
It is in answering this question that we make lots of assumptions that may lead to poor financial decisions that hurt our finances.
Assumption 1: Cheap is Inferior, Expensive is superior
Of course, there are many cases and instances where the cheaper option may be inferior to the more expensive ones. But we must not assume that this is always the case. We must ask two questions at this juncture. The first question should be whether the more expensive option provides higher value than the cheaper ones. The second question is whether that extra value is relevant to you.
[bctt tweet =” Of course, there are many cases and instances where the cheaper option may be inferior to the more expensive ones. But we must not assume that this is always the case.”]
In many cases, the difference between the store brand products and products with popular brand names is just the brand. The brand name products have to be more expensive not because of a higher value offering but because of the higher advertising cost associated with popularizing a brand. In those instances, you are better off saving the money by buying store brands than products that are expensive just because of the brand name. Is the name on the product worth the extra $100? Unless the name is worth the extra dollars, (which I doubt in most instances) you should not buy it.
Similarly, even if the more expensive option has an extra value offering, you must ask if that extra value is significant to you as a person. Do you need the extra value offering that constitutes the $200 difference? Let’s take the purchase of a gadget that needs installation as an example. Company A may charge $500 for the gadget while company B charges $600. Company B may charge the extra $100 for installation. In that scenario, the question is if you need someone to help with the installation. If you don’t need that help, you can save the $100.
Another example involves used books versus new books. Is the newness of the book a vital value offering that is worth the extra dollars? Different people will answer this in different ways. This is why it is “personal finance.” But the point here is the willingness to raise the question in the first place.
This also applies to premium offers and services. If the basic service is all you need, then there is no point subscribing for the pro. If you will need the pro in the future, wait till you need it and save some dollars. If you don’t plan to host more than one website, for example, there is no need to opt-in for a hosting plan that allows you to host multiple sites. If you need it in 12 months, you can upgrade after twelve months (unless you expect a significant price increase which you will still have to pay at the next renewal). You have saved some dollars you can put into a different use.
Assumption 2: Cheap is better, expensive is hyped
The flip side is to believe that the cheaper option is always the better choice. But this assumption does not also work. Sometimes, the difference in value between the expensive option and the more affordable option is genuine and essential.
Consider two cars with the same features from two different brands. Let’s say Brand A sells for $80,000, but Brand B sells for $100,000. Also, let’s assume that Brand A has a maintenance cost of $10,000 every year while Brand B has a maintenance cost of $5,000. If you plan to use the car for more than four years, Brand B is a better buy compared to Brand A. The example may seem simplistic, but it is to illustrate the point that in the long run, the cheaper might become the more expensive.
[bctt tweet= ” In the long run, the cheaper might become the more expensive. “]
Therefore, you must be sure if the difference in value between the two products is genuine and essential. (This analysis assumes that affordability is not a factor)
Solution: Don’t make assumptions, work with facts
You can save a lot of money if you work with facts rather than assumptions. The comparative value of products must be well researched before making a purchase decision.
[bctt tweet=” You can save a lot of money if you work with facts rather than assumptions. The comparative value of products must be well researched before making a purchase decision. “]
Consider if the difference between the two options is just a difference in name with no added value. If the difference is due to some added or unique value offerings, do those extra value offerings offer any benefit to YOU? If they do provide added benefits, are those added benefits worth the difference in price?
These three questions can help us save a lot of money to invest in other things that are important to us.
To begin to answer the questions, here are some guidelines:
- Go to the respective websites and extract any valuable information
- Call the customer service or sales personnel and ask relevant questions
- Read honest reviews (online) of the two different brands
- Ask for offline reviews from friends and family
- Take your time, don’t be desperate
You are in charge of your finances; ensure you are the actual boss.
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