Value = Benefit/Price

April 15, 2011 –

What is value?  Dictionary.com defines value in part as “..the worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.”  That and 17 other definitions for a simple concept that we understand on a basic value.  Even a toddler understands value; his toys, pacifier, blanket, and anything that is known to him has value.  The true concept of value is abstract to the same child, but take the toy away and his reaction will demonstrate the value of the toy to him.

Paul Carney, Jr. – vis-a-vie Seth Godin – has recently posted an excellent article breaking value down to a simple formula.  The formula is admittedly too simplistic when emotion is involved, but useful for material goods.  This concept applied to selling goods or services to customers can help close a sale or provide needed adjustments in pricing or benefit.  Homepreneurs and small business owners might consider the value formula when putting prices on goods and services.

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Posted by PaulCarneyJr on March 30, 2011

It is such an easy formula that I learned from Seth Godin.

Value = Benefit / Price

For the following example, we will assume that each benefit is worth 1,000 points so that the ratio is a smaller number.

A man needs a vehicle to get him back and forth to work and the occasional family trip. He buys a $20,000 car that provides the following benefits:

  1. Gets him to where he is going, comfortably
  2. Decent gas mileage

So, his Value is 2,000 / $20,000 or 10%

A woman wants a vehicle, too, but she wants it to have style, make a statement, and get her where she needs to go. She decides to buy a $40,000 car with the following benefits:

  1. Smooth ride
  2. Luxury features
  3. Status
  4. Extra safety features

Her Value is 4,000 / $40,000 or 10%

See how it works? The person in the second example paid twice as much for her car, but her Value is the same as the guy who bought his car. This is an easy way to determine value even if the price is different.

This same example can be used to sell items to people by revealing the value of a product or service to them while convincing them to pay the price you want. As Seth says, you don’t always need to lower your price to generate more value. I will cover in an upcoming blog post some cool ways that you can increase value while raising the price!

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2 Responses to Value = Benefit/Price

  1. Colby Hottle says:

    I just wanted to say, I of course enjoyed your blog post and I added your link to my wordpress blog today as a recommended site. This is the blog I was finding for! Thanks

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