How Price and Value Work

People often confuse price with value. It’s a serious mistake.

Value and Cost

In the simplest terms, value is a collection of advantages you gain by having an object or service. Cost is a collection of inputs you must give up to get the value

Looking at Value, I might pay attention to things like reliability, durability, environmentally sensitive, suited to my use, warranties, ease of delivery or acquisition, service after the sale, friendly staff, and others specific to your own personal values.

Value is what you get.

Cost includes price, plus other things you must put in. Having to wait for service or delivery, less durability, no warranty, missing functionality, or harder to use are a cost to you. If you can’t put those inconveniences into your cost bundle, you must be willing to pay a higher price in money

Sometimes you can get a missing attribute by paying extra. For example, I had a friend who built a very large house in Prague in 1989. He leased it to the Canadian government and set about getting a phone service — at the time quite difficult. The phone company said it would take 10 years to get the service installed. His response, “That won’t work. That’s the day the gas company is coming.” Several hundred American dollars later, they both appeared in less than a week.

Cost is what you must give up.

Be sure you understand what you are getting and what you are giving up to get it.

The tricky part of comparison

Not each element of value is about money. Some have other effects. Suppose with the purchase of some product, one of things that could go wrong is you might be killed. Reliability is unknown. How low would the price have to be if the probability of killing yourself using the product was 50%. Even with a good warranty, most people would find any price to be too high.

The ideal exchange is one where your value received exceeds your cost. A low price says nothing of value unless you know everything else is the same.

Take life insurance. 

Every insurer faces an identical situation for probability of someone dying, the rates they invest premium for, their cost of operations, their commissions paid, and their taxes.

If an insurer offers a premium materially lower than the competitors, there is a reason. One of them is the policy is somewhat different than what the competitors are promising in exchange for the premium.

For any easy example. term for 10 years and renewable has a higher premium than if it is non-renewable. The longer the period covered, the more the premium because with a long periods there is a greater likelihood of a death and a payout.

Insurance policies are complex documents and few ever study them. You should understand the basics though. Is the payout guaranteed or does the insurer get to revisit the original documentation? A pre-existing condition clause means the insurer might be able to avoid payment. Is the premium guaranteed or adjustable as the company wishes? When will the coverage stop being available? Who controls the actual policy? Group insurance policies are controlled by the employer. The individual has no coverage they own or control. That can be a problem if the employer decides to change carriers or amend the coverage. It is not portable. If you quit, it disappears.

The observations

Comparing products based on price alone is for fools. Anyone can make something cheaper by taking away some of the value. If you don’t know what has been removed, you could be in trouble. Think factory second parachute, or brakes. Or cheap laser eye surgery.

There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.” John Ruskin

“Lawful prey” sounds like a bad thing

Know how much the problem is worth you are trying to solve. You might want to think whether a $10 problem requires a $100 solution. Quite often the product you buy has features you don’t use. Why pay for solutions you don’t need or use.

“A thing is worth what it can do for you, not what you choose to pay for it.” John Ruskin.

The Takeaway

Comparing value and total cost is a little more work. The effort produces solutions that provide the value you need for less cost.

Shopping is the way you do it.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: