Value Pricing: The First Law of Marketing
Source: VeraSage Institute
The following includes excerpts, reproduced with permission, from a blog entry by Ron Baker.
The labor theory of value still wields enormous influence over our present-day concept of value and price. Marx explained his theory in Value, Price and Profit, published in 1865:
“A commodity has a value, because it is a crystallisation of social labour. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labour necessary for its production.”
If you have pizza for lunch, under Marx's theory, your tenth slice would be just as valuable as your first, since each took the same amount of labor hours to produce. One glaring flaw in Marx's theory was it did not take into account the law of diminishing marginal utility.
Fortunately, economists developed the theory of marginalism and created a revolution. As Carl Menger explains in his book Principles of Economics, written in 1873:
“Value is . . . nothing inherent in goods . . . . Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence . . . [T]he value of goods…is entirely subjective in nature.”
If one were to lay the two theories of value – labor and subjective – side by side, it would look like this:
Cost-Plus Pricing – Labor Theory of Value
Product » Cost » Price » Value » Customers
Pricing On Purpose – Subjective Theory of Value
Customers » Value » Price » Cost » Product
Notice how value pricing turns the order of cost-plus pricing inside-out, by starting with the ultimate arbiter of value – the customer. The costs do not determine the price, let alone the value. It is precisely the opposite; that is, the price determines the costs that can be profitably invested in to make a product desirable for the customer, at an acceptable profit for the seller.
For the complete entry, read “Show Summary, July 11th: The First Law of Marketing: The Value of Value.”
From VeraSage Institute, July 14, 2014, www.verasage.com/index.php/community.