Thursday, December 1, 2022

HomeValue Per Time: How it impacts the price that a customer pays...

Value Per Time: How it impacts the price that a customer pays for a product

While the power of the brand and the aspiration to own the brand do play a role in justifying the prices, the element of actual value/hour derived, may also be a key factor in influencing those prices..

We live in a golden age of consumerism. A world full of choices. Having plenty of options has presented us with a new challenge – the conundrum of choice! We all have devised our own priority metrics for deciding which product to purchase, the usual being – price, make, reviews, ease of use, etc. That brings us to the big question, are these parameters the only ones that guide us to a purchase, or is there something else that we either look at very analytically, or that still plays on our subconscious mind, and aids in our decision making, as we evaluate a purchase?

Let me share a childhood memory that I have, associated with shoes. As one from a typical middle-class family, our purchases were largely driven by a value-for-money perspective.

When it came to shoes, for example, we would buy a decent, comfortable pair, but certainly not some of those very expensive shoes. We would even wonder why someone would pay 2-3 times the price for a pair of shoes that appeared to be so similar to the ones that we were purchasing! Till one day, a relative who used to purchase the more expensive shoes explained his logic. Which was that he would be spending say, 8-10 hours each day, in the particular pair of shoes, and having that extra bit of comfort, having a lack of bit or the slightest awkwardness in the feet, was worth spending the extra money for!

The operative element in this argument was the number of hours that one spent in those shoes! And how that made spending the extra money worth the while.

This is an interesting way to look at all products, the value that one derives of them, and consequentially, the price that one is willing to pay for it.

Let’s look at a mobile phone, for example.

You might find two reasonably similar phones, one selling at say, Rs 50,000 and the other at Rs 100,000. The latter may be marginally better, but a thrifty buyer may be justified to question the differential price, for something that is only marginally better.

However, let’s look at the value proposition for the one who does decide to spend that higher amount.

Today, a person could easily be using their phone for 10 hours a day. And changing their phones, say, once in 3 years. Thus, the extent of usage of the phone is 365 days x 3 years x 10 hours a day, or about 10,950 hours. Let’s say, approximately, 10,000 hours. Then the extra Rs 50,000 spent is an equivalent of Rs 5 per hour! And the “marginal” additional value between the two models could easily be perceived to be more than that amount!

Mumbai. Maybe the 35-year-old who is contemplating a purchase has one option at Rs 2.5 crore. And then there is another option at say, Rs 3 crore. Maybe it is a slightly bigger apartment or perhaps in a more convenient area or a place with more amenities, etc. Some definite advantages. But is it worth spending a princely extra sum of Rs 50 lakh for that?

That again depends on the length of time that one is going to utilize that benefit.

So, if that 35-year-old believes that this is going to be his home for at least 20 more years, and he and his family are going to enjoy the place for all 24 hours of the day, then let’s look at the value proposition. It is 20 years x 365 days x 24 hours = 175,200 hours spent. And the additional Rs 50 lakh spent then translates into just around Rs 28 per hour. Would that be a worthwhile value proposition then?

By the same token, one can question also, moneys spent on something that provides value for a very short time only. Let’s say, a firecracker that you buy for a fancy sum, to blow away, at a wedding ceremony or when your favorite team wins a cricket match.

Say, it costs Rs 1000. And the duration for which is provides the enjoyment of a loud noise, is say, 2 minutes. Now, if we look at the value / hour of this firecracker, it works out as 1000/(2/60) = Rs 30,000 per hour! Compare that with the expensive mobile phone that translated to an additional Rs 5 per hour or the expensive apartment purchase that translated to Rs 28 per hour!!

So, what is more expensive in the true sense??!

Viewing value and price in this manner gives a new paradigm for both the shopper, for evaluating their purchase, and for the seller, to decide on a pricing approach.

While the shopper may not necessarily be so analytical, as explained in above examples, intuitively, most shoppers would be analyzing their purchase, keeping the aspect of longevity of usage, and deciding whether a price is worth paying or not. And if the shopper is not doing so, and you, the seller, desire a higher price from the shopper, this equation of value/hour needs to be somehow brought out, to the shopper, to enable him to feel justified about paying the asked price!

The seller too, at their end, must not be pressurized to bring their price down, if they can justify an attractive value/hour proposition for their customers.

While there is nothing particularly novel about the concept that I have shared above, not too many of us really look at value and pricing, in this manner of calculation. And we wonder what justifies the high premiums being paid for a fancy phone or an expensive pair of shoes. While the power of the brand and the aspiration to own the brand do play a role in justifying those prices, this element of actual value/hour derived, may also be a key factor in influencing those prices.

Having said that, I am still not able to comprehend the very fancy prices paid for a branded bag, the nearly identical replica of which, one can buy for a fraction of that amount, on a Dharavi Street, considering the fact that the usage of that fancy bag may be limited to an hour a week, or maybe 50 hours a year! The value/hour for the extra amount paid for that bag, would not be a very attractive amount!!

For most of the other heavily used products that are expensive though, the value/hour equation might be the critical factor justifying the price!



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