One of our Warren Buffet quotes is this one: “Price is what you pay. Value is what you get.”
This quote is based upon the truth that there is a HUGE difference between being cheap and frugal.
When you’re cheap, you’re focusing on the PRICE of a good or service. Price isn’t always an indicator of the VALUE involved in the transaction.
A friend of mine has learned this lesson the hard way. Every year for the past five years, she’s purchased a new laptop computer for her business. Every year, she makes her decision on which computer to purchase based solely upon price. She’s spent on average $250 every year for a new computer for the past five years.
5 laptop computers X $250 = $1250
Meanwhile, five years ago, I purchased an “expensive” laptop computer for $1000.
Even if my old reliable stops working tomorrow, I’ve have spent $250 less on computers than my friend has over the past five years.
However, that’s just the tip of the frugality iceberg. Every time my friend’s computer crashed, she lost valuable information for her company. Ouch! She also lost time – her most valuable asset. One year she lost almost a week’s worth of work while trying to replace her computer. If you figure in the time and information she lost each time her cheap computer crashed, it might have only taken her 2 years to recoup the cost of the more expensive computer.
Frugal means being smart with your money.
When you’re frugal, it means you have prioritized how you spend your money.
Being frugal means finding the best value instead of focusing simply on price.
Being frugal means understanding the difference between investments and expenses.
It’s little wonder that the richest people in the world boast frugal spending habits. It turns out that the wealthy have so much wealth because they recognize the real value of time and money.
The Warren Buffet Effect
Warren Buffett has made billions of dollars because he’s able to determine the VALUE of a company.
Another Warren Buffett quote:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
That’s just another way of saying, “Price is what you pay. Value is what you get.”
The VALUE of a company is fixed – while the price of a company’s stock fluctuates. By the way, shares of Buffett’s Berkshire Hathaway stock topped $300,000 per share in December of 2017. His company outperformed the S&P 500 that year, rising more than 22 percent compared to the index’s 20 percent gain. In December of 1962, Buffett bought his first shares of Berkshire for $7.50 each.
Price vs Value
It’s easy to figure out the price of most things. Price is easy. Look at the price tag.
Determining value – now that’s a different story.
It took five years for the “value” of my friend’s computer purchases to play out fully. However, when the first cheap computer went down after only 10 months, that was her first clue that her decision making process was flawed in the first purchase. That was the time for my friend to take a closer look at the “value” of her purchase.
Over the years, she learned that in addition to the money she paid for her computers, she also incurred other expenses. It took time for her to install the software she needed to run her business. She lost new business opportunities as she shopped for a new computer and then set up the new computer.
So how do you determine value? This is a common question not only for consumers but also businesses as they price their products. According to McKinsey & Company
“Value” may be one of the most overused and misused terms in marketing and pricing today. “Value pricing” is too often misused as a synonym for low price or bundled price. The real essence of value revolves around the trade off between the benefits a customer receives from a product and the price he or she pays for it. […]
Customers do not buy solely on low price. They buy according to customer value, that is, the difference between the benefits a company gives customers and the price it charges. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the perceived benefit and/or the lower the price of a product, the higher the customer value and the greater the likelihood that customers will choose that product.
So this whole VALUE discussion should be sparking your own internal dialog about the pricing of your company’s products and services.
Price is based upon how much it COSTS to produce what your business sells. Value is how your customers PERCEIVE the impact of your product or services on their lives.
Communicating Value
It’s just good marketing to help your customers determine the VALUE of the products/services you offer.
Let’s take a look at Dr. Jean’s ebook 50 Secrets for Growing a Successful Frugal Business as an example.
The price of the ebook is $2.99. However, the book is filled with valuable tips for growing your frugal business based upon Dr. Jean’s extensive business building experience.
For me, the value of the book was easily 1000 times the price based just upon a single bit of information she shared. In the book, she shares a way to determine which tasks in running my business are essential, which are urgent and which are important. I found this information to be life altering!
The extremely low price tag of her ebook should make the decision to purchase 50 Secrets for Growing a Successful Frugal Business an easy one. Ah, but here’s another tricky part about PRICE – the financial cost is just one of many consumers take into consideration.
The book is extremely easy to read, but it will still take you a couple of hours to read the whole thing. Let’s say it took me 2 hours to read the book. My time is worth $125 per hour. Suddenly, the “price” of the ebook jumps from $2.99 to $252.99.
Remember though, I shared that one piece of information that raised the VALUE of the ebook to be much more than that. Since reading the ebook, I’ve changed the way I spend my most valuable asset: my time. So instead of “costing” me 2 hours of my time, the ebook helped me to free up that much time each week.
Determining Value
Whether it’s making purchases for your business, or pricing your products and services, you must know the VALUE before you can decide whether the price is fair.
- Evaluate all costs. Financial cost is just one factor. Include time and opportunity costs as well to accurately determine value.
- Frugal is investing wisely.
- Cheap only looks at price, not value.
- Focus on finding the best value instead of finding the lowest price.
- Remember, your customers are making decisions based on more than price as well.