Waterfall with water flowing as a metaphor for the flow of money and value in business.

How to know if your product or service is valuable

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In business, much of your success comes down to two factors: the value of your product and your ability to sell.

You can evaluate your sales skills by comparing how many deals you closed relative to other people on your team. But how do you measure product value?

Start by using money as a measure of value

Business people commonly use their local currency as a proxy for value. They trade the 0s and 1s of their bank balance for supplies, staff and resources. Because bank notes or digital transactions are accepted by the people they work with, inherently valueless ‘money’ becomes a token for exchange.

Now, you might be tempted to think that this makes money a perfect measure of value. However, money is not as stable and fixed as we link to think.

Indeed:

  • The value of money changes over time: most currencies today are controlled by a central bank or government. This central authority can usually print more currency and thereby devalue each unit already in circulation. This is known as inflation.
  • Money loses its value when it is not accepted for payment: Unlike other resources (such as wood or metal), money has little to no functional value. If people stop using a particular currency for exchange, the value of that currency drops to almost zero. Therefore, the value of money rests on your ability to settle transactions with it. You can see this holds true in these examples:
    • If you operate a business in Thailand, and you travel to the United States, most shops won’t accept your Baht. They don’t value your currency.
    • People also don’t want dirty money from robberies, theft or other illegal means, because it doesn’t rightfully belong to you, and they may be required to pass it back to the original owner.
    • If you go to a store that doesn’t have a credit card reader, and you don’t have cash, the money in your bank is essentially useless. You won’t be able to trade because the merchant cannot accept your offer.

Even with these constraints, money is still one of the best measures of value for business today. This is in large part thanks to its widespread use as a vehicle of exchange, which allows you to compare the value of different products.

How to calculate product value

If you want to estimate how valuable a particular product is, just figure out how much profit it makes. You can calculate profit by multiplying units sold with the price per unit, and subtracting total costs.

For a product to be profitable, the number you get at the end needs to be positive (above 0€). If you get a negative number, that means you’re losing money on each sale.

Profit, and thereby product value, is typically calculated after sales. But you can still get a rough idea of the numbers based on estimates of different scenarios. This is useful when you want to launch a new product or service, and see what it would take to succeed.

Let me walk you through a quick example:

Imagine you’re a restaurant owner that wants to offer a new pasta dish. You already spent 200€ coming up with the recipe for this dish, and it would cost you between 5,50€ and 6,50€ to prepare one serving for a guest.

When you add a new dish to your menu, 10 people/day order it in the first year. 5 of those choose the new dish over another dish (with an average sales price of 7€, and cost of 6€), and 5 are new customers.

You want to sell the new pasta dish for 8,50€, but aren’t quite sure whether this pays off.

After some quick arithmetic, you figure that in the first year you will earn 10 x 8,50 x 365 = 31.025€ from the dish. It will also cost you max 23.725€, leaving you with a net profit of 9125€. You do, however, lose 1825€ in profit on your other dishes. This would leave you with a total profit increase of 7300€ in year 1.

Increasing the value of your services

From an economic perspective, you can increase business value by boosting demand, charging higher prices, and lowering costs.

Boosting demand

Demand goes up, if more people want to buy your service or the same number of people buy more units of your product. There are a number of ways to influence demand, but all of them come down to increasing the perceived value of your offer (more on this later!).

Charging higher prices

What price you charge for your product or service is 100% in your control. However, if you raise your price, you will often sell less units. Think of it this way: the number of people who pay 20.000€ for a car is much higher than those who pay 100.000€.

Why? Well, the price you can charge depends on your customers’ ability and willingness to pay. If prospective customers don’t have 100.000€ in the bank, then they can’t buy your Ferrari no matter how much they like it. And if they’re not into cars or can’t drive, then they’re probably not interested in the Ferrari in the first place. That’s why it is crucial that you offer your product or service to a segment that is both able and willing to pay.

You can’t easily change people’s finances, but once they can afford your product or service, you can influence their willingness to pay. And of course, that generally increases when people see your product or service as valuable.

Lowering costs

The value of your business increases when you use resources more efficiently. This allows you to incur fewer costs in the provision of your product or service. While lowering costs is not the focus of this article, I do want to point out that lowering total cost gives you a higher margin, so you can reinvest more of your profit into improving the value of your product or service.   

Not value but value perception drives purchasing decisions

We’ve seen that profitability, as factor of demand, price and cost, is a measure of product value. But now let’s go one step further and look at the psychology behind product demand and pricing.  

I’ve suggested earlier, that you can increase demand when you increase the perceived value of your offer. What I’m implying here is that people buy things not because of some innate value, but because they perceive these things as valuable.

This is why people buy and store gold in bank vaults, even though gold is functionally not a useful asset to own. Similarly, people choose to buy a holiday home not just to enjoy it every summer, but because they’ve seen that all their friends have holiday homes and they must be valuable.

The same is true with pricing. If people think that your skill-set is rare and useful, they may be willing to pay a premium for your service. But if they (perhaps mistakenly) believe anyone could do your job, they may not be willing to pay you your money’s worth.

Of course, value perception is highly subjective – on the same day, you can speak to a customer who pays 250€/hour for your advice, and another who calls you a sell-out. Let’s now look at what influences people’s value perception.

8 factors that influence value perception (and what you can charge!)

  1. Personal beliefs

Our beliefs determine what we value. For example, if we think running is fun and healthy, we might run every day and buy a new pair of running shoes every few months. Or when it comes to food, people who are very health conscious will spend more on organic, high-quality vegetables than people who don’t see diet as a key priority. Beliefs always inform action, and therefore what we believe directly shapes what we buy.

    2. Life problems

    Demand for some products and services only exists because of problems that people face. For example, we wouldn’t need medics if everyone was healthy all the time. So doctors are valued only because people get sick and they promise to help them feel better.

    The same is true for dozens of business models. Like defence lawyers who we hire only when accused of committing a crime in court. Or relationship coaches that we consult when there is tension in a marriage.

    Typically, the worse a particular problem gets, the more people are willing to invest (in time and money) to solve it. And so, the more we struggle, the more we value people who can help us overcome an issue.

    3. Purchasing intent

    People may also weigh the economic value of their future purchase against its cost. Depending on what people want to gain, they may measure this in different ways. For example, a plot of land sold to an investor for building a farm or factory may be worth more than a comparable plot of land sold to an individual who wants to build their own home. Because both buyers intend to use the same type of resource in different ways, they have different value perceptions that make them willing to pay different price points.

    4. Trust in the seller

    Beyond the tangible value of a product, the likelihood that you are going to receive it also determines whether and how much you are willing to pay.

    After all, you wouldn’t give someone 25€ for an event ticket, if the event could be cancelled anytime and the speaker has a poor track record of showing up.

    Similarly, people unconsciously consider and evaluate marketing claims. If they think that the seller can be trusted, or even have confirmatory evidence (such as positive reviews), they are likely to value the product more than if they doubt the claims made by the seller.

    People’s willingness to value a product or service thus depends on how convinced they are that the seller delivers on their original promise.

    5. Time to delivery

    Imagine an online shop allows youto have your groceries delivered in the next hour or a week from now. Would you pay a premium for near-instant delivery?

    The reason many people are paying to more is that the online shop promises a faster solution to their problem. Speed can trump price when people don’t want to wait to enjoy the benefits of a product or service.

    However, a long time to delivery can actually increase the perceived value of luxury goods. Buyers then assume that the product is hard to produce, and therefore, fewer units will be created. The perceived exclusivity of the luxury product in turn adds to its value.

    6. Marginal utility

    Marginal utility is an economic concept based on the idea that each additional unit of a product can be perceived as either more, less or equally valuable as previous units.

    Imagine you made a fresh pizza that you sell it slice-by-slice. You can sell each slice for the same amount of money. But if a single person already bought 5-6 slices from you, they might start to feel full, and no longer want to pay the same amount for the next slice. The reason here is that the perceived value of the additional slices falls as the person fills their stomach, and they eventually stop buying pizza.

    Tasty slices of pizza

    What’s going on here? As the gap between what we want and what we have declines, our perception of the value of a good can also decline. The increasing fulfilment of our ‘wants’ makes us less likely to pay the advertised price for a purchase (or even purchase at all).

    7. Invisible benefits in ‘destructive’ products

    There are some products that seem to provide no real benefit to the people buying them. Think of unhealthy, processed foods, destructive weapons or illegal drugs. What’s fascinating is that some people still seem to value them.

    I think the reason why destructive products are considered valuable by select groups is because of the intangible benefits they provide to those groups based on their belief system (see point 1) or context.

    Most people in the Western world would, for example, not find a weapon particularly useful. However, police officers may value weapons in extreme situations, where those weapons are the only means of self-defence.

    Similarly, people in a criminal environment may want to own a weapon to feel powerful. To them, weapons can seem to be an antidote to fear and its value comes primarily from the belief in having a way of protection. Still, the perceived benefit of a weapon is not its ability to harm (except for the rare psychopath that draws a sadistic pleasure from the suffering of others), but rather the change in power dynamics.

    Another great example is the drugs trade. I would posit that people who trade illegal drugs don’t solely do so for the financial benefit – after all, they could have a much safer (and equally lucrative) existence if they chose to do business on the right side of the law. Instead, there may be perceived social benefits to operating in a covert industry, such as a sense of belonging, success and recognition within a peer group.

    For people to trade or buy destructive products, their intangible benefits must be perceived as more valuable than the accompanying self-deception and potential corruption of personal values. These hidden ‘purchasing costs’ can also be seen quite nicely in more ethical realms of business.

    8. Hidden purchasing cost

    Many purchases are accompanied by additional costs that can decrease the perceived value of the initial product.

    A good example is when you buy a house. The house itself may have a certain value and price tag, but for the transaction to happen, you may need to pay brokerage fees and taxes. These additional costs not only detract from the financial, but also the perceived, value of your purchase.

    The same is true for pharmaceuticals. While drugs may help you alleviate the symptoms of a particular disease, they often come with possible side effects. Knowledge of these side effects may decrease the perceived benefit of the drug.

    Spiritual perspectives on product value

    From a spiritual perspective, a product is valuable when it improves the emotional state of the individual purchasing and using it.

    Mind you, this doesn’t mean that a product simply makes someone feel slightly better at the time of purchase – but rather that it contributes to and supports the long-term wellbeing and happiness of its new owner.

    For example, a piece of chocolate (which only gives you a short happiness boost) is less valuable than a piece of clothing that you can feel good about every time you wear it.

    Similarly, products that provide emotional relief in the short term but get in the way of solving an actual problem, wouldn’t be considered valuable from a spiritual perspective.

    Here’s an example: you go to the doctor with an infection. They tell you that you’ve got a splinter in your skin and offer you pain killers (for the next month) to alleviate the symptoms. By doing so, they’re just providing you with emotional relief, when they really should be finding a way to remover the splinter.

    The doctor earns more money when they prescribe you pain killers again and again instead of using their knowledge to help you. However, many products that have to be bought continuously only increase revenue for sellers in the short term. This is because, from a spiritual perspective, the seller doesn’t create true long-term value for purchaser when encouraging product dependency.

    Dependencies are often based on lies (such as ignoring promising alternatives) and therefore prone to cause a stir when the truth is exposed. At this point, there can be a sharp drop in sales, but even if the seller succeeds in maintaining consumer dependency, they are likely to, at the very least, deceive themselves about the merit of their product. This self-deception can subconsciously lead to feelings of guilt and shame, and therefore come to harm the seller, financially or otherwise.

    Therefore, a product is truly valuable only when it improves the emotional state of the purchaser and creates or reinforces positive emotions in the seller.

    How you can shape people’s perception of product value in a wholesome way

    Marketers use a broad range of techniques to influence value perception. At one extreme, we have fraudulent claims about product value, as seen with Pfizer’s pharmaceuticals and the Volkswagen emissions scandal.

    At the other end, marketers only shape production perception through clear, honest messaging and matching product positioning.

    This can involve offering a product or service in the right sales context. For example, an award-winning artist would not play violin solos in a metro station, where his skills aren’t adequately valued. Instead, he would offer to play the violin in theatres, concert halls and other venues that attract the right type of audience for this skill.

    Similarly, marketers can be very clear about who their product is and isn’t intended for.  A great example of this is Ramit Sethi’s landing page for his Earnable course, where he specifies who shouldn’t be buying his product.

    Screenshot from the Earnable landing page

    Supercharging your product value with positive energy

    A powerful technique to increase product value is to visualise that the product or service is full of positive energy and brings maximum value to the life of the person purchasing it. You can make this energy so strong that your product or service shines brightly and automatically attracts the right type of buyer. You can also visualise how happy your customers will be with your product, as they use it day to day, or how they benefit from your services for years to come.

    The key here is to visualise with an honest intent, purely focussed on the best possible outcome for all people and beings involved.

    The five-second value test

    To finish this article, I’d like to give you a quick and practical way to tell if your product or service is or has the potential to be valuable. Just ask yourself the following four questions:

    • Would I (want to) use the product or service myself?
    • Can I find three other people who would want to use my product/service?
    • Are people willing to pay for the product/service?
    • How much are people willing to pay?

    If you said ‘YES’ for the first three questions, then congrats: you’ve got a valuable product. Your answer for the final question can give you a rough estimate of just how valuable your product is in monetary terms.

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