Perception of Value

To begin with, the idea of value is relatively psychological and personal, and typically we divide value into economic and non-economic terms. But in reality, value exists on a spectrum. It’s almost impossible to determine what things might be worth to the individual person. For example, a trinket from a carnival might be worth little economically, but it can be have significant sentimental value to the person who won it. We’ll start by breaking down traditional economic value as this will contribute to our discussion of value.

Economically, there’s such thing as perceived value versus real value. These terms help business owners determine what their product is worth and how they are able to price the product.

The real value of an object is what it takes to produce and sell a product. Real value accounts for the costs of labor, raw materials, shipping, marketing, and product development. This is the value of a product without the inflation of things like brand name and buyer perception. Real value is often seen as the absolute value of the product, or what it is actually worth.

Meanwhile, the perceived value is what the buyer believes the product to be worth. It has to do with what they feel the product is worth. This is based on several factors, such as what problems the buyer believes the product will solve, brand name, and public perception of the product itself. This number can actually be higher or lower than the actual value depending on the product. It could also be called intangible value as it can’t be attached to anything definitive.

The buyer’s interpretation of the product and its worth can highly impact a buyer’s decision to buy the product. There’s a level of urgency that occurs when a product is perceived to be worth more than the purchase price. They want to buy it while it’s on sale. Meanwhile, it takes more convincing to convince buyers to purchase products with a higher perceived value.

This is typically when brands come in. Often, people will purchase a product based on the brand name because they believe the brand name provides more value. They trust the brand name to deliver on the promise they’ve made, which is they will provide a great product that solves your problem.

For example, say two different businesses are creating similar cars. These cars might have approximately equal real values, meaning their cost to produce is roughly the same. However, if one car has a better reputation for reliability or even if one car is seen as more of a status symbol, then that car will have a higher perceived value. This will allow the company to sell the car for more. Or think about how you probably only buy brand name paper towels because the understanding is it will be easier to pick up your spills.

There’s this story about Frederick II, the King of Prussia that may be a myth, but this almost doesn’t matter. The message is still there, and it’s worth bringing up as it can help explain how perceived value works. Frederick was attempting to convince the lower class to value potatoes and forcing them to try and produce potatoes didn’t work. The lower classes deemed potatoes practically inedible. So, the King went in the opposite direction. He declared potatoes a royal vegetable and said only royalty could eat. He ordered guards to protect the potato farms, though secretly ordered them to relax their watchfulness at night. The lower class began to steal the potatoes and grow them secretly. The trick was convincing them that potatoes were worth something. The King increased the potatoes perceived value.

So much effort goes into creating perceived value. There’s a reason why the common belief is that brand name products are better and worth the price. Companies spend millions to create a higher perceived value for their product. There are often huge campaigns with the singular goal of establishing the brand in people’s minds and increasing the perceived value.

You could easily argue that creating perceived value for the sake of a sale or a higher profit margin is inherently manipulative. For instance, when a company claims there is a limited amount of a product, so you should buy it immediately, there’s a level of manipulation happening, especially if the company could easily produce more of the product. You don’t necessarily have to have the better product in order to have the higher perceived value.

Even the story about Frederick II has hints of this. It was ultimately for a good reason. Frederick was trying to stabilize bread prices and avoid future famine. But the manipulation is still there. It toes, or sometimes blatantly goes over, the line of propaganda.

However, it would be false to say that perceived value is always bad since value is not always economic. Since value exists between the spectrum of economic and non-economic measures, and between worth and non-scarcity worth in the spectrum of scarcity. Adopting the idea of “price” would allow identifying the limits of worth from the sense of scarcity but not for value in general.

Value, citing the classical figure in the realm of George Simmel’s well-known book, Philosophy of Money, in which Simmel claims that creating values is to allow humans to identify its demand as well as dissatisfaction of objects. That could help explain the differences between how much a thing costs, and how much it is worth. Cost and worth are two different concepts. Worth is judging by the purchaser, while cost is decided by the seller in the context of trade. Yet, how are these two personal concepts linked? Value. Simmel explains value does not necessarily need to be economic and non-economic related. A thing could have an absolute worth, but with no economic measures, yet is still valuable (to someone), or vice versa. We’ll get into this further in a little bit.

Beyond that, sometimes economic value often fails when compared to non-economic value. In a TED Talk, Ryan Sutherland, an advertising expert, talks about intangible value, or perceived value, has a larger effect on our behavior than we tend to believe. He argues that all value is actually perceived value. In doing so, Sutherland actually does blur the lines between economic value and non-economic value.

Sutherland brings up the story of Frederick II, but he also discusses various examples about how the thing that costs more money doesn’t always improve the situation.

One example he gives is the electronic signs that tell you your car speed as you drive past them. He mentions how some of these signs have smiley or frowny faces in the corner depending on your speed. Apparently, they cost far less than a speed camera, but they prevent twice as many accidents. Our understanding is that these signs have less actual value, but they have a much higher perceived value as they do more work for less.

This is worth bringing up simply because how do you actually measure this type of value? How do you measure the number of lives saved by the cheaper product? Those lives have value outside of an economic model, even if you can attribute economic value to the object that helps save them. This is what I mean when I say that value actually falls on a spectrum.

Sutherland is fundamentally discussing the psychology of how we perceive the world around us. The example of the street signs may, Sutherland puts it, “baffling to conventional, classically-trained economists” because these street signs have far more to do with psychology and behavior than they do with economics. People do not feel threatened by the possibility of a fine or points on their license. They’re far more convinced by a frowny face. The perceived value replaces the real value.

So, how do you determine the “real” value of a product, meaning its value outside of the market? This is when value begins to become personal. To bring it back to economic value for just a moment, a basic example is buying vegetables already chopped up might not be worth it to one person, while it might be incredibly worth it to a disabled person who has difficultly chopping up their own vegetables.

In terms of non-economic value, this is something that everyone must determine for themselves. Perceived value is always determined by the person’s perception. It’s determined by memories and the senses and what our parents told us. Some cars or clothes are considered valuable simply because they remind us of a different time, a time we might consider better for whatever reason.

Value is also determined by each person’s intellectual and moral values. Maybe a worn-out book is your most important possession. Perhaps you watch the same VHS tape over and over again of this old movie that no one remembers. It could be that your favorite thing is your flower garden, but you don’t grow to sell. Just because it does not economic value does not mean that it doesn’t have value. And no one else can determine how you will value something.

           However, this also means that you can actually decide how you value things. If you decide to place a higher value on things, including intangible things like family, then you can change your own perception of those things. You can decide to value education or compassion more. You can decide to put more effort into your friends or exercise. Ultimately, you can decide whether or not to place so much value on things. Your own perception of value actually goes into your perception of your own wealth, a topic we’ll be addressing in another chapter.