Price is what you pay, value is what you get

One of the best-known quotes from investing legend, Warren Buffet:

“Price is what you pay, value is what you get”

Warren Buffet

What does it mean? Well, the quote is set in the context of investing – buying stocks and shares in companies around the world. But the message is just as relevant to spending decisions we make with our day to day finances.

Clever marketing can often blur the lines between price and value. Advertising and retail techniques can make us think that something is great value. Sometimes adverts will create a sense that we need a product or service to make our lives easier or happier – think about some of the TV ads for cleaning products.

Other times, the focus can be on low prices to make us think that we’re getting a bargain. These can often involve an element of scarcity i.e limited time offers such as “buy now while stocks last”.

Cheap bargains do not necessarily translate to good value. I can be as tempted as anyone else by ‘BOGOF’ deals and other incentives that are designed to part us with our money. But if we don’t really need the stuff – or worse, if we end up not using it at all, can it really be good value?

Value is the benefit we derive from a product or service. It cannot really be determined in terms of money and it varies from person to person.

If you take out a gym membership with a 50% discount, you might think “magic, I got a bargain there”. But whether or not that translates to good value depends on how much you actually use the facility and how it makes you feel.

Price, cost and value

Retailers will often used a technique called ‘anchoring’ to help create the illusion of a bargain. If you see a suit in a shop, with a discount sign offering 70% off, your buying decision can be ‘anchored’ to the original price, for example £1,000.

To me, £1,000 is a tad excessive for a suit, but if it was discounted to £300, it might make me think that I was getting a high-end suit for a great price. But rather than focus on the ‘saving’ of £700, I should focus on whether I would get £300 worth of value from the purchase.

If the suit’s a bit uncomfy or doesn’t fit properly, then it’s probably not much of a bargain. If I never wear a suit again because I end up working from home due to coronavirus, then it would be a complete waste of money, no matter how much I saved on a Black Friday deal.

Remember, it’s entirely up to retailers and service providers how they set a price. They need to make sure it covers all their costs otherwise they won’t be in business for long.

So if you see goods and services with a price that appears to be cheap, don’t automatically assume it’s good value. The price just reflects the policy of the seller.

When it comes to value, that’s personal to you. Don’t let anyone else tell you something is great value – only you can decide that.

This table may help to summarise these key points:

Basis for ComparisonPriceCostValue
DefinitionThe amount paid for a product or serviceThe amount incurred in creating the product or serviceThe benefits (utility) gained from the product
Who is affected?The purchaser / consumerThe producer / sellerThe user
Calculated By?Pricing policyFactOpinion
The role of money?Calculated in terms of moneyCalculated in term of moneyNot calculated in terms of money

How to focus on value, rather than price or cost

Try following these suggestions to help maximise value from your spending choices:

  1. Ignore the amount of discount or saving being offered. Look only at the actual sale price and ask yourself if you will really use the product or service enough to get your money’s worth.
  2. Write a shopping list and don’t get distracted by offers for things you don’t need. Only buy what you set out to buy.
  3. Think about your own values when choosing which businesses to support. For example, if you value the environment, think about the carbon footprint of products. Will you pay a lower price for goods that have travelled across the world, or will you gain more satisfaction by paying a higher price for goods that are local?

A final thought….

Financial coaching is usually less expensive than regulated financial advice, but that doesn’t necessarily mean it’s better value.

What you get out of coaching will depend on what you put in, so although it can be cheaper, it might not deliver value if you’re unable or unwilling to learn and take action.

On the other hand, if you do enjoy reflecting on topics like this and then take steps to change your financial behaviours, you could find that coaching is transformational and truly priceless.

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