The difference between value and price

Mon, Oct 18, 2010

All successful entrepreneurs know that there is a distinct difference in value and price. But most people don’t fully understand this difference. If you want to build a successful business, understanding this distinction is simply crucial.

What is price?

Everyone understands what ‘price’ is. It is the amount of money you pay for goods or services. Sometimes price is not as easy to deduct, but in essence it is that simple.

As an example let’s take a simple software system which you can buy, which will cost you $1.000,-. Then the price is simply $1.000,- (sorry if this seems too obvious, it is important to clarify what price is for the next bit!)

What is value?

Value is the actual worth of whatever it is that you are buying, such as goods or services. Value is not easy to deduct and therefore needs some more explanation. Let’s look at a simple software system again. If I can use a software system and it allows me to either:

Increase my sales by $1.000,- per month (for simplicity’s sake we assume no costs are involved)
Decrease my costs by $1.000,- per month

Then the value of the system is $1.000,- per month or $12.000,- per year.

The difference between price and value

If both software systems in my example are the same, then I am able to make a great deal. If I know that this system is saving $12.000,- in costs per year for a company and yet it costs me $1.000,- to buy it, there is a huge difference between value and price!

So remember that value is the perceived worth while price is the actual cost.

Some examples

I have been using this difference for years to build a successful company, and so have many others who understand this principle well. Here’s some examples of ways to use this knowledge:

Warren Buffet – uses this knowledge to buy stocks which have a lower price than they’re actually worth. Knowing this, he is basically buying a bargain and he can be sure that in due time, the price will once again reflect the actual value; leaving him with a nice profit!
Reselling – did you know that Red Bull was a hugely popular energy drink in Japan before it came to Europe? Some smart guy figured that the success of the drink could easily be turned into millions by changing the name to Red Bull. The value was reflected by this smart man’s imagination, while the price of the reselling rights outside of Japan was the price. And much lower than the millions or even billions of dollars it is generating each year!