Another Example Of The Difference Between Value And Price: Free Mosquito Nets Are More Valued

from the economics-at-its-finest dept

We've pointed out time and time again how price and value are not the same thing. They may be related, but value tends to explain the demand curve, whereas price is determined by the intersection of supply and demand. To think about it logically, we buy stuff all the time because we value what we buy more than the money we're paying for it (the price). That's why the economic transaction happens. Or, to put it another way, you'll pay the price for something if it's lower than what you value it at, but that doesn't automatically change the value of it to the price. Now, there are some reports that suggest that the price, acting as a signal, can impact perceived value, but that appears to be limited only to a few specific situations.

We saw another example of the difference between price and value in a recent episode of Planet Money, which involved a discussion with the authors of the book Poor Economics, about their very data driven look at various economic questions. An early part of the discussion looked at the question of whether or not people in poor countries don't value mosquito nets when they get them for free. Apparently some economists have argued that you have to make poor people pay for their mosquito nets or they won't "value" them. Tragically, it seems that even some economists don't recognize the difference between price and value.

Thankfully, the folks who wrote this book went out and did real research, and the data shows that people in poor countries actually seem to value the free mosquito nets even more than when they have to pay for them. That is, people who received free mosquito nets seemed even more likely to use them than those that were paid for. I'm a sucker for data driven economics, so it's always nice to see stories like this one.

Filed Under: free, mosquito nets, price, value

Don't Try To Make Sense Of LinkedIn Share Price

from the it's-a-game dept

The big Silicon Valley IPO today was LinkedIn going public. In many ways, it's a great story, in that LinkedIn isn't an overnight sensation by any means, but really was a company that built up a strong and loyal user base over many years. However, Silicon Valley has been pretty starved of "celebrity" IPOs for quite some time. Of course, in typical Silicon Valley celebrity IPO fashion, the stock shot up much, much higher than its offering price. In the past I've talked about how this is really about a company having left a ton of money on the table (i.e., LinkedIn only got $45 for all of the shares that hit the market, so the stock trades over $100 are between others, and doesn't directly -- immediately -- impact LinkedIn's cash position, though later stock sales can obviously benefit).

I've always found the obsession with the "first day pop" kind of a weird infatuation in Silicon Valley, often done by people who don't recognize what it really means (i.e., that it was priced low). However, there's been a lot of hand-wringing about how LinkedIn's valuation from the super high share price seems ridiculous based on its revenue. And, I agree. It's nearly impossible to match the valuation to the company's actual financial situation. However, this is the nature of the game. Certainly one part of the problem is that some of the buyers and sellers in the market don't really understand what it is they're buying and selling and how to value it. That's just the way things are with the stock market. However, the bigger issue is that people buying and selling the stock are really judging price on two separate factors. The underlying value of the stock is certainly important, but for many people, rather than betting on that, they're betting on everyone else. That is, they're not buying and selling based on a long-term concern for the actual value of LinkedIn, but they're trading short-term by betting on what they think everyone else will value the stock at. In the long-term, that's not sustainable, but it's the simple nature of "the game."

On the last Planet Money podcast, they explored whether or not there's a "gold bubble,", but they actually do a nice job explaining how bubbles form, even though "rational economists" suggest it shouldn't be possible. In the podcast, there's a great story about some experiments, in which students (including business students who should understand this) are given opportunities to buy and sell a single stock with a very clearly defined value... and yet bubbles still form, where people (who can't even explain why) overbid on the price of the stock, even though the real underlying value is known.

To some extent, it's that people don't intrinsically understand statistics and value. Part of it is that people get tied up in "the game." And part of it is just psychology. But the fact is that bubbles form all the time, and trying to rationally value something in a bubble isn't a particularly fruitful game in the short term, because the length and extent of a bubble are nearly impossible to determine (long term is a very different story). So, for everyone fretting about the price to value question on LinkedIn, unless you're looking for a long term investment, at this point, it's a meaningless question. What's happening now is gambling and entertainment masquerading as a serious "investment" issue.

Filed Under: ipo, price, value
Companies: linkedin

Debunking The Claim That Giving Away Music 'Devalues' It

from the debunker's-forum dept

One of the popular claims from critics of this site is that giving away music (or even offering it much cheaper) "devalues" it. We've posted many times explaining how price and value are two different things. A lower price does not inherently change the value of a product. The simplest way to think about is the example we've used before: all of us value air a whole lot. We use it to stay alive. And yet, we don't pay for it directly. But I don't think anyone claims that this "devalues" air. Value is more a determination of the demand curve. How much you value something tells you whether or not you'll buy it at a certain price. If you value something highly, and it's offered at a lower price, you'll buy it at that lower price. That doesn't mean that the value to you has decreased, it means that you've received a surplus (you got more in value than you paid). That's a good thing.

Yet, recently, the whole "low prices devalue music" thing has come back again. There was the former record label exec who suggested selling albums at $1.60 and got trashed for wanting to "devalue music." Then, of course, we've written a few times about the indie label Asthmatic Kitty, which had worried that having Amazon offer its new album at $4 might devalue the music, since they believe music "is worth more than the cost of a latte."

Thankfully, Ian Port, at SF Weekly has come along to do a nice job of debunking those claims:

Several have argued that selling an album for less than a cup of coffee or a bottle of water would devalue the art of music. But people -- at least, young people who don't buy much music anyway -- don't judge the artistic value of music by what it costs. If they did, they would look down on artists who give away free MP3s and whose albums were obtainable on file-sharing sites. They don't.

The devaluing-the-art argument misses two other important points: First, coffee and water bottles can't be downloaded quickly and anonymously at no cost, while digital music can. Second, paying $3 or $4 for a tangible good (i.e., a cup of coffee you watched a person make especially for you) seems intrinsically reasonable in this day and age, even, I would guess, to a 13-year-old. But paying $10 to download a digital file that's a copy of a copy of a copy -- all of them made at no additional cost -- somehow doesn't.

I'm not saying musicians shouldn't be paid for their work. Selling digital albums for $1 or $3 would not stop superfans from paying $10 or $20 or even $50 for elaborately packaged CD or other hard-copy releases. Vinyl lovers will still pay cash money for virgin 180-gram translucent red plastic with big art. And even the $1 digital album, if it made piracy less attractive and increased sales volumes, could bring artists more revenues than they're currently getting.

It's good to see more people pushing back on the silly "low price devalues music" claim.

Filed Under: devaluing, music, price, value

Online Gaming Store Lowers Prices 75%, Sees Sales Shoot Up 5500%

from the price-elasticity dept

We were just talking about how some in the recording industry are realizing that raising prices on downloadable songs may have been a mistake (just as the book publishing world is pushing to raise ebook prices -- despite a fair bit of evidence that people actually are expecting prices to go in the other direction). It's as if they don't understand price elasticity and how you can quite often maximize revenue by lowering price.

In the video game world, at least, they seem more open to this concept. Last year we wrote about Valve reporting on some numbers that showed the more they reduced the price, the greater the money they brought in. In the case of reducing the price by 75%, Valve found sales increased 1470%. Not bad! But apparently an online video gaming store in Sweden has them beat.

Rasmus Larsson points us to a report from an online gaming store that also reduced prices by 75% and saw sales increase by an astounding 5500% (Google translation from the original). A similar test, with a price decrease of 50% saw sales increase 533%. Interestingly, after each price decrease, the company put the price back up again and saw a (slight) sales increase at the higher price too. As the article notes "the price is marketing."

Filed Under: digital goods, marketing, price, price elasticity, video games

Dean Singleton: Please Explain How Charging For Something Magically Gives It Value

from the it-doesn't dept

Mathew Ingram points us to a ridiculous quote by MediaNews CEO, Dean Singleton, who also happens to be the Chairman of the Associated Press, talking up his decision to make one of his papers start charging for online news, claiming that charging magically imparts value:

"When you give it away for free it has no value. When you begin charging for it it has some value."

That's wrong on both counts, and you would think that a major American media CEO would understand the difference between price and value. It's a bit scary that he seems to think that putting a price on something automatically gives it value. Unfortunately, he may have to learn that lesson the hard way. I could say that the blank pad on my desk has a price of $10,000. But that's meaningless, because no one would value it that high. The price you put on something is entirely independent of the value that buyers have for it. If the price you put on it is lower than the value they get from it, then they may decide to buy. But that value isn't created by the price.

Filed Under: dean singleton, journalism, price, value
Companies: associated press, media news

You Can't Raise The Price For News If You Don't Actually Add Value

from the let's-try-this-again dept

It's no secret that plenty of folks tend to confuse price and value, falsely thinking that if price = $0 then it means that the value is also 0. That's not true at all, as we've discussed multiple times. But, there's a flip side to that discussion that many in the news business seem to be struggling with as well: they believe that if they raise the price of their product, then by that very same equation, they've somehow increased the value, and people will suddenly pay for the news. Except... that's obviously a fallacy. Just because you raise the price on something it doesn't mean that people will suddenly pay.

Yet, Stephen Brill's new operation is based on this very premise. The fine folks at NPR's Planet Money spoke to Brill about his new venture, but what was frustrating was that they didn't directly challenge a number of his highly questionable assertions. They did bring on someone afterwards who disagreed with Brill, but it could have been a lot more powerful. For example, Brill claims that readers have always paid for a share of the news -- while the truth is subscribers usually barely (if at all) covered the costs of printing/delivering the physical paper, but not for the reporting itself. Brill claims that the decision by newspapers to go online was "group suicide," but neglects to note that almost everyone (with a very few exceptions) who tried to charge online -- including Brill himself -- found that people just didn't want to pay. It wasn't "group suicide," it was economic survival to recognize that charging wasn't working. He also claims that giving away content for free online is why newspapers are in trouble, which is shown as wrong later in the program, when it's pointed out that most newspapers are still profitable -- but the real problem was how much debt the papers took out. It's not about getting readers to pay, it's about how screwed up management has been.

Brill also seems to totally misunderstand iTunes, saying that it works because it's simple and cheap, so his Journalism Online project will be that way too. He leaves out the key point of why iTunes worked: the iPod. People wanted to fill up their iPods and iTunes made that easy. But in the case of news, there are already lots of other options that are easier and more efficient.

Yet, at the same time, folks like Alan Mutter (who will be on the "news" panel at The Free Summit), are suggesting that newspapers should raise their prices. But, again, this seems to be mistaking price for value, assuming that if you just raise the price, people are more than willing to pay.

Instead, the opposite seems to be true. Mark Potts recently pointed out how the online price of the Wall Street Journal (usually held up as the example of online news people will pay for) has gone up so much that he's reconsidered subscribing. Every time they raise the price, it just becomes an increasingly questionable expense, for no added value.

In contrast, however, Potts points to the Cedar Rapids Gazette in Iowa, who unlike most of these other papers, actually does seem focused on actually providing more value, not just talking about how everyone should value the paper, or nostalgically reminiscing about the "good old days" before there was competition. Instead, the paper has absolutely everyone talking and thinking about ways to really become the central hub for everyone in their community. They recognize that they can't rest on their laurels and be the voice of the community because there's no one else. Instead, they know they need to work at it, embrace new technologies, and actually strive to provide a better solution than what else is out there. That's a paper that's focused on value first, rather than complaining about price. Who knows if it will work, but it's a much better strategy than just focusing on price, like so many others.

Filed Under: business models, journalism, news, price, stephen brill, value
Companies: journalism online

Open Source Text Book Company Flat World Knowledge Gets Funded

from the disruption-on-the-way dept

We wrote about Flat World Knowledge, the open source textbook provider earlier this year, in noting how the textbook market was ripe for disruption. It's great to find out that the company has now received $8 million in funding -- which seems to go against a rash of recent stories from publications about how companies building business models with a big "free" or "open source" component would have trouble raising money these days. FWK, of course, is using free properly -- as a part of a larger business model where scarcities are charged for, but infinite goods are given away freely. Who knows if it will succeed, but it's nice to see the vote of confidence from investors.

Filed Under: disruption, open source, price, textbooks
Companies: flat world knowledge

The Coming Disruption In The Textbook Market

from the innovators-dilemma dept

Textbook pricing is always a controversial subject among college students and professors -- many of whom feel that the prices of the books are artificially inflated. Textbook publishers faced their first "shock" when internet booksellers came along, and they suddenly had less of a monopoly on the supply of books. But even that didn't decrease the price all that much. Over the past few years, a number of textbook publishers have been freaking out over the "threat" of "piracy." But rather than recognizing that they needed to improve their product to compete, they basically just looked for ways to make people pay even more. So, it really shouldn't come as much of a surprise that the market is ripe for disruption.

We've already seen some innovative business models enter the space, such as Flat World Knowledge and its free online textbooks with tiered pricing for additional products -- and it looks like various state education agencies are actively interested in moving away from the old model of super expensive textbooks. Reader MikeZ points us to an article detailing how a bunch of states have been making it easier for teachers to look at switching to online educational materials rather than textbooks, recognizing both that textbooks are often too expensive and not nearly as useful as some other resources. States that had budget line items for textbooks only are quickly redefining things so that money can be spent on other educational resources.

This certainly doesn't mean the end of the traditional textbook, but if the existing publishers follow the footsteps of other industries in trying to resist this disruption rather than adapt to it, expect plenty of angry stories about the evils of internet "piracy," with little recognition that piracy isn't the problem at all.

Filed Under: disruption, price, textbooks
Companies: flat world knowledge

WSJ Editor Claims Google Devalues Everything

from the no-wonder-no-one-uses-it dept

This has been clueless newspaper guy month around here, and it's kept up with the appearance of Walter Isaacson (yet again), Mort Zuckerman (owner/publisher of both the NY Daily News and US News & World Reports) and Robert Thomson (managing editor of The Wall Street Journal) on the Charlie Rose program, where they spend plenty of time whining about the way things used to be and why people have to start paying -- but never touch on any reason why people should want to pay. Still... that's a dead horse at this point. Instead, I wanted to focus on the rather stunning claim from Thomson concerning Google:

But one of the -- Google -- I mean, the harsh way of just defining it, Google devalues everything it touches. Google is great for Google, but it's terrible for content providers, because it divides that content quantitatively rather than qualitatively. And if you are going to get people to pay for content, you have to encourage them to make qualitative decisions about that content.

This is wrong on so many levels it's hard to know where to begin. Google doesn't devalue things it touches. It increases their value by making them easier to find and access. Google increases your audience as a content creator, which is the most important asset you have. It takes a special kind of cluelessness to claim that something that increases your biggest asset "devalues" your business. Thomson's mistake seems to be that he's confusing "price" and "value" which is a bit scary for the managing editor of a business publication. Yes, the widespread availability of news may push down the price (that's just supply and demand), but it doesn't decrease the value at all. It opens up more opportunities to capture that value.

As a content publisher, I can say, definitively, that Thomson is completely off base if he thinks Google is terrible for content providers. Google has been a huge help to us because it has helped us build our audience and our community -- which is the biggest asset we have. Thomson's mistake seems to be that he thinks the asset of publishers is the content. It's not. It's the community. It's the community. It's the community. Sorry for the repetition, but it doesn't seem to be getting through.

He's also wrong if he thinks Google divides content "quantitatively." Google's ranking mechanism is the exact opposite. It works out ways to measure the value of content at a qualitative level -- pushing the best content up. If the WSJ is afraid to compete with other content providers, you can understand why they'd be afraid -- but if they truly believe they have good content, that content will rise to the top (of course, the WSJ is harmed by its practice of making that content harder to read).

Finally, he's very wrong that the key to getting people to pay is to have them "make qualitative decisions about that content." If they've reached that stage, they're not paying. The value of the web and Google is that it lets people look at many sources and compare and contrast them qualitatively. Putting up a paywall is what devalues the content. It makes it harder to access and makes it a lot less useful. People today want to share the news and spread the news and discuss the news with others. As a publisher, your biggest distributors should be your community. And what does the WSJ want to do? Stop the community from promoting them. I can't think of anything that devalues their content more.

In that one paragraph, Thomson seems to be wrong on every single point. Is there a way to short the Wall Street Journal? It's really stunning that these newspaper guys (Isaacson goes on to agree with Thomson) can be handed the greatest mechanism for building their audience and adding value to their sites, and they whine about how it devalues them. It's the horse carriage company owners complaining about how automobiles destroy the value of a beautiful horse drawn carriage. Guys: you're looking in the wrong direction. Turn around and look forward at all that opportunity.

Filed Under: economics, journalism, news, price, value
Companies: google, wall street journal