Value of Things

Like the story of the Blind men and an Elephant knowing and being aware of the different perspectives gives you a better understanding of a situation – helping you make better business decisions. 

When considering the price and value of assets, there are several lenses that you can look through.  Firstly, it should be noted the “Real Value” of things cannot be accurately determined without context or purpose – a bottle of water at home is worth cents, in a concert a few dollars, in the desert priceless:  

• Cost Price/Value – the original price of an asset at which you purchased it. This is one of the simplest ways to value something as it is what you bought it at.
• Book Value – the value of an asset according to its balance sheet. This is typically based on accounting depreciation standards which takes the cost of the asset and subtracts depreciation expensed.
• Market Value – the value of an asset according to the market forces (supply and demand).
• Fair Value – the estimated market value according on the open market. This is different from market value as it is calculated rather than solely on market forces.
• Scrap Value – estimated value of the asset at the end of its life. For example you buy a truck for $10,000 and you expect it to run for ten years at which you can no longer use it and sell it for $1,000.
• Perceived Value – the customer’s intangible perception of what they think the asset is actually worth. This is increased by marketing, branding and reputational efforts which raises
• Economic Value – the benefit derived from a good or service to another. This is also rather intangible as it can incorporate non-financial metrics such as positive externalities, association and some perceived benefits.

This understanding of intent and purpose can result in variations of prices – capturing these differences is where one can take advantage of arbitrage.  By considering the market value, perceived value, accounting values and cost price you can make a better informed decisions for your business model.

If your cost price is much less than the market value, it could be that you have found a cheaper form of production and can profit on this margin.  This is commonly when you find a more efficient/effective means of production without a significant compromise on quality such as cheaper natural sources or means of production.  For example, NZ’s environment is well suited for kiwifruit with fertile soils and have rather basic pH soil – NZ’s climate and volcanic soils produce its ideal growing conditions with minimal assistance.

If your market value is lower than the perceived value you can take advantage and pocket the difference.  This is commonly used by resellers of limited edition products like sneakers where they typically sell at 30% markup but can go as high as 200% or more.  This is typically generated by branding, limited supply and hyper generated by mass mentality thus is subject to fast flash crashes.

When you understand the value and prices that propel your business, you are more aware of what can affect your business performance and strategy.  If you want a consultation or advice on the underlying drivers, contact us today!