Thursday, October 1, 2009

Cost and value

I just read a post by Seth Godin entitled "If Craigslist cost $1". I've used Craigslist and I agree with him that even a small charge for the service would likely clean it up a whole lot. At $1 per listing, most people with a legitimate need would still choose to use the service. But, for scammers and those with not so virtuous purposes, the small charge and thus the requirement for verifiable identification for the money exchange, would push them out of the game. Plus, the money coming in for using the service could go towards making the service better or making the owners richer or be used for philanthropic purposes or whatever.

The post made me think about cost and value. What if the cost to use the service was higher ($5, $10, $20)? At what point would the cost outweigh the value? Well, certainly the higher the cost to use the service is, the higher the cost of the items sold on the service will be, right? I mean, I don't think I'd want to pay $10 to use the service if I'm going to sell my item for $10. Maybe if I'm selling my item for $20, I'd be willing to pay half of that to get it sold.

My actual, real-life use of Craigslist has typically been for a few basic reasons:
1) I no longer use the item(s) but they are in good enough shape that I think someone else would/could use them.
2) Having someone come pick up the item and take it away is much easier than trying to figure out how to get it to my local Goodwill (stuff like furniture and larger items).
3) I bought something on a whim and either never used it or only used it once or twice before realizing that I really didn't want or need it.

The real bottom-line for me has typically been that I just wanted to get rid of something that I was no longer using but believed the item to be in good enough condition that it "shouldn't" be thrown away. (Waste not, want not!) So, in most every case, even if I only asked a few dollars, the point was that I was able to get the items out of my house and off to someone else who wanted them. I didn't have to do anything except put up an ad, answer a few calls and then exchange the item(s) for cash when a buyer appeared.

It wasn't about the money that I received for the item. Even if I hadn't sold the item, I would have gotten rid of it somehow, so the money was just a "nice to have" benefit. The value of the service was that it was easy for me and I believed it was a win-win for both me and the buyer. I'd have been willing to pay a fee to use the service.

But really, this isn't about Craigslist. It's about the cost (price you're willing to pay) of something versus the value having or using that something has to you. Another example is software. Some of my favorite software tools have cost me little to nothing to obtain. I use them constantly and have been very happy to pay for them (most everything I'm thinking of has cost less than $30 each). But there are other products that cost *a lot* ($1,000 or more) and while I really might like to have them, I'm not willing to pay that cost. I'm particularly not willing to pay when there is a comparable product that is available for free or at a very low cost. The first example that comes to mind is TOAD vs SQL Developer. [sidebar] I am not advocating either product nor am I comparing features or virtues of either. [/sidebar] Since SQL Developer is free, I'd very likely choose it instead of the costed product and use it until I found that it didn't meet my needs to such a degree that the cost of buying TOAD would be outweighed by the benefit of having it. Even then, I'd hesitate unless the feature I needed was so key/critical that I could easily identify how having that feature would save me money in the long haul.

But, if TOAD was priced much lower, say under $300 (instead of the base edition being nearly $900), I don't think I'd hesitate to buy it. This is where I wonder how companies decide to price their products. Is it truly a "what the market will bear" pricing strategy or what? I likely have a poor way of looking at it, but if I had a software product that I think everyone should use, then I'd be willing to sell it at a lower cost in hopes that I'd sell more and thus make up the difference. In other words, I'd rather sell 1000 copies at $300 each than 100 copies at $3000 each. I'd say there is an excellent reason why pricing isn't done this way and there's also a reason why I'm not in sales and marketing. ;)

How about you? How does cost and value fit into your personal buying decisions?

1 comment:

Brian Tkatch said...

Toad is a bad example for this.

1) Toad has a free version.
2) Many people pirate toad and the company does very little about it.
3) Toad is aimed at companies purchasing the product, not individuals.
4) Individuals request it from their companies after they end up using it.

The way i see it, in one sense or another, Toad is free for non-commercial use, creating a slew of users who want it, and get companies to license it for commercial use.

Personally, i think paying or non-paying in itself is the biggest issue. SQL Developer is free. If it even cost just $1, i would look at all products. There mere idea of paying is enough to make me use any free product, even if the cost was $.01. Once i (internally) agree to pay, how much i pay is less relevant. Though, strangely enough, before i decides to pay, how much it costs is more of a factor. But that's just me.

I worked at a company that noticed its competitor's product costs 4.5 times theirs and was doing much better. So, they repackaged their product, charged 3 times the price, and sales went up. Apparently, people rate the quality of a product by how much it costs. Perhaps using the idea that:

if it costs more, the market must like.
If the market likes it at that price, it must be feature-laden/easy-to-use/have good support.
(Eventually, when using the product, assigning current costs as the "market value" of the current product, which becomes the benchmark.)