Understanding Product Value Analysis
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to support your journey of personal and professional continuous improvement and improve financial literacy around the world. Today is March 1, 2025.
As we continue our journey to improve financial literacy, and awareness of myriad financial concepts, let’s take a deeper dive into the relationship between price and value. Last week we introduced the concept of value and noted the difference between the price paid for a product or service and the value derived from consuming or using that same product or service. Optimally, for an individual consumer, the value you derive is greater than the price you pay. We argued that in the aggregate, the market clearing price of a product is found at the point where the value derived by all buyers of the product equals its price.
The main outcome of last week’s lesson was that by focusing on the value we derive from a product or service, we will, on average, make better decisions about what we buy and we’ll experience less waste from purchases we really don’t need or want. We’ll experience less emotional regret (a.k.a., buyer’s remorse) about our buying habits, will end up with purchases that provide greater utility (usefulness), and have more money to save for emergencies, major purchases, and/or retirement.
As a side note, remember that when I’m talking about “value,” I’m not referring to things that are cheap or substandard. I’m talking about the product or service’s worth to you as the consumer.
Since I’ve asked you to start thinking more about the value you derive from the things you buy, it’s instructive to understand how company’s set the market price of their products. Economists would like us to believe that corporate decision-makers evaluate elaborate supply and demand curves and set the market price as the intersection between supply and demand. Conceptually this is true across all buyers and sellers of a product—that there is an Adam Smith-style “invisible hand” that sets market-clearing prices.
However, at the individual company level, a tool known as value analysis is frequently used to set the price of their goods. In value analysis, the individual attributes of a product are determined, and then strategic pricing personnel work in concert with the company’s marketing team to identify broad groupings of consumers by establishing customer personas. Current and potential customers are placed into these persona groupings and are surveyed about how much they would pay for each product attribute.
For example, let’s suppose we work at Fiskars and need to set the price of a new product offering — a pair of scissors. The marketing team has identified two customer personas: a 44 year old DIY male homeowner, and a 39 year old female mother of school-aged children. The strategic pricing team has engaged with the product development team to identify three primary product attributes: the fit of the scissors in the user’s hand, duration of blade sharpness, and ability to efficiently cut through multiple material types.
Next, a cohort of actual and prospective customers is developed for both customer persona groups and they’re asked a series of questions about how much they value each of the three product attributes—specifically how much would they pay for each attribute holding the value of all other attributes constant. Survey results are then tallied and an estimate of the optimal product price equals the sum of the dollar values assigned to each product attribute from the survey.
The outcome from value analysis is then compared to the price charged for similar items by the company’s competition and the cost of building the product plus a profit margin that will allow Fiskars to earn a return on their investment. These three price estimates are then evaluated to arrive at the price you see in the store.
The reason I’m introducing you to how the price of the products you purchase is set in the real world is to help you think about value as the sum of a product’s individual attributes. I totally understand that doing your own calculation for each product you buy would be incredibly tedious, and I don’t recommend this type of analysis for everything you buy as doing so would likely lead to analysis paralysis.
However, to get started thinking about how you value the things you buy, I recommend focusing on five attributes that apply to almost all purchases you make. They are:
Aesthetic Value: How does the product look? Does it’s aesthetic fit with your lifestyle? Unless you’re a utilitarian, aesthetics matter to most of us.
Emotional Value: How does the product make you feel when you’re using it? Does it bring joy or frustration?
Utilitarian Value: Does it do the job it’s intended to do efficiently and effectively? Utilitarian value can be further broken down into individual product features.
Monetary Value: Is the product priced to fit within my budget?
Brand Value: Does the brand have meaning to me? Does it convey a message of trust and reliability?
There are many other factors to consider to determine the value you derive from using a product or service, but these are the big ones.
Remember, our goal is to make better decisions about what we spend money on so that we can use our money more wisely. As an individual consumer, we want our assessment of value to exceed the price we pay. We want to minimize the likelihood of buyer’s remorse (feelings of regret) by thinking more carefully about the things we buy without tipping over into the spin cycle of analysis paralysis.
Grace. Dignity. Compassion
