The Market Value of Water
Social media is abuzz right now after leaked documents show a particular pair of Nike shoes costs $16/pair to manufacture, including all materials and labor. The selling price for said shoe? $180/pair. That's an 11x markup, or stated in terms of gross margins, 91% gross margin.
"They are screwing us!" shouted one commenter. Another irate Nike fan exclaimed, "Now we know they aren't worth near $180!"
Question: What is the correct market value of this pair of Nike's? What's the proper price that should be charged?
Answer: Whatever people are willing to pay.
How much these shoes cost to manufacture means absolutely nothing when it comes time to set a selling price. The actual market value of the shoes is solely determined by how much money people are willing to spend on them.
Let's go simpler. What is the market value of a bottle of water? The question is too vague; it needs more context.
What is the value of a bottle of water attained in your home? $0. Fresh, clean water is prevalent in nearly every home in modern America. Nobody would pay a dime for a bottle of water in their home.
What is the value of a bottle of water purchased at a gas station? As low as $1. Options are prevalent, and consumers have walk-away power.
What is the value of a bottle of water purchased outside a major sporting event? Probably $2-$3. There aren't as many options as in a gas station, but consumers still have walk-away power.
What is the value of a bottle of water purchased inside a major sporting event? Probably $5-$6. You are a captive audience and have limited walk-away power. Either you want water, or you don't. You can fork over the $5-$6 or go thirsty.
See the crazy dynamics of these relationships? The exact same water can range from $0 to $6, depending on context. Context always matters! Nearly every product on earth can and should be viewed through this lens. Its market value is not based on what it costs to make or what it "should" cost (in the eyes of particular people). Instead, the market value is whatever people are willing to pay.
Sure, our individual opinions matter in terms of our own personal go/no-go decisions, but our individual opinions have zero bearing on the market value of xyz item. The crowd determines the price, not us individually. I frequently talk to my favorite meat dealer friend, Teresa, about this. The price of steaks is bonkers right now. I have a hard time personally justifying them often. However, my opinion matters none, as the broader crowd has decided they are eagerly willing to pay far more for nice cuts of meat. That doesn't make the crowd wrong, or me right. It just is.
On the flip side, I will bring Teresa wheelbarrows of money for her awesome ground beef, beef patties, marrow bones, beef sticks, and sourdough loaves. They aren't necessarily cheap, either, but they are wonderful and I'm willing to pay the piper because they add much value to my family's life. We love it!
Life is so much simpler when we frame everything through the lens of cost vs. value......to us. It's worth it to me because _____. It's not worth it to me because _____. Keep it simple, and know what the value of something is to YOU.
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