The difference between price and value

By October 1, 2009Business models, free

Mike Masnick at Techdirt has a post up lambasting Dean Singleton, MediaNews CEO and Chairman of Associated Press for the saying the following whilst defending his decision to make one of his papers start charging for online news:

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

Now, as Mike says it is nuts to think that sticking a price on something gives it value, and I agree that in this instance Dean is misguided.  That said, I can understand where the thought originates.  It is a common, and I think accurate refrain, in business that if you start giving something away for free people value it less – largely for psychological reasons.  Dean’s mistake is to not spot that this causality is only one way – i.e. just because giving something away lessens the perception of value doesn’t mean that charging for it increases the perception of value.

To get theoretical about it – utility determines value whilst supply and demand determine price.

Mike explains this point in more detail in his post from Jan 2008 News Is Valuable, But Value and Price are Two Separate Things in which one of the commenters points out that oxygen is perhaps the best example of something which is free but has value.

All this is important, critical even, for the news industry as it grapples with its future business models.  All to often the arguments in defence of charging for news focus on the fact it has value rather than the price it can command when supply is abundant.  Much the same logic applies to music, film and games as well.

  • Apparently Dean assumes that by adding a price to a previously free magazine that somewhow the readers of the magazine will see this as adding value? Hardly logical. If he is going to add a price, he's going to have to add value to the magazine to justify the price. Just saying that the addition of a price merits value creation is not credible. What “added value” are the readers gaining from the magazine having an added price? If there are new features and benefits then a price introduction can be somewhat justified. If not and its the same content and features as before, then price is no longer an added value but become a penalty for loyalty.

  • chrispadfield

    Surely to a consumer value is what they would be prepared to pay – what they have to pay. Most companies spend a lot of time trying to get this to as close (but not at) zero using price differentiation (subject to competitive pressure of course)

    There are a few things where value is increased as cost increases. Diamonds, limited edition cars, art, nightclubs and/or dating websites are examples of this.

    I would imagine that most web users value facebook/google search/email more than the rest of all internet services combined – despite being the bits they don't pay for. While some fraction of people would likely pay for these services if forced to, I doubt anyone would say it increased their value!

    >> All to often the arguments in defence of charging for news focus on the fact it has value rather than the price it can command when supply is abundant.

    I think that some people who make this claim would question your premis that the type of news they are talking about is abundant. They are claiming it has value because it is not abundant. Surley the same applies to music/film/games where the reason that price is trending to zero – is not because there is now so much content competing that the price trends towards zero and that people are not prepared to pay for it – but that because it's easy to get valuable content for free through piracy so they are not prepared to pay the pricing they used to.

  • Hi Chris – what I was trying to say is that people value things they won't pay for – including some of the examples you give, e.g. Facebook.

    And I'm not sure I agree with the guys who say their media content isn't abundant. With news it is easy to see the multiple free options available, and piracy makes music etc. de facto the same (although even without piracy I think the same would be true eventually).

  • chrispadfield

    Agreed on first point – although it often amazes me how irrational people (including myself) are about paying for some things or not. Facebook provides me far more utility than a lot of things I pay for but like most people I doubt I would pay for it if forced too.

    Media/news is certainly abundant, good/news media – and just as important someone to select/recommend/package good news/media is not. The later might be solved by technology – but the the former will always have a cost to produce that needs funding; or it simply wont exist.

    A direct question: If you think people will not pay for news, do you think news companies will be able to come up with a business model that generates enough revenue to pay for the creation of high quality news? If not, and given the political necessity of having an informed citizenship for a functioning democracy – does this further validate the need to fund the BBC – and perhaps other countries will have to increase public support of news?

  • I think it might go two ways – either news companies will find alternative business models, as Techcrunch, Huffington Post, and eConsultancy have done at a small scale, or following an almighty shake up we will end up paying!

  • chrispadfield

    Surely to a consumer value is what they would be prepared to pay – what they have to pay. Most companies spend a lot of time trying to get this to as close (but not at) zero using price differentiation (subject to competitive pressure of course)

    There are a few things where value is increased as cost increases. Diamonds, limited edition cars, art, nightclubs and/or dating websites are examples of this.

    I would imagine that most web users value facebook/google search/email more than the rest of all internet services combined – despite being the bits they don't pay for. While some fraction of people would likely pay for these services if forced to, I doubt anyone would say it increased their value!

    >> All to often the arguments in defence of charging for news focus on the fact it has value rather than the price it can command when supply is abundant.

    I think that some people who make this claim would question your premis that the type of news they are talking about is abundant. They are claiming it has value because it is not abundant. Surley the same applies to music/film/games where the reason that price is trending to zero – is not because there is now so much content competing that the price trends towards zero and that people are not prepared to pay for it – but that because it's easy to get valuable content for free through piracy so they are not prepared to pay the pricing they used to.

  • Hi Chris – what I was trying to say is that people value things they won't pay for – including some of the examples you give, e.g. Facebook.

    And I'm not sure I agree with the guys who say their media content isn't abundant. With news it is easy to see the multiple free options available, and piracy makes music etc. de facto the same (although even without piracy I think the same would be true eventually).

  • chrispadfield

    Agreed on first point – although it often amazes me how irrational people (including myself) are about paying for some things or not. Facebook provides me far more utility than a lot of things I pay for but like most people I doubt I would pay for it if forced too.

    Media/news is certainly abundant, good/news media – and just as important someone to select/recommend/package good news/media is not. The later might be solved by technology – but the the former will always have a cost to produce that needs funding; or it simply wont exist.

    A direct question: If you think people will not pay for news, do you think news companies will be able to come up with a business model that generates enough revenue to pay for the creation of high quality news? If not, and given the political necessity of having an informed citizenship for a functioning democracy – does this further validate the need to fund the BBC – and perhaps other countries will have to increase public support of news?

  • I think it might go two ways – either news companies will find alternative business models, as Techcrunch, Huffington Post, and eConsultancy have done at a small scale, or following an almighty shake up we will end up paying!

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