A thought experiment:
I am successfully selling something at £500. I tell people that all day.
Then, an employee tells a customer the price is actually £100.
I am annoyed but then - as I am legally obliged to do - sell it for £100
Is the right price for the product £500 or £100?
This, give or take a few adjustments, was the question Professor Philip Cowley posed on Twitter recently. Cowley, whose speciality is politics, was obliquely referring to a debate the previous evening in the British House of Commons in which members of parliament had been given conflicting information over whether the outcome would or would not be a vote of confidence in the government which might potentially lead to a general election.
But, like a number of others, I treated the experiment literally, because it seems to me to relate quite usefully to wine. What is the ‘right’ price for a bottle of Burgundy or Napa Valley Cabernet? The amount you could have bought the then-current vintage for a few years ago, or the sum you would be asked to pay for the one that’s available today?
And what’s the right price for a new wine that’s just been launched and has no track record of its ageability or appeal in the secondary market?
The response I liked best came from someone called Edward Greening who simply said
“The price is £100, the value is £500”.
Tomorrow, Professor Cowley might try to recoup his 'loss' by hiking the price of his item to £1,000. Until someone happily hands over that much cash, the value will still be £500 - the amount others have been happy to pay.
Price and value often enjoy a complex, not to say loose, relationship. What is the current price of a barrel of crude oil? What is the respective value of that fossil fuel to the producer and the customer?
If Professor Cowley has customers happily buying his ‘something’ for £500, or if Berry Bros & Rudd or Zachy’s have people ready to pay that much for a bottle of wine, that is its value - to those buyers. And - provided there are enough of them to ensure that Cowley, Berry’s and Zachy’s aren’t left with any unsold stock, they are the only ones who count.
Hermes, the luxury goods leader whose revenue, Fortune reported, went up by 24% to €3.1 billion in the third quarter of 2022, is raising the price of its handbags by 5-10% next January. This would push the cost of a Birkin 25 in Paris through the €8,000 barrier. The company justifies the price of these and its other products by pointing out that each item is hand-made by skilled crafts-people using the highest quality materials. Those prime-location shops don’t come cheap either, and nor does the glossy advertising, Even so, Hermes made a very attractive recurring operating margin of 42%. And, its business model is robust enough for it to continue to increase production of its bags and leather goods by 7% every year.
Most people I know would balk at paying even €2,000 for a handbag (assuming they were unaware of the secondary market demand for a Birkin). Others, I’m sure, might happily hand over €10,000 without blinking.
Stated simply, the price - of a box of chocolates, a bunch of flowers or a bottle of wine - is what the vendor would like to get for it. The value is what sufficient customers are prepared to pay.
