What’s The Right Price To Pay?

In the age where information dissemination can happen in moments and hype cycles are attached to buzz words in every industry, the term value may be the most bastardized of all in the marketplace.

Value should be reflective of the price paid, but this brings up a compelling question: How do you properly determine the price for a good or service?

As Travis and I launched El Dorado Digital, an ad agency, and investment firm, we had intense dialogue around how to price our services and properly align incentives. These varied from the proper cost-structure to produce our service offerings down the spectrum to our price sensitivity as an investment firm.

Some of the questions we considered (maybe you should too).

What was the right price for a client to pay us today?

What price should they pay tomorrow?

Is it fair to be more expensive if we issued a longer time preference for value capture?

Should experience be reflected in price if it doesn’t guarantee future results?

Should we cost more because we provide more value than competitors?

How do we provide value to our partners and how do we capture it as a firm?

Needless to say, we are building a very different agency on a much different foundation. We think it’s better that way and these examples were a small glimpse of the questions we’ve asked ourselves as we go to market.

So, where does value come from?

To understand where it comes from, let’s first visit what it is. Value can be referred to as the amount of money that can be received for something; it can represent an abstract object or demonstrate the importance, it can be a function of utility. How useful is the product or service to the next, available, and willing buyer?

Value in the marketplace becomes distorted when it’s the byproduct of too many extraneous factors coming into play, price begins to deviate, and this distortion is a big problem.

Price should be set by supply and demand for a given good or service and reflect the value of a company, product, service, or some other offering. However, this becomes obfuscated, especially in new and emerging products and services.

The price can’t be based on fundamentals when it’s not well understood by all market participants and not all participants have access to the same information. Not to mention, the burden has never been higher to self educate. Service offerings are more specialized, niche, and require more learning than ever before.

Should it not be less about what competitors cost and more why a service costs what it does?

The rapid evolution of technology and infinitely replicable amount of bits all over the internet has created a burden for the consumer to properly educate themselves. Where does one put their attention?

Here are a few examples of prices going awry.

Consumers don’t know enough about any given specialized offerings to understand what they are getting for when they pay.

Are you paying this price because it is, in fact, that valuable? Has it been artificially pegged due to the cost required to produce the service in the marketplace? Is this partner concerned about their economics or yours?

Early-stage and growth investors are paying higher prices than ever before in the capital markets which means the need for larger initial public offerings.

Private companies were debuting at unparalleled prices via public offerings: Uber IPO’d at $82.4 billion, WeWork tried to IPO at $47 billion, Peloton, SmileDirect, and the list goes on. Does this mean that more “value” is being created in the private markets than ever before?

Maybe institutional investors need to push price higher since they paid more? Their primary responsibility is to capture enough value to reflect the risk of their initial investment for all the limited partners they deploy capital on behalf of. That’s called being a fiduciary.

Evolving technologies are deflationary; they can provide the same amount of value (from a consumer’s perspective) as legacy providers can at a fraction of the price. So while prices go down, the value remains constant, and the ability to capture the value by the firm is what changes.

The next time you look at the price consider this.

Whether you are searching for a product or service, maybe you look into investing in the next IPO (at this point, please don’t), I hope this note leaves you with a certain curiosity. Ask yourself, am I getting enough value? Am I willing to secure this product or service at a higher cost than it took the opposing party to produce it?

How do you think about the price? We’d love to know in the comments.