Saturday, May 04, 2013

Personal Values


“Nowadays people know the price of everything and the value of nothing.”

Oscar Wilde, The Picture of Dorian Gray


A good Guardian piece reveals that a house has just gone on sale in London for £250m. Another British house can be bought for £1. (Yes, you didn't misread either of those figures).


Image from Yahoo Cars

This ultimate Ferrari (it goes from 0-60mph in 3 seconds) is expected to find buyers at £1m - twice as much as its slightly less testosterone-powered stablemate.

Penfolds Ampoule of 2004 Block 42 is on sale for £120,000 at Hedonism in London.

All of these high prices strike most people as ridiculous. And of course, compared with the money most of us have to spend and the way we choose to spend it, that is precisely what they are. 

It would be hard to fit any of them into any terrestrial concept of value for money. 

But what about a small Starbucks cappuccino for £1.15 ($1.75)? At around 1/3 less than the usual UK price, that sounds like a bargain, doesn't it?




Photo from Tripadvisor

Until you put in the context of Mumbai, where it translates into 95 rupees: the price middle class Indian inhabitants of that city are queuing up to pay for their daily fix

On their way in or out of the store, those Indians will inevitably pass some of their 6m (yes, it's worth pausing over that figure too: 6...0...0...0...0...0...0) fellow slum-dwelling citizens who rely on $2 per day  simply for their survival  

Presumably, to one of those ragpickers, the notion of spending their entire daily budget minus 25c on a cup of hot liquid is also... ridiculous. But not quite as ridiculous, presumably as the Indian launch in 2009 by Mont Blanc of 3000 rollerball Mahatma Ghandi pens, priced at $3,000. (There was also an even more limited edition gold-and-silver effort priced at $25,000)

Both pens were withdrawn from sale after action by the Indian government, but anyone who really wants one can apparently bid for it on eBay. 



Whatever price that pen fetches - however ridiculous it might seem to the Mumbai beggar, or to you or me - will be its value at the time and to the person who decides to buy it. As will the final sale price of the London house.

And that's my point. I keep hearing people say that this or that price for a Pauillac, a Napa Cabernet or a Provence rosé is "silly", and that the wine in question is not "worth" that price. I used to be part of that chorus, but then I grew up and learned the basic rules of capitalism.

1) The value of anything is what someone is prepared to pay for it. There may only be one potential buyer who's ready to pay £250m for that house. Indeed there may not be any takers for it at all at that price. Perhaps the current owner will end up accepting £225m or £200m, or maybe even £150m, if he's feeling a bit strapped for cash. But whichever of these figures he pays will be the value of that house on that day.

2) The value of anything depends on two factors
  • The seller's need to sell
  • The buyer's desire to buy
3) The price the buyer - assuming he has the desire - will pay depends, in its turn on 
  • The place (a glass of Coke costs more at in a seafront cafe in St Tropez than in a London pub; prices fetched at auctions may be higher or lower than for the same items elsewhere)
  • The time (hotels have high and low seasons; umbrella salesmen can raise prices in a rainstorm)
  • The buyer's means (Lionel Messi earns over £2m per month; the extravagant purchase of the Penfolds Ampoule would be paid for in a couple of days.)
Now obviously everyone is different. There are poor people who spend foolishly and billionaires who are "careful" with every penny they spend. And everything is relative. Once a middle class indian is prepared to spend 61 rupees for a coffee - the going rate for the local CCD brand - maybe finding the extra 34 isn't too big a stretch.

My point, and one I'll address in greater detail separately, is that the one factor that is totally irrelevant to this scenario is an outsider's opinion of the "value" of whatever it is that is being bought.

You may earnestly believe that Grange or Lafite, or whatever, is not "worth" - cannot possibly be worth - the price people are paying for it. Sorry guys, that's just your opinion. Even if almost the entire world agrees with you, to the person who has decided, for his own reasons, to make the purchase, your views... are of absolutely no value at all. 





30 comments:

  1. Excellent ! Great and very relevant comments.

    ReplyDelete
  2. One factor that is totally irrelevant to this scenario is an outsider's opinion of the "value" > relegating role of influencers in decisions to irrelevancy maybe over the top, but dismissing the 'worth' of something like a brand, with all it's dimensions, can be naif and misleading.

    ReplyDelete
    Replies
    1. I'm not sure I understand you here Patrick... But I THINK we are in agreement

      Delete
  3. Hmmmm.... initially I agreed with everything you wrote, Robert, and then I paused. Of course, I cannot deny being a capitalist, as you are, as probably everyone is who reads this post, even if some are in denial. But I also believe in something much more undefined and wooly - responsibility.

    I think your comparisons in this post fell down, because you discussed the price of single, unique items (the Ferrari, the hugely priced house and arguably - though probably a few of them for all I know - the Penfold's Ampoule) and you compared these with items produced in quantity - Starbucks coffee and Grange or Lafite, even though the latter two are of course limited, whereas Starbucks is unlimited.

    My point is that your conclusions apply absolutely for the unique items, but for other - let's call them - consumer goods I think an element of responsibility has a role to play. In the case of Starbucks well that responsibility is obvious and I'm not going to start arguing about how they should use it here, as I am neither an economist nor a poverty campaigning expert. But, in the case of Grange or Lafite, these two products are part of a much wider and diverse industry, dependent on many different people and aspects beyond the simple rules of capitalism and perhaps at least to a small extent, setting an example to their peers comes into it... OK, I repeat, I am no economist, so maybe you and others will think I'm talking rubbish, but I do question this for the wider good of the wine industry.

    But Robert, I did like the post as it made me think this through...

    ReplyDelete
    Replies
    1. Thanks for your thoughtful response Wink. I agree that there is a separate discussion to be had about social responsibility, but it's a very complex area. Bill Gates was, I believe, already a big charity-donor when he and Microsoft were - to many people - Public Enemies no 1 and 2. Apple on the other hand, has always charged premium prices, paid low wages and never been known for its generosity to charity. But Steve Jobs remains a huge hero.

      Starbucks avoids UK tax and - to my mind - overcharges for its not very good coffee - but it can claim to have done much to boost the incomes of workers in coffee farms.

      Nike has employed sweatshop workers - and has contributed to the Chinese economic miracle. Do you do more "good" buying Nike trainers than cheaper own-label examples from Wal-Mart?

      The person who buys that £250m house may also give another £250m to cure Aids or feed the poor. But maybe she should give £450m and make do with a £50m house.

      And how many of the people who can afford to buy £50 bottles of wine but only spend £5, donate the £45 they've saved to charity?

      We could go on and on. And unless/until everyone signs up to some kind of complex ethical register, I'm not certain where it will get us.



      Delete
  4. @louisgeirnaerdt wrote I appreciate your thoughts and share them. But I believe there is a overrating of mankind. Many products and wines especially are priced and targeted at the "fool who is prepared to pay whatever". Greedy, rich and out of control is a growing market.

    ReplyDelete
    Replies
    1. "fools prepared to pay" have existed for a VERY long time. In 17thC Dutch tulip bulbs sold at 10x craftsman's annual wage.

      The big difference is that the spread of huge wealth is broader and access to it - for some at least - much faster

      Delete
    2. "A foole & his money,
      be soone at debate:
      which after with sorow,
      repents him to late.

      Dates from 1573

      Delete
  5. VineStead wrote To digress a little, I suppose the marketing value is the greatest worth of the ampoule to Treasury.

    ReplyDelete
  6. @VineStead wrote Has anyone actually bought an ampoule? Or are they all ‘placed’? If the latter, value yet to be established?

    ReplyDelete
    Replies
    1. Hard to say whether they've been bought or placed. I didn't say they were "worth" the price any more than the £250m house. We'll have to wait until they are seen to have found real buyers. But £1000 Lafite (previously unthinkable) IS a reality

      Delete
  7. @BluePoles wrote Had a read - all good. Note: I've never bagged the price of wine, just the viability of it being what it is.

    ReplyDelete
  8. JRo66 wrote Isn't it a function of rationality plus emotion? It's the emotion that causes price to go above rationale value.

    ReplyDelete
    Replies
    1. Yes, but emotion is involved in every purchase. Watch my 8-yr-old in a toy shop.

      Delete
  9. @BluePoles wrote If I had more characters I would have said long-term viability ... twitter is not a great platform for discussion at times...

    ReplyDelete
    Replies
    1. "viability". Why is a $1000 bottle of red less "viable" than a $20,000 return 1st class London-Sydney return airline ticket?

      Delete
  10. From my memory of basic economics at school I think there is another element to add to

    3) The price the buyer - assuming he has the desire - will pay depends, in its turn on

    ..that being the price (and availability) of substitutes. The closeness of a substitute obviously depends on the product, but for Grange see Hill Of Grace, for Lafite see Latour, for Starbucks see Caffe Nero etc. If the price of a close substitute for a product falls then the price a buyer is willing to pay for the product also falls - so the theory goes, anyway.

    Then we come to pricing to imply quality...

    Interesting debate!

    ReplyDelete
    Replies
    1. A very good point, but not one that negates my basic gist. The Indians in Mumbai can buy a cheaper alternative to Starbucks - or Costa at the same price. The fact that they queue for Starbucks says much about their relationship with that brand.

      Delete
  11. Hi Robert - agreed about the relationship with the brand, but then again, one also is happy to switch brands when one finds a nicer coffee shop nearby that holistically offers you a better experience... Also - I think we've stopped even thinking about the price we pay for coffee, we just walk into Starbucks and pay for it ... when we buy wine, it is a very conscious decision as to what to pay for it - whether we have a brand relationship with it or not

    ReplyDelete
    Replies
    1. I'm not sure that this is all true at the higher end of the wine scale - which is the target of this post. Any more than perfume users are prepared to stray far from their brand - or sweat too much over price...

      Delete
  12. PS Like the new blog profile photo... :)) Very distinguished

    ReplyDelete
  13. I agree my point doesn't negate your post. Economics starts with the basic premise - often forgotten - that consumers are rational. While rational is not exactly the same as unemotional there is a gap in understanding if that premise is assumed to be true all the time - which we know isn't the case. This gap is where Consumer Behaviour, Marketing and Advertising operate.

    What proportion of wine advertising focuses on the flavour and quality of the wine (its intrinsic qualities)? I'd argue far less than the proportion which expound on the wine's geographical origins (albeit very broadly) or the sophisication associated with drinking a particular brand (les Francais adorent Le Piat d'Or!)

    ReplyDelete
    Replies
    1. Hmmm... Wine producers DO focus on quality (though not in a way some dislike) via Parker points. Describing flavour is far tougher, especially given the difficulty of finding language that consumers like and understand. Perfume makers don't focus on quality - or the specific character of their aromas...

      Delete
  14. Mike Paul7:22 pm

    I totally agree with your post Robert. To insiders in an industry prices may sometimes appear ridiculous but insiders tend to be too close to the product.
    One can also object on moral grounds of course and that opens up a much broader and very interesting debate as to how society values goods and services and what if anything should be done about it.

    ReplyDelete
    Replies
    1. Thank you Mike. I must say that there seems to be something peculiarly puritan about the wine industry's view of itself. Talking to people in other industries, I don't hear members of the fashion industry questioning the viability of the $200 t-shirt, or motor industry people disdaining the $100,000 car. The existence of a strong ultra-premium sector cannot harm those who, for whatever reason, want to sell their products at more modest prices.

      Delete
  15. Phil Reedman12:11 pm

    Robert, can I suggest that William Poundstone's Priceless is a fine and relevant read on this intriguing subject.

    ReplyDelete
    Replies
    1. It lives by my bedside. The Gideon's Priceless

      Delete