
Some items are valuable and some are not. For example, an antique dresser used by Churchill is valuable. An old dresser lying on some street corner is not valuable, even if it happens to be the very same dresser.
There lies the fundamental misunderstanding of value by many people - that value is intrinsic to the product, that it is something within the product itself. This is wrong - value is completely external to the item of value.
Imagine you put a team of a hundred people to work on a game, and they worked for 2 years. You spend over 10 million dollars developing this game. You release the game, and 300 buy the game, making you 4000 dollars. What is the value of the game? Is it in what you put in, or in what the market saw as its value? Obviously, the value of the game was determined only in the open market, and all the money you pumped into the game did not improve its value.
That’s the fundamental understanding that has to be gained - value is only created when an object is in a market where value can be established. As soon as a person shows that he willing to exchange certain other items of value for this particular item, this establishes the temporal value of the object at that level. This value is only valid in the exact moment where the offer is made, and can be used as a reference point for any future negotiation, but that does not mean that the value will stay at that level!
For example, if a colonel is illegally selling medals for an army, the value of those medals is determined by what all the other soldiers are willing to pay for those medals. Depending on the benefit achieved by receiving those medals, the value of the medals can go very high. The minute the army loses the war however, the value of those medals is completely wiped out. Over the entire process, the medal was just a piece of metal. But its value can fluctuate massively. This is because the value of the medal is completely external to the medal.
Value is not created by the cost required in creating the product. It’s not created by the polish of the product. It’s not created by how smooth the product feels. Those are attributes of the product that may create value when the product is placed in an appropriate market, but they are not valuable by themselves.
For example, diamonds. These stones only have value because the market wants them - they are just stones that are not very expensive to produce nowadays.
How is this understanding relevant?
1. When asked for a reason, you say “because I worked so hard on it”. Your working hard on something means nothing. Your hard work on a product that fails shows that you do not know how to convert work into value.
2. A product that has not been released into a type of market has a value of 0. No matter how polished, how well working, it has absolutely no value if it is not in a market.
3. Once a product is in a market, the value of the product is not established by the value you think it has, but by the value that the market is willing to exchange for it. You can reduce the value of your product to 0 by pricing too high. For example, if you price a leather bag at 100.000 dollar, and nobody purchases it, then you can say that “The value of the leather bag priced at 100.000 dollars, is 0 dollars”. If you reduce the price to a more sane level, for example $20, you bag gains in value because you start selling it.
4. Value is created by demand. When you are working on a product, you should not be working on a product that is a good product, but a product that offers value to other people, because they will then be willing to exchange other items of value for this product. Part of the value of a product lies in the story around a product. For example, a cube stone cut by a machine in a minute is worth $10. The same cube, carved by a soldier lost on a greek island in 1942, has more value. The value of that cube is completely dependent on the story, because the cube exchangeable with many other cubes. So, when you have similar products, you can raise your value by using a story that creates value in the mind of customers.
5. The expectance of value creates value. Most low-end flatscreen TVs come from factories in the Guangzhou province in China. They are all made with similar components, but when they arrive in Europe, they are branded with different names. The companies that have created value in the past can create a higher market value for their product by simply branding it with their name. The value of the product does not lie in the customer service or in the brand of the product, it lies in the fact that people are willing to pay a certain price for that product. And the people are willing to pay that price because they believe that the value of the product is accurately advertised by the company. They believe this because in the past they (or friends) have paid this price and they have not been disappointed. Yes, it’s the same flat screen TV, but the value is different because on model has a story, and the other does not.
6. Value is temporal. Value is not something that exists in a product, so it can disappear without anything changing about the product. For example, let’s say I made an ajax web based todo list in 2001. This would be a valuable product back then. If I left it unchanged right up to 2009, the value would be next to nothing, because the demand for that product has completely changed.
7. Value exists in tunnels, and if this tunnel is broken, the value of the product can break down very quickly. For example, TV shows lost some of their value because of the free distribution of content on the internet. A new value exchange tunnel opened up, and the customer had to exchange less to get the TV show. The less tunnels to exchange a product, the more the value can be artificially influenced.
To summarize - a painting by the best painter in the world is worthless. There is no value intrinsic to the painting. The painting only gains value when some type of demand for the painting is created.