Why Anyone Buys Anything

So, why do we buy?

It turns out this is a pretty easy question to answer: I will buy something when its price is less than its value to me.

It sounds simple, and it is… at least at a concept level. In practice, dissecting value can get thorny, and we’ll explore that in other articles. But at a summary level we can explain every purchase with those two points on a vertical line. Here’s the whiteboard version:

 

Why Anyone Buys Anything

 

Now about that Benefit:

It is Personal. It has to be my benefit. I may agree that a $20 filet from Outback is a great deal for someone, but if I’m a vegetarian I don’t want it, and I won’t buy it.

It is Perceived. I can be persuaded that I need a $1000 mattress to help me sleep better and improve my health and productivity, that the Benefit is far greater than $1000. But as soon as I see the same mattress on sale for $700, the perceived benefit of that mattress drops and I’m not likely to spend more.

In YOUR business, each of your customers buys from you because their perceived benefit exceeds the price you charge them. Every customer that fires you (or doesn’t renew) leaves because their perceived benefit is lower than the price you charge.

So that’s why we buy… but why do we sell? In short, we sell because the price we can obtain for a product or service is greater than our cost. Let’s add the seller’s cost and upgrade our diagram:

Benefit - Price - Cost


I sometimes call this the spumoni chart because it reminds me of the three-color ice cream carton. Speaking of ice cream, let’s walk through a simple transaction:

  1. It costs the ice cream shop $2 in materials, labor, rent, marketing and everything else (Cost, or C on the chart) to produce a deluxe milkshake.
  2. The shop charges $5 (Price: P) for the milkshake; I buy it.
  3. The ice cream shop makes a Profit (or Seller’s Surplus) of $3 (P – C, or $5 minus $2)
  4. My personal, perceived Benefit for the milkshake is $9 (B), comprising nutrition, diversion, happiness… etc.
  5. My Value (or Buyer’s Surplus) on the transaction is $4… (B – P, or $9 minus $5). Even if they had charged $8 for the milkshake, I would have bought it and enjoyed a $1 surplus.

There are many complexities to price, cost, and value, but the basics are as simple as a chocolate milkshake.

Try This: The next time you find yourself in a price discussion with a customer or vendor that gets emotional, draw out the spumoni chart on a piece of paper or whiteboard. Start talking about what you’re getting out of the deal, and what they are getting out of it.

A price discussion is almost always negative; a value discussion is usually positive. [See a video illustration of this here.] 

Send a reply to let me know your thoughts or pass this along and encourage a friend to join our list. Wishing you maximum value,

Jack Quarles

 

Want more great articles that will help you determine the best values for your money? Here are some articles that will help you when deciding to buy anything for your business:

What Are You Buying Anyway?

Business Buyer Beware: The “Lowest Price” Mirage

 

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