One topic I am obsessed about is the difference between value and price, and, more generally, how to price a product. Why are you ready to pay for a $1,000+ iPhone when you have Android alternatives that can do the same job at half the price? Why are women ready to waste hours at a store to pay $10,000 to $100,000 for a Birkin bag when you can buy a product with the same utility for $50 on Amazon (and delivered to your door)?
This is a fascinating topic that goes deep into our brains and relates to utility, status, and pleasure.
The most common way to price a product is to use the value the product gives to the end user. Defining the user value can be straightforward and, sometimes, quite impossible.
Imagine you create a photo editor that makes photo editing 10% faster than the competition. You can price the product based on the cost of picture editing. You will take a proxy to estimate the price labor cost and base the price on this. In this case, it is easy to define the value given to the user and derive a price based on this.
On the other hand, take physical goods like clothes or cars: it’s impossible to know the real value they bring to the user (and it highly depends on usage frequency). In this domain, you will see wild variations in terms of pricing. If you look at cars, a Toyota Corolla (~$20,000) and a Rolls-Royce (~$500,000) provide the same utility and yet, their price differs widely.
The fact is that people will see value very differently.
From some, this is the utility you get out of a product and a Rolls-Royce is better than a Corolla but not 20 times better and therefore, cannot justify buying a Rolls-Royce. They may buy a premium product (e.g., a Tesla Model S at $100,000) but cannot justify buying a luxury product (the Rolls-Royce at $500,000).
For others, this is the prestige and status you get from owning the product that justifies the price. Spending $8,500 to $100,000 for a purse does not bring you more value (e.g., it provides you the same utility: you put stuff inside a bag). And spending $500,000 on a Rolls-Royce does not make you go faster on roads with a 65 mph speed limit. People buy such products to show their status. They are willing to spend insane amount of money for not having more utility but only show their status.
We can debate if buying luxury products this is a good thing or not. I never bought any luxury products because I do not see the benefit and would rather donate the extra money to causes that need it. But the reality is that luxury (driven by a strong brand) is expensive and people buy for the status it provides.
In the startup world, charging for luxury products is not common. Therefore, you are likely to charge based on the value.
Almost all successful B2B platforms use this approach: Snowflake (storage used), Amazon Web Services (compute used) or Mailchimp (number of email sent) use this technique to actually set the price of their products. Estimate the value you provide (or save) and derive the pricing based on this data.