Negotiating Tips November 16, 2023

What Is Something Worth? - Knowing What Something is Worth

What is something worth?
By Dr. Chester Karrass

There is a world of difference between what something is worth and what it costs. Things that cost little to produce can carry high price tags, and vice versa. Cost is subordinate to worth from a negotiating standpoint.

Worth analysis can shed more light on another party’s needs than volumes of cost data. Accountants and cost specialists have avoided worth because it is difficult to analyze and defend. Their avoidance is unfortunate because the key to setting sensible negotiating targets lies more in what a thing is worth than what it costs.

What something is ‘worth’ depends upon how we approach this value question.

Recognize that in negotiating an exchange of goods or services, each participant may value items differently. A buyer, the buyer’s organization, the salesperson, and the salesperson’s organization do not see the product or price the same way. The salesperson may view the sale in terms of a free trip toHawaii, while the buyer may perceive it as just another requisition to be disposed of. Neither may be deeply concerned with profit, cost, or use. The exchange of goods or services can be worth something different to every person involved.

Here’s just a few ways we can look at ‘worth.’

  1. Worth may be related to a company’s ability to pass increased cost on to a third party. A product may actually be worth more to a buyer if they pay more for it. This happens when a percentage is added by the buyer and passed on to the customer.
  2. Companies who automate can build a mousetrap faster. Yet they can charge the same price that less efficient producers do. Their costs are irrelevant with respect to price.
  3. A component that does the same work as three other parts can be worth the price of the three parts it replaces.
  4. Worth may be related to a buyer’s gain. If a seller knows that a buyer will make a windfall profit in reselling the product, the seller may raise their price so they can make a claim on some of the windfall.
  5. A company may be content to sell a product at a price that merely covers direct costs, if in doing so they can keep their employees working during a slow period.
  6. 6. When a publicity agent takes on an important client at a low fee, they do so in the hope that other big-name clients will be attracted.
  7. The worth of a service may be established by a standard or custom, or based simply on ability to pay.
  8. Worth and special knowledge are related. The tax accountant with experience on a specific problem may charge on the basis of what they know rather than on a time basis.
  9. Worth may be related to matters irrelevant to the economics of a specific transaction. In mergers and acquisitions, companies may be worth a lot if stock is exchanged, and much less if cash is used.
  10. Worth can be related to what might happen is the deal falls through.
  11. Worth may be related to cost. In a free, competitive market, it sometimes is.

There are many ways to look at the broad question of ‘value’ and ‘worth’ – a very important component in any negotiation. Conduct a little ‘worth analysis’ the next time you plan for a negotiation. I find this useful when establishing targets.

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