One of the greatest misconceptions I had before my MBA was thinking that things had value.
I had this idea that a thing, whether it was a company, a product or a service, had a value, and that getting an MBA would teach me out how to calculate that value.
But what I’ve learned over the past two years is that things don’t have an intrinsic value based on just what they are, but also on the 5 other “Ws”: who, when, where, how and why they are being valued. If you want to find the “value” of something, you need to ask 6 questions:
- Who is doing the valuing? You might call this defining or segmenting the market. To increase the value of something, find the people who value it most — who really hate being cramped on flights and can pay for business class, or who love watching Olympic volleyball.
- When are they doing the valuing? In other words, what else has just happened to them? Maybe they are entrepreneurs who are about to go bust; they may value cash enough to give up more equity than they would otherwise. Or maybe they are on a first date, and happy to splurge on champagne. Or just lost their life savings in the financial crisis. Timing matters.
- Where are they when they are valuing it? You might pay $15 for a gin & tonic at a posh club, but would balk at paying that in a dive bar. “Where” is relevant to real estate, as anyone renting a flat in London knows all too well, and anything that relates to real estate. Which used to be almost everything, before the internet anyway. (And now with mobile browsing location detection, the “where” is making a comeback.)
- How are they valuing it? People value most things in reference to other things, so understanding what someone is using as a comparison matters: are they comparing the price of the Gucci wallet to cheaper wallets, or to other more expensive items at Gucci? Are they valuing a company based on its assets today, or on its potential future cash flows in 5 years?
- Why are they valuing it? Buying a white cake costs $20. Buying a white cake for a wedding costs $200. People will value the same thing in radically different ways depending on the reasons for valuing it. Valuation by brokers can be particularly tricky for this reason: are they pricing the house low to get it sold, or high to increase their commissions?
- What are they valuing? Oh yeah, the thing itself matters too. A little.
Well, Liz, you think, what an obvious Aabservation. Of course the value of something depends on who, when, where, how, and why as well. Of course it’s not just the “what.”
But I promise you’ll forget that complexity as soon as you see a statistic about the value of Greek debt (“the” value? really?), or observe price volatility in the stock markets (surprise!), or see a supply and demand curve showing a thing’s value at the intersection.
If you are interested this topic, I’m happy to chat further as we learned a number of techniques to get at the value for a specific transaction throughout our MBA — in marketing, financial modeling, negotiations, and organizational behavior classes.
But that would take longer to explain here, and your time, by any metric, is valuable.