The Concept of Value, or Why Price Cuts Can Fail

            What makes a product valuable to a consumer? The answer is simple: if a product satisfies the needs of the consumer, then the consumer will consider the product valuable. On the other hand, if a product does not satisfy the needs of the consumer then it is not very valuable to them at all.

            In order to develop a successful product, companies need to ensure that the services offered by their product are what consumers deem valuable. If they can do this they have a product that is valuable to consumers and is likely to do well. If there is a mismatch between the services offered by the product and what consumers consider valuable then the product can struggle, regardless of the effort spent marketing and developing it. The ongoing conflict between the PS3 and the Wii demonstrates this quite clearly.

            The PS3 is undoubtedly an impressive piece of equipment. Not only does it offer superior graphics, it is also capable of playing Blu-ray disks. What does this tell us about how Sony perceives the market? The inclusion of superior graphics suggests that Sony believes that consumers value graphics. Similarly, the inclusion of Blu-ray playing capabilities, suggests that Sony believes that consumer also value the ability to play Blu-ray disks.

            How well was the PS3 sold? The answer is: not very. This suggests that Sony may have misread what consumers need that is, it may have misjudged what consumers deem valuable. However there are others who do not think that Sony has misread the market. Instead, they argue that the PS3 is valuable to consumers, that consumers do value superior graphics and Blu-ray. What has happened, they argue, is that the price of the PS3 exceeds the value placed in it by consumers. Cut the price, it is claimed, and sales should increase dramatically.

            On the face of things, there is nothing obviously wrong with the price-cut argument. However it makes an assumption. Namely, it assumes that what Sony considers valuable (superior graphics, Blu-ray) is what the consumer considers valuable. If this assumption is false and consumers do not consider the services offered by the PS3 to be valuable then no amount of price-cutting will help. Paying half price for something that is worthless to you is still paying too much. So has Sony misread the market? The answer to this question lies in the Wii.

            The Wii is undoubtedly inferior to the PS3 in terms of the graphics that it can provide. Nor can it play Blu-ray disks. In fact, it cannot even play DVDs. Yet it has consistently outsold the PS3 since its launch and shows no signs of slowing down. Why? Look at how the Wii is marketed. The ads for the Wii focus not on the game being played, but more often, on who is playing the game and how they are playing it. The Wii sells itself as being approachable and family friendly. It is seen as easy to use and social. These are the qualities that Nintendo thinks consumers deem valuable. The response of the market has been unequivocal: Nintendo was right.

            This is not to say that graphics do not matter. They do. But above a certain point, increases in graphics quality cease to matter. While no one would pay several hundred dollars for a console incapable of producing better graphics than the NES, it seems that the graphics of the Wii are, by and large, considered good enough. If superior graphics did matter, if there was no ‘good enough’ threshold, then the PS3 would be a success and the Wii a failure. The graphics of the Wii, while not spectacular, meet the needs of consumers.

            Similarly, if Blu-ray was what consumers valued then the PS3 should be in front of the Wii. It is not. This suggests that Blu-ray is not valuable to many consumers. There are several possible reasons for this. Firstly, the improvement in sound and picture quality offered by Blu-ray requires specific audiovisual equipment. To the majority of consumers who do not have this equipment or are unwilling to invest in it, Blu-ray has no value. Nor is there reason to suspect that this story will change in the near future. The jump in sound and picture quality between VHS and DVD was vast. The jump from DVD to Blu-ray is nowhere near as large. The slow uptake of Blu-ray even after the demise of HD-DVD suggests that for many consumers DVD is good enough. The extra sound and picture quality of Blu-ray offers little value to them because DVD meets their needs.

            Blu-ray does not only offer greater sound and picture quality it also offers larger storage capacity. In gaming terms this equates to potentially larger games. If larger game size was valuable to consumers then again, PS3 should be on top. But this is not the case. It is likely then, that as with graphics, there is a game size threshold. The games on the Wii are not always as large or as complex as their PS3 counterparts but for most consumers they are large and complex enough, as demonstrated by Wii software sales. Therefore the potential for larger games offered by Blu-ray does not translate into greater value as perceived by consumers.

            Given all of this, what effect will a PS3 price-cut have? The answer is: not much. The values offered by the PS3 (i.e. the services it provides) are not what consumers deem valuable. Paying half price for something without value to you is still paying too much. If this seems unbelievable, consider the Xbox360. Despite some of the models of the Xbox360 being at or below the price point of the Wii it has not made any significant inroads into the Wii’s sales lead.

            To finish with a somewhat trite example, consider two ice cream companies. One of them makes vanilla and the other makes strawberry. Both of them want me to buy their ice cream. Unfortunately for the vanilla company, I like strawberry ice cream. They can cut their price in half, even put in real vanilla and it will make no difference. I do not value vanilla, but I do value strawberry.

Is there a summary?

Good post
What is based on Blue Ocean Strategy ? Break value/cost ratio

Those are flawed logics. You're talking as if value was totally separate from price. If that was the case, then Nintendo would have charged $600 for their console, and it would still sell like bazookas.

Choices, and value, aren't as black and white as you portrait here.

I may strongly prefer strawberry ice-cream, but I may very well end up buying vanilla if I think it tastes good too, and the vanilla company is selling it 30% cheaper.

I never claimed that value and price were totally separate. In one of the paragraphs I outlined the price-cut logic, namely that if the product is valuable but costs too much then lowering the price should increase sales. This logic is perfectly valid when the product is valuable to the consumer, but I argued that the characteristics of the PS3 are not valuable to the consumer.

Nintendo could not sell the Wii for $600 because while it would still be valuable to the consumer its monetary cost would exceed its value. However, if the Wii did originally sell at $600 then subsequently cut that price to $250 then I would argue that its sales would dramatically increase unlike the PS3. It is also worth noting that prices for the Wii on sites like ebay have exceeded those of the PS3 in the past, for instance during the last Christmas period.

Your analogy with the ice cream is not correct. In your analogy you like the taste of vanilla, meaning that you value it, although perhaps not as much as strawberry. In my example, I do not like the taste of vanilla and place no value in it so cutting its price will not produce an effect. This is what the PS3 and Wii battle is currently like. What Sony and Nintendo perceive as being valuable is very different and this is reflected in what services their consoles off. However it is Nintendo's view that best corresponds with the values held by consumers and this is reflected in the console sales.

In the end the consumer will decide and I am waiting to see whether or not Sony does institute a price-cut.

The problem is that cost ( and price ) depend on values offered.

Example: Say PS3 sales are low cause its high price is moronic because forget that the price is caused by the "high cinematic/hollywood" experience offered by Sony.

There is a paradigm shift of values in the VG industry nowadays. It's a funny period to watch.

The "relative" low cost/price of Wii is because Nintendo broke value/cost balance.

EDIT:

Obviously it's not black and white. There is people mildly interested by a product ( with its set of values ) but won't purchase it at certain price.

However in VG industry is based heavily on momentum and Wii is getting a ton of it day in day out.

You're confusing concepts.

Values and Value are not the same thing.

Values are what people look for in a product. Values have a value to people but they are not the same thing.

You are absolutely correct to say that value is directly linked to price. But you are incorrect to think that values are. Given any product a consumer is interested in, they will have a set or list of values which are qualitative not quantitative, products of interest that contain those values have a value based on the sum of those values and not the individual values themselves.

If that confused you then consider these definitions:

Values - the ideals, customs, institutions, etc., of a society toward which the people of the group have an affective regard. These values may be positive, as cleanliness, freedom, or education, or negative, as cruelty, crime, or blasphemy.

Value - relative worth, merit, or importance;

-also- 

Value - monetary or material worth, as in commerce or trade

you wrote to much...

 .......Did you just say that PS3 graphics aren't superior to Wii's graphics, and that they sacraficed better graphics in order to include Blu-ray? I've never heard anyone argue about that second point, so I don't know whether it's true or not, but........

You said PS3's grahpics aren't superior to the Wii's? My whole grasp on reality is being distorted right now.