A word or two about value

I want to tell you about a guitar. The instrument in question is a 1969 Fender Stratocaster in black with a white pick guard. It was the standard model and was purchased in Manny’s Music in New York. It was purchased because an airline had mislaid a band’s instruments and the guitarist needed a new ‘axe’ to complete the US leg of the band’s world tour.

Over the next two decades the guitar suffered massively through its use and the guitarist’s numerous alterations to it. The white pickguard was replaced for a black one. The tuners wore out and were replaced. the guitarist shortened the tremolo arm with a hacksaw. The pickups and potentiometers were replaced on numerous occasions. Several necks were bolted on to the body as frets wore out or as the guitarist searched for different tones. the guitar’s owner decided to try a Kahler tremolo system, an alteration which required a large chunk of the body being chiselled away. Eventually the guitar was retired having, its owner thought, seen its working life through.

However, after a few years, the guitarist decided to restore his old guitar. The hole for the Kahler bridge was filled with a new piece of wood and a standard Fender bridge installed. New pickups were installed and the rest of the guitar cleaned and repaired.

The guitar saw a few more outings on tour and on a couple of new records. Then, to support charities, the musician decided to sell his black Stratocaster. That musician was Dave Gilmour of Pink Floyd. The black Stratocaster was the instrument used on Dark Side of the Moon, Meddle, Wish You Were Here and all the bands classic albums.

In the charity auction held at a major London auction house, the ‘Black Strat’ sold for $3,975,000. At the time the highest price ever paid for a guitar at auction. A price only beaten when Kurt Cobain’s Fender Jaguar was sold a few years later. That’s not a bad price for a guitar where, it is thought, the only two remaining original parts are the pickup selector switch and the bridge plate.

For comparison, if you want to by a 1969 Fender Stratocaster, not formerly owned by one of the World’s greatest rock guitarists, you’d pay between $5,000 and $8,000. If you want to buy the new equivalent of a standard American Strat, you’d pay $1,300.

So how did the buyer of Gilmour’s guitar decide its value and the limit of his bids?

Today, particularly in mature markets, it is argued that customers are a rare commodity. Customers therefore have strategic value. You need to win customers and once you have won them you need to keep them. You don’t just consider the exchange of products and services, you need to consider the value which is created by that exchange.

So how do customers calculate value?

Accountants (and some economists) would only consider the economic value, the value in use, of goods and services. This isn’t just the cost of purchase but other costs such as switching costs, maintenance and repair, cost of disposal, etc. Through showing lower cost in usage, it is therefore possible to justify a higher initial purchase price.

However, if we were to consider just the cost in usage of Dave Gilmour’s black Stratocaster, no one would pay such a vast sum. We’d either buy a 1969 Stratocaster for $5,000 or we would pay $1,300 for a brand new Pro model.

However, the buyer of the Black Stratocaster wasn’t just concerned with its economic value, they were concerned with its perceived value. Perceived value is the qualitative element of a product or brand. Whilst products may function in a similar manner, the customer may perceive one to be superior to the other. For example, Ford and Vauxhall have for years tried to gain a foothold in the executive car sector. They have had little success in disrupting the market share of brands like BMW and Mercedes. Simply, the buyers of BMW’s and Mercedes cars perceive those brands as having higher value than cars from Ford or Vauxhall.

So the purchaser of the black Strat wasn’t buying a functioning electric guitar. The guitar may never be played again. It will sit in a glass case attached to the wall of a millionaire’s mansion. Even more likely, it will sit in a highly secure bank vault where it will receive occasional visits from its proud owner.

Value is about more than price and exchange is about more than goods and services. Value is the solution to a formula expressing the differences between a customer’s perceived benefits resulting from their purchase and their perceived sacrifices from the transaction and future ownership of the goods or services.

So the customer who purchased the Black Strat perceived that he would gain greater benefits from purchasing the guitar in terms of owning a piece of history, the guitar that created lasting art, like Rembrandt’s easel or Da Vinci’s brush, than he would sacrifice in paying the huge cost of the guitar or the security needed to retain it.

The purchase of the black Stratocaster satisfied the higher Maslow’s hierarchy needs of its new owner. The guitar is now an expression of that individual’s self actualisation in terms of bragging rights, self image. It is an expression of their wealth and self image. It is also an expression of their generous nature as the profits from the sale of the guitar go to charity. In that respect it is worth far more than, in the words of Richard Thompson, “A block of wood with some wires on it”.