|What is Value?|
A Creative Cow Business & Marketing Report
by Tim Kolb
©2003 Tim Kolb and Creativecow.net. All Rights Reserved.
Creative Cow's Tim Kolb takes a look at the concept of 'value' -- It's a topic that comes up over and over on the many forums in which Tim participates. In this article, Tim discusses the various factors involved in determining value and how to know if we're getting our money's worth.
What is Value, Anyway?
As a host on many web forums here at creativecow.net dealing with the video production industry and related fields, one topic seems to be appearing with increasing frequency over the last year. That topic is value. It's been brought up in many different ways from as many different perspectives, but whether the user is complaining or bragging about features, price, tech support, upgrade frequency, infrequency, potential prosperity or failure of the manufacturer, the value we feel we are or aren't getting from our equipment and software manufacturers can lead to serious questions, spirited discussions, and even heated arguments over what can be some of the larger purchase decisions we'll make during the course of conducting our business or personal affairs.
The factors we use in determining value before purchasing tend to consist of pricing, competition, and company reputation or perceived corporate well-being. We hate to buy something now, if we are convinced that the manufacturer won't be around to support the product down the road. We also are usually going to compare one product to another in relationship to price and features (or better yet, benefits) and how they fit in to our methods of doing business and style of working. A $100,000.00 video editing system may make sense for a television program producer's budgets, technical requirements and timelines, but if you are a wedding and event video producer, a sub-$10,000.00 system will most likely be very fast, affordable and functional.
In the last ten years, the pace of development has increased to almost incomprehensible levels. Once the video equipment industry migrated to became part of the computer industry, rates of innovation and advancement of television and video production equipment accelerated to that of devices like desktop computers, cellular telephones, and personal digital assistants. The new equation of lower costs and expanded capabilities has transported our industry from a time when things like VTRs and cameras where purchased and "amortized" (or expensed off against income) over 3-7 years, and dropped us right into a time where those pieces of equipment should really be scheduled for replacement or significant upgrade every 1-3 years, and 3 years is generous.
The other big change is the same equipment, which has gone from something close to a mortgage in investment and pay-down to a relative "disposable razor", has also accumulated 10 or even 100 times the power and versatility of its earlier budget-swallowing, room-heating, tweak-intensive, welcome over-staying, tube-powered ancestors.
The ultimate complication in all this is that how often equipment or software is updated becomes a perceived component in the value equation. There is almost no other purchase we make in our entire life where we judge a product by development not yet done, or how soon it's replaced. And I know of no other product area where the same information is interpreted so differently by different users. Companies who update frequently and charge fees for that service are sometimes thought of as "gouging" their users, while companies who go some longer period of time without a major software upgrade are thought of by some as "sitting on their laurels" or "abandoning their customers"....it's enough to make me happy I'm not a manufacturer.
The Pricing Triangle
So, how do we figure out if we're really getting our money's worth? This will most likely remain the domain of personal judgement and personal circumstance. We can, however, gain some insight as to why companies do what they do, develop what they develop, and charge what they charge.
One of the biggest factors in our idea of value is how much currency we have to part with to get an item in the door. Understanding some basic principles of pricing might help to lend perspective on how manufacturers determine the price of their wares. One often-used illustration of some of the basics is the "pricing triangle". The triangle is used to represent the three main factors in setting prices. The three factors are 1. Cost, 2. Competition, and, oddly enough, 3. Value (to the customer).
As each of us who operate an independent business know, it is always a good idea to charge more for something than it cost you. This is the way a business makes money, updates equipment, and invests in growth. Costs for those of us in the production business include the cost of equipment, labor, office space/facility, telephone, printing business cards and letterhead....and the list goes on. For the manufacturer of software or hardware, many of the categories of expense are the same. Most need buildings, telephones, equipment including computers, marketing and advertising costs like tradeshow booths and magazine advertising, etc. In addition, hardware manufacturers need to buy the things they need to manufacture each physical copy of the product they sell to each of us, like electronic parts that are components of the finished product such as capacitors, resistors, integrated circuits, wiring, etc., or the CDs that the software is distributed on, not to mention packaging for the product. Additionally, in the case of most of the manufacturers who make the sophisticated equipment and software that many of us use everyday, there is a very considerable research and development cost that went into creating the product in the first place.
In the case of a business that mass produces a product sold in quantity over time, just how much of the "overhead" (or costs not associated directly with producing each physical item sold, such as the R&D and office costs previously mentioned ) gets built into the price of the individual product has to be determined by estimating what quantity of the product will sell over what period of time. If your development cost is $1,000.00 for a product that you expect will sell 100 units, obviously $10.00 of the price per unit is built in to cover that cost. If you expect to sell 10,000 units, that makes for a vastly different equation, resulting in 10 cents being built into the price of the product. This scenario also has a lot to do with why the price of electronic and computer equipment comes down over time...many companies want to fund the new product development as soon as they possibly can, so the recover their development cost in fewer sales when a product is introduced, lowering the price as the company's need to cover costs is met over time and sales could use a boost . This may help to illustrate why the price of some of the equipment and software decreases as a product ages in the marketplace. Costs per unit sold gradually decrease as the manufacturer recoups the costs associated with bringing the product to market.
We all have to pay heed to the competition we face in business and our equipment manufacturers are no different. Customers have choices and the companies who manufacture our equipment and software understand this, certainly. Competition as it relates to pricing is a good regulating factor. If you are providing a service that 2 other companies in your town also provide, you want to be competitively priced. If you're much cheaper than the rest of the marketplace, you will be so busy that you can't do anything but work, complicated by the fact that you aren't profiting from your efforts like your competitors. On the other hand, if you are much more expensive than your competition, you will probably work less than your competition if customers perceive the work product of you and your competitors to be equivalent other than cost. (In fact, significantly raising prices is a time-proven method of reducing a business's volume when it becomes overloaded) You want to charge a fair price for what you offer, but be in the same neighborhood as "similar" products and services in your market.
Of course, there are no hard and fast rules to any of this and if we want to turn these principles on their head, we can look at things from a completely different perspective...
If you are priced drastically less than your competition, your main problem may not be too much volume. Your problem may be not enough. In a world that has now experienced the Yugo, "blue light specials", and the exciting world of sub-standard after-market auto parts...customers don't necessarily flock to dramatically lower prices. Sometimes they are suspicious of them. The old saying "You get what you pay for" has been proven far too many times to ignore. For a person making an important purchase decision such as many of our clients who will spend a considerable amount of money on a video production, or those of us who may be spending thousands of dollars on an equipment purchase...it's common knowledge that the costs of a sub-standard product or service over the long haul can dwarf even considerable cost savings in the one-time purchase price. On the other side of the equation, many customers want to know that they've bought the best. Let's face it, we all know someone who spent a relatively large amount of money on something because they keep reminding us of the amount every time we see them and their expensive whatever... What's annoying for those of us who have to listen to that person drone on about how much money they paid, is not such a bad deal for the company that sells the product. One-upmanship can build a great customer base, just ask German car manufacturers.
Value is really only determined by each individual for themselves, usually based on individual circumstances. Value as it relates to pricing means to let what the product/service is worth to a customer help to determine what a manufacturer will charge. You may have a product that costs you $5.00 to make and it lasts for two years....oh, and it saves the customer $100.00 per week if they buy it. To recoup your manufacturing costs, overhead and maybe 20% profit, it may bring the price to $12.00, however, over two years, that product will save that customer $10,400.00. Charging $250.00 for something that costs $5.00 to make sounds ludicrous if you are strictly looking at the "cost-plus" method of pricing, but if I'm the customer who stands to save over $10,000.00 over the next two years, $250.00 is a deal almost too good to be true, in fact $250.00 may be too cheap and you might have trouble convincing potential customers to give it serious consideration. The gap between "cost-plus" pricing and a price significantly higher that the marketplace is still eager to pay is about the fairest way I've ever seen to assess the value of a product's "intellectual property".
The difficult part in determining Value is that so many people really derive 90% of their conclusion from 10% of the total equation. Expensive sports cars (I'm talking EXPENSIVE, like Ferrari, Lamborghini, etc...) are not known for their low-maintenance. The customers who spend this kind of money don't put this trait at the top of their priority list. Cars like these are rarely primary transportation. Most of these cars spend the bulk of their existence getting washed, detailed and shown off, with the largest percentage of time spent in some type of sterile storage. Cars owned by people like most of us need to run dependably. I need to get to work in the morning and home at night, get groceries, meet clients, etc, etc. I depend on my car and my wife's car to require repairs as little as possible and to function properly in a variety of extreme Wisconsin weather conditions. Very few of us rely on our Ferrari to get to our jobs so we can continue to live paycheck to paycheck, just as there are very few multi-millionaires who collect Saturns or Toyotas because they require very few repairs...different markets and different customers with completely different objectives. Customers who buy Ferraris are buying image or a collector's item and don't care about fuel mileage, repair costs, impact ratings or even resale to some extent. Toyota and Saturn buyers want safety, reasonable cost of operation including fuel mileage and upkeep, and dependable transportation. Does this mean that no one has ever complained about a steep Ferrari repair bill or secretly desired a more sexy car than their Corolla? Certainly not. These concerns just aren't primary for each market.
The prospect of value gets REALLY complicated when you have one product, which means completely different things to different groups of people. The video equipment and software industry seems to be setting a new benchmark for complexity in this regard. 16 years ago, when I started in this industry you had "professional" video production gear and "consumer" video production gear. It's not that you had NO crossover mind you, there were the corporate video production departments that produced internal training tapes by shooting, editing and delivering on VHS, however I don't recall a single case of someone buying a $45,000.00 BetaSP deck to record home-movies. Formats like SVHS and High Band 8 Millimeter started to blur the lines a bit...equipment was available for each of these formats that could be used by a consumer for home use, or different configurations served the professional, small-market broadcast news operation and pro video user. When the first computer-based non-linear video editing systems came along, the high-end pro-level tools led with some consumer units following close behind, but these units were very different with regard to capability, service and of course, purchase price.
Through the course of all this evolution, manufacturers like Sony and Avid were carving out a clear niche in regard to the capabilities their equipment had and the level of professionalism a user had to have just to get enough work to make the payments. It got to the point where prospective clients strictly focused on a couple of small factors to delineate production companies. The vendors that shot on BetacamSP and edited on Avid MUST be good because that stuff is really expensive. Even a completely incompetent dolt could stay in business for a couple years based on an impressive equipment list before everyone realized that particular production company emperor had no real production skill pants on.
The picture gets hazier with the introduction of the DV format, or maybe I should say the explosion of the DV format, and the incredible cost reductions in computer technology, which came just a bit later...
"Where is 'Here'?"
The separation between professional and consumer is blurring in every possible way. A professional can purchase an editing software package for $500.00 that will serve his or her needs and install it on a laptop computer that costs $2500.00 or a desktop for even less and do things that even at the top of the professional industry 10 years ago, would have been thought of as virtually impossible, no matter how far out in the "future" you were prognosticating... Cameras, desktop computer technology, software muscle, image quality...it's all 10 times what it was 10 years ago, with much of it available at 1/10th of the cost. The market is now very diverse and different users have different expectations from identical products. Steven Soderbergh makes a feature film on a Canon XL-1 while weddings are being documented for much smaller budgets with JVC GY-DV500s, which are more expensive to buy... Hobbyists are spending thousands of dollars on equipment that has capabilities that weren't available to professionals 10 years ago, no matter what the cost. Broadcasters in small and even not so small markets are finding out that these same systems could work well for their needs...and so what if they end up being a mistake? They're so inexpensive, we can try a different one next year.
This all may seem to be leading us away from the substance of the discussion until we boil it down a bit...the consumer and professional markets haven't merged, they've collided. Markets that merge, merge in more ways than just price and capability of the products coming together. The two customer groups have to have an increasing similarity of NEED as well. And that just isn't happening. It may be the largest hurdle in front of the businesses that supply the video and multimedia production industry with software, hardware, and really scary stories...
How do we see the equipment and software we buy?
There is a particular scene in an episode of "Star Trek, The Next Generation" that I saw long ago that stuck with me. For those of you not familiar with, or interested in the show...bear with me. The scene is in the Captain Picard's "office", I guess. The ship's "Counselor", one Commander Troy, who's job it was to constantly unravel the mysteries of feeling and emotions to all these military-types so that they could go about doing their jobs without nuking the universe, was there as well. They were discussing how they might go about communicating with an alien race who didn't speak their language. Picard was issuing his standard order for "Tea, Earl Gray, Hot" to the device in the wall which could create anything from Filet Mignon to a Crescent wrench by rearranging matter, as long as you could accurately describe it. While he was having his beverage molecularly constructed, he was musing that communicating with other intelligent beings shouldn't be incredibly difficult... The ship's Counselor seized the opportunity presented by the tea as Picard removed it from the magical hole in the wall, and she asked him if communicating was so easy "What is that that you're holding?" Picard answered impatiently "Tea!". She replied in words similar to "Really? Or is it a cup? or round? or smooth? or liquid? or hot?..." Apparently even wise old starship captains need a little education in varied perspective once in a while.
We can take our extremely rare kernel of primetime television wisdom (Captain Stubing, where are you when we need you?) and apply it to our field today. If a hobbyist invests 4 or 5 or even 7 or 8,000 dollars in a computer set up to edit video with software and video cards, they've invested the kind of money that many families invest in a second car, or a really good family vacation, or even 2 more modest ones. This is a lot of cash. The computer is not a money-making venture for this user, it's a way to have a hobby that interests and intrigues them and one within which they can grow and refine techniques and have some fun while they are doing it. Everytime a software upgrade comes out for the system they've bought, it may mean that they have to pass on it if it is a costly upgrade, or maybe they are satisfied with what they have and see no need to spend the extra money. Every time they see the system they bought available at a lower price later in it's product cycle, they see a situation where they could have gotten the equipment they already own for a much lower price if they had waited. It may even be the case that the system has gained features or horsepower simultaneously with the price dropping due to technological developments and new economies for the manufacturer. Since the user in this scenario hasn't been taking in income associated with his system, it's hard for them to feel any other way than a little cheated because of no other reason than timing.
Many hobby users who spend this kind of money are usually spending the most they've ever spent for video equipment right now. They've been "ramping up" as they progress from strictly editing in-camera to sort of "selective dubbing" to full-fledged computer-based video post production. Make no mistake, these systems are bought with increasingly rare discretionary money the user may have been accumulating for some time and the decision was most likely agonizing because the next opportunity to purchase something of this nature may not come for several years when money can be re-accumulated in savings for such a purchase.
Let's flip over to the established professional side. As recently as 1996, $4,000.00 represented 9 gigabytes of hard drive. No computer, no software, no monitor...just one, lunch bucket-sized box with 9 cavernous gigabytes of storage. A complete system with adequate RAM (64 or 96 megabytes was a load at that time), which you probably couldn't even install without adding a board, video compression and decompression boardset, an almost unbelievable 36 gigs of media drive space, and all the necessary software from Avid, Media 100, Immix, or a very short list of additional manufacturers, would cost $50-100,000 and up. I remember our own company feeling like we went the cheap route, spending only around $45,000.00 for our first NLE system in the mid-90s, instead of the one we would have maybe preferred, had we had over twice that much to spend.
These professionals who spent this kind of money on systems 7, 6, or even 5 or less years ago, can now edit standard definition video on the same 4-8,000.00 systems we mentioned in the hobbyist paragraph above. Even when we really look at systems at the high end that are used for uncompressed and lossless editing of television programs*...the purchase price of editing muscle shows no signs that it will stop going down.
(*High Definition post production is another story that has a variety of other forces to consider, so we'll keep that off to the side for the purposes of our discussion here.)
From the professional's point of view, the return on investment in equipment is constantly improving. Cameras that are superior to what would have been considered "broadcast quality" and cost tens of thousands of dollars just a few years ago, can now cost less than 6 or 7,000 USD. Non-linear video editing applications that have quality requirements that are professional, but not requiring lossless or uncompressed, can be accomplished with systems utilizing high-quality DV video compression on increasingly "run-of-the-mill" personal computers (or even laptops) that cost a fraction of what a system cost that same few years ago. The speed of upgrades and price reductions aren't seen in the same way by professionals who use the tools to make a living. Constant upgrades of hardware and software usually mean speed and stability increases, not to mention enhanced feature sets. This all translates into increased capability to turn projects, which should mean increased ability to create income. When the selling price of a device drops below what a particular professional user paid over time, that user has the billings that the equipment helped create during the interim to figure into the picture. If they would have waited they would certainly buy the machine or software for less, but they may not have been able to create as much income in the interim... This is the main reason why most professional users only buy equipment when there is a clear benefit to them or their clients immediately. There will always be something cheaper and better coming out a year from now, however, if you have a need for it this year, you buy it because 12 months of billings against a particular piece of equipment may more than cover it's purchase price.
In any case, in contrast to the hobby or prosumer user, long-time professionals are typically paying the least they've ever paid for equipment that has the most capability they've ever had.
There are companies like Adobe who have software products that cross over almost every market niche imaginable, from pure hobbyists to broadcast production. There are companies like Apple and Ulead who make different video editing applications that are targeted at different users. Pricing, capability, and complexity are clearly different in both of these cases between the consumer and professional product.
Any manufacturer will tell you, if pressed, that the consumer and professional markets have completely different maintenance costs as well. Professionals are used to paying substantial fees for their tools, while consumer hobbyists are extremely cost-conscious, which makes sense as the pure hobbyist isn't deriving income from their purchase. An interesting development that has become more and more acute over the last several years however, is the cost to the company after the sale.
Every time a user calls tech support with an issue, the company that sold the product has to extract the cost of paying the person who takes the call and all the associated costs out of the profit they made on selling the product. Even in cases where tech support is charged for, it is doubtful that it's anything more than an attempt at some cost-recovery.
As a wider and wider variety of users start using these pieces of equipment and software, the technical support needs become both more frequent as well as more diverse...
Brave, Relatively New, World
So, here we are. Depending on who you talk to, a $5,000.00 camcorder is expensive OR disposable. Of course, everyone has different expectations of expensive things than they do of disposable things. A fast food cheeseburger that was mistakenly missing the cheese may not be enough for you to go back after using the drive-through order window...but consider buying a car that was missing a back seat? The same is true for computer software, and video cards, hard drives and the computers themselves. It's cheaper to be a professional and more expensive to be a consumer hobbyist than ever before. Manufacturers have a true struggle on their hands for the short haul. The products that they sell for video production and related work sell in different niches for different reasons. Which niche do you market to, actively sell to, LISTEN to?
Each camp has there own ideas of where the equipment and software they use should go. Each camp has different associated costs of user support and maintenance. The consumer/hobbyist/new professional marketplace presents obviously larger numbers than the traditional, established video production market, but pricing is as tight as the quantities are massive. The features wanted by each market strata tend to be different. Television and traditional video production require high-quality compositing, keying, and color correction, while other users are seeking more 3d effect transitions and an aesthetically pleasing interface. Professionals that still work in some offline/online environments need good EDL handling, while consumers like the capability of correcting misadjusted white balance with a click of the mouse in post. Consumers want smaller camcorders for convenience while long-time professionals long for the stability of a heavier camera body and the respect a large, intimidating broadcast camera once commanded from clients. Consumers want to make an image in less and less light while professionals want to make a better and better image in professional lighting situations...
Ultimately, the only answer I can come up with is to purchase the equipment that you know you can use today and to appreciate its benefits, even while being distracted watching the next big thing and the big thing after that hit the streets. It's not that you should always be satisfied with your current equipment, it's being satisfied with your purchase decision at the time you made it, and understanding that not every upgrade has major advantages for every user. The trend of decreasing prices in the face of growing capability is pretty well established. Manufacturers would go out of business if they stopped progressing, and they are listening to users all the time to find out what customers want. Competitors will leapfrog each other, and the guy down the street may end up with a system from another manufacturer that you perceive superior in some way to your equipment. The important thing to remember is that your equipment still has all the positive traits that caused you to purchase it in the first place, nothing has changed. That sort of thing will keep going on and it's the reason we have the incredible technology we use today.
No matter what equipment or software you're buying, it's safe to say that the cost-effectiveness of our tools has never been better, yet they are most likely worse than they will ever be again. I've never let what the future might hold restrict what I do today to solve my client's problems and try to serve them well. I keep telling myself that when I look at what equipment I bought 2 years ago...and I'm betting I'll be repeating myself 2 years from now. Everything changes and I guess we shouldn't live in the past...
Hey...did you guys hear Sony discontinued Betamax.....?
Tim Kolb has spent thirteen years in video production including time in television news and eleven years at his own company, Kolb Communications. He is a multiple ITVA, Telly, American Advertising, and Emmy Award winner. His business focuses on corporate and commercial projects. He can be reached at firstname.lastname@example.org
Visit Creative Cow's website and forums if you got here by direct link to this article...