We Pay For Value Not Effort
One Takeaway
Costs don’t determine prices. Consumers’ willingness to pay does. Value flows from the consumer backward to producers and guides what gets made and how.
Who Really Sets Prices?
It feels intuitive to think that prices are simply a business’ costs added up with a profit margin tacked on top. That may be how some management books help business owners start making decisions, but it’s not how the economy actually works in the long run. And it doesn’t reflect the main mission of every business: creating something that customers value.
In reality, consumers dictate prices. Or more precisely, prices of goods reflect what consumers are willing to pay. If buyers don’t think something is worth the asking price, it doesn’t sell. Period. It doesn’t matter how much it costs to produce.
For example, a coffee shop can’t charge $10 for a cup just because the beans were expensive from a limited small batch. If customers aren’t willing to pay that much, the shop must either lower the price, improve the experience, or go out of business. The consumer has the final say.
Price Comes Before Cost
It might feel backwards, but value flows from the customer to the business, not the other way around.
Here’s how it works:
Customers express what they value by what they’re willing to pay, and actually making a purchase.
Producers adjust their budgets, inputs, and strategies to meet those preferences.
Resources (like labor, materials, and tools) get their value from how much they help create things consumers want and from producers competing to buy them.
Think about smartphones. If consumers are excited about a new camera feature, phone makers will bid more for the sensors and chips needed to deliver it. Those components didn’t become valuable on their own. They became valuable because consumers wanted the results they helped create.
How Are Costs Priced?
The price of a business’ inputs (the business’ Costs) come from competition. Every producer is trying to buy the same limited pool of resources. These resources can include things like skilled labor, land, equipment, or ingredients. The more valuable a resource is in creating something producers believe people want, the more producers will be willing to pay for it.
Take microchips. If automakers and smartphone manufacturers are both racing to buy them, prices may rise. But those prices are just a reflection of what consumers want and value; like more EVs, more phones, more laptops. Producers don’t just buy inputs. They bid for the ability to meet consumer demand using those inputs.
What This Means for Businesses
If you’re producing something, your job isn’t to justify your costs. It’s to create something people value and are willing to pay for.
Focus on customer value first. You don’t get to decide what your product is worth. Your customers do.
Work backwards. Start from what people want, then figure out what you can afford to spend to deliver it.
Don’t confuse effort with value. A diamond found on the beach is worth the same to a buyer as one mined by a team of 12. The consumer doesn’t pay for your struggle. They pay for what it means to them.
Sometimes the market will show you that what you produce isn’t valuable enough to cover your costs. Other times the market may value what you have to offer so much that you can have a high markup on what you produce.
What matters is that customers don’t care what it costs you to produce your good or service. They care about the value you bring to their lives. Keeping your costs low is important, but creating value for customers matters more.
Why This Matters
This isn’t just a simple idea. This has real consequences for how resources are used and how businesses succeed or fail:
A producer who ignores what customers want will likely overspend and underdeliver.
A business that listens carefully to what consumers want can find creative, efficient ways to meet demand.
Transactions driven by consumer choice reward how well producers respond to consumers.
This simple fact also keeps everyone honest. No one can just raise prices to cover mistakes. If the consumers don’t want a product or service, it doesn’t sell. That’s the profit and loss feedback loop working as intended.
The Bottom Line
Consumers don’t care what something costs you. They care what it’s worth to them (their value). And that simple truth keeps the economy focused on what matters most: creating real value for real people.