Perceived Value versus Real Value versus Potential Value

I deal with this every day. I’d like to think that it has made me more realistic about the real value of the things I possess. Here is what I see almost daily. A person walks into my shop with an item that they perceive as having a substantial real value. Sometimes they ask me for the price they see it as worth – and sometimes I say “Yes, I’d like to buy that from you and your price is fair.” This is the place where perceived value and real value meet. This is the ideal situation. I wish it was like that all the time. Real value is where money changes hands and I suppose I need to point out that this is a fluid value – it does not stay the same. As an example, the person leaves the shop and I place a price tag on the item and another person comes in and says “I like this and your price is fair, I’d like to buy it”. Again perceived value and real value have met – for the same item but at a higher price. Let’s say the buyer is also a dealer and she takes the item to her shop where she places an even higher price on it. Another person comes in and says “Hey I like this and your price is fair” and so it goes until the item is taken off the market or until a dealer has a higher perceived value than the real value of the item to anyone who sees it.This happens to me all the time too – I buy an item which I perceive to have a higher potential value than the price I am paying. It’s worth noting that until someone else agrees to pay the price I am asking, the real value remains at what I paid for it but if no one is willing to buy it, the potential value has decreased and as a result my perceived value will probably decline until I reach a real value where someone else agrees to buy it.

So, back to the first person who comes in my shop with their item. More often than not, they have an inflated sense of the perceived value and I either decline (if it seems they are not willing to lower their expectation) or I make an offer that fits with my perceived value of the item. As a dealer, my perceived value of the item is almost always lower than that of a buyer – that is how I earn living. My thought process goes something like this “I think I can sell this for X amount and Y is the amount I want to make on the item eventually – so I am willing to pay X-Y for it” Some people think it’s a simple matter of percentage for example -“I think I can sell this for $100 so I’m willing to pay $80 for it” but that’s not the case. There are other factors. If I think I can sell the item the same day – I am willing to earn less, if I think it will be harder to find a buyer than I want to pay less, and if I have to hold the item for a very long time, I am willing to pay even less. If the item is big and takes a lot of space or requires a lot of work on my part – I need to pay much less. So it is never as simple as someone asking “How much is this worth?” and me as an appraiser saying “It’s worth this much”. Does it have emotional value? Is there an interesting history to it? What is the economy doing right now? What are the current trends? What kinds of prices have such items brought in the past?

Potential value is the pie in the sky – the place where the right buyer with the right need and the right amount of money is in the right place at the right time. Most people think of their items with the highest possible potential value. i.e. Grandma was important to you so Grandma’s stuff has a lot of value – but unless you find someone who Grandma was equally important to, you will have a hard time finding a shared perceived value and a real value transaction.

In summary – real value is a monetary transaction. Perceived value is untested. Potential value is where the stars align and the item brings the highest real value possible. My 1994 Jeep Cherokee illustrates this concept well. I paid $900 for it. That’s the real value. It’s a fairly desirable model and I’ve made some improvements but also put a lot of wear and tear on it – so my perceived is a bit higher at around $1500. Finally, the potential value is the one I hope for – I’ll put an ad for around $3000 and hope that the guy who has been looking for this model happens to find my ad and have the money. Probably what will actually happen is that the actual new real value will be somewhere between $900 and $1500, but it’s always good to have hope.