Thoughts on Value
We recently listened to an Acquired episode on LVMH that led us to ponder the relationship between price and value. In our world of down-and-dirty small businesses, it’s easy to scoff at the luxury goods market. What fool would pay $25,000 for a handbag, $500,000 for a car, or $5,000 for a bottle of wine? That mindset is clearly missing something. Today, Bernard Arnault, mastermind of the LVMH luxury goods holding company, is the richest man in the world. In 2021, LVMH had $22 billion of free cash flow, a 77% increase from 2020. That is a lot of cash flow. While it ain’t us, clearly somebody is buying— and finding value in — these products.
This reminded us of the wonderful Palessi story. In 2018, discount brand Payless Shoes hosted a grand opening of a fake luxury shoe store under the name “Palessi” in Los Angeles. They stocked the store entirely with Payless shoes that normally retail for $20-$40 but instead charged $400-$650 per pair. They invited fashion influencers to check out the selection and sold plenty of shoes at those high prices. When interviewed about their impression of the collection, the shoppers praised the design, the apparent quality with which they were made, and even exclaimed how friends would be clamoring to get their own pair once they showed them off.
After checking out, shoppers were told that the shoes they just bought for hundreds of dollars were, in fact, Payless shoes. They were (unsurprisingly) dumbfounded. You can watch a short segment from ABC News here.
With 2023 operations well underway at various Chenmark companies, the LVMH and Palessi stories reinforce a couple of points about price.
First, the price you pay for a good or service is more than just the sum of the component parts of that good or service. Like a Louis Vuitton bag, the Palessi shoes were far more than the leather, stitching, and rubber that went into making the shoe. Similarly, using our lawn care business as an example, services are far more than the fertilizer we spread, or the solutions in our foggers or TurfCos. Customers are hiring our company for expertise, peace of mind, professionalism, reliability, responsiveness, ease to work with, and a host of other completely intangible things.
Second, the distinction between price and value only works if we nail those intangibles. Palessi built a real high-end store with marble floors and backlit glass display cases and then hosted an invite-only grand opening to an A-list of fashion influencers. The shoes were fake, but the experiment worked because everything other than the shoes was real.
Our lawn care company could double its product material budget or visit a property two extra times without charging customers more and while it would likely result in a better-looking lawn or longer Tick & Mosquito protection, customers are unlikely to value those services if that level of quality is not reflected in everything else we do. How we present ourselves to customers, how we interact with them, and what we do when things go wrong, are all part of the value we provide.
Getting these things right is simple but not easy. When we do get them right, though, they are the same things that cannot be easily copied or replicated by our competition. Put another way, anyone can buy the products we use and copy our company’s business models, but no one can copy the Chenmark way.
Have a great week,
Your Chenmark Team