The hardest thing to do is accurately value anything. It involves finding the recipe to the secret sauce of a buyer’s perceptions of what you’re selling. Finding the accurate value for your labor would mean knowing your employer is paying you the most of all potential employers in exchange for the use of all of your assets.
Some things are relatively easy to value, like a basketball – you figure out how much it costs to make, what consumers want and how much they will pay for it. If the ball will be profitable, you make it.
A basketball player, on the other hand, is difficult to value. There is seldom a direct line between a single player and financial returns. A team can try to benchmark using market values, but those are clearly flawed at least some of the time (see: NBA and NFL, summer 2011). A player’s value can also be calculated using a combination of past contribution and projections of future value (see: Derek Jeter’s current contract). Again, this assumes things will go at least as well as planned. Not always a great bet (see: Wall Street, late summer 2008).
A great source of value comes is arbitrage. Where people and products are commodities, value has to come from getting things cheaper and faster. Where there is arbitrage – or where arbitrage is created – a brand has effectively gotten into its consumers’ minds.
Take Coca-Cola. I was at a great sandwich place in Hollywood a couple months ago and noticed Coke being sold in cans, bottles and from a fountain. A 12 ounce can of Coke cost $2.00, while a 12 ounce bottle of “Mexican” Coke cost $3.50. Two products that were initially developed to be indiscernible in two different markets are now being sold in the same market at largely disparate prices. Coca-Cola’s brand adds value already, but the alternative branding, slightly altered flavor and different packaging add (very close to) $1.50 of pure margin.