Valuation Formula
JA: Warning - The following might be a bit boring but habits die hard. I was a stockbroker for 20 years when stocks were related to reality and were bought for investments as opposed to a computer trading casino environment. So things like relative value actually mattered and we actually tried hard to measure it.Â
As for Porsche parts which still exist in reality, I use the following equation to determine value:
Value = Quality / Price
Of course the values are not always linear and there are times when a higher price may not mean better quality (especially with Porsche parts and the Porsche tax!).
Here's a generic example:
Product A:Â
- Quality = 8
- Price = $5
- Value of Product A:Â 1.6
Product B:
- Quality = 6
- Price = $3
- Value of Product B:Â 2
In this example, even though Product A has a higher quality rating, Product B offers a higher "value" because of its lower price relative to quality.Â
Here's a real life example . I'm going to compare the AC Taillights with ones that have the Porsche brand on them using actual prices for each. Quality comparison is of course subjective and we will give the Porsche ones a higher score simply based on brand.
Porsche Classic Brand (pair):Â
- Quality = 800 (scale 0-1000)
- Price = $1,550.00 (includes $100 for re-pop lenses)
- Value:Â 0.52
Audette Collection Brand:
- Quality = 600
- Price = $779.00
- Value:Â 0.77
The AC branded taillights win in terms of value. Of course many other things factor into a buying decision but if an item is of adequate the value becomes more compelling as a factor.