Consumer Surplus – When is a 10K Cigar worth more than 10K?

This is the dialog that occurs in the first few minutes of the movie Hotel Rwanda. A great example for describing willingness to pay and consumer surplus.  After all, value is in the minds of the customers!

Dube: Aah, that is a fine cigar, sir!
Paul Rusesabagina: This is a Cohiba cigar. Each one is
worth 10,000 francs.
Dube: 10,000 francs?
Paul Rusesabagina: Yes, yes. But it is worth more to me
than 10,000 francs.
Dube: What do you mean, sir?
Paul Rusesabagina: If I give a businessman 10,000 francs,
what does that matter to him? He is rich. But, if I give him a
Cohiba cigar straight from Havana, Cuba. Hey, that is style, Dube.
Dube: [smiles] Style!

What Paul, played by the actor Don Cheadle, describes as style, something that makes the 10,000 franc cigar worth more than that for a rich man and hence make him do favors which he would not have done for 10,000 francs, is the rich man’s consumer surplus.

Paul  thinks the cigar is worth more than 10,000 francs not because of his consumer surplus from consuming it but because of the value he can extract from the “rich man”  he gifts that to.

The net is, effective pricing is about finding what different customer segments value and willing to pay for that value and producing it at a cost that enables you capture a share of the value created.

(If you are interested watch segment from 1:40 to 2:56)

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