Cost, Price, Value

8 03 2010

Cost, price and value are often used interchangeably but they have distinct meanings:

  • Cost: the cost of your product/service is the effort/amount you spent to produce it
  • Price: is the financial reward for providing the product/service
  • Value: is defined from the customers sight of view and represents their appraisal of                   the worth of the product/service for him/her

These definitions get sharper by viewing on an example:

The cost for a plumber to fix a water-mains burst at a customer’s home may be 15€ for travel, materials costing 5€ and an hour’s labour at 20€. But however, the value of the service to the customer – who may has water leaking all over his/her house – is far greater than the 40€ cost, so the plumber may decide to charge a total of 85€.

So you see the amount of price is not directly related to it’s cost, but in order to make profit there should be a                  Δ(price-cost) < 0.

To increase the aggregated profit the selling person has to find a price which has a great enough Δ to the cost but not a too big one, because then nobody will buy the product.

Graphic origin: http://www.goldratt-toc.com/gtl01/uploads/241/MarketPrice.png

References: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073790695

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