Pgbarranca's Blog

March 1, 2010

Price, value and cost

Filed under: Uncategorized — by pgbarranca @ 8:56 pm

PRICE

Price is typically defined as the sum of the costs plus overhead plus profit or the quantity of payment or compensation for something.

Price is also defined as the amount of money expected, required or given in payment for something.

Economists view price as an exchange ratio between goods that are exchanged for each other. This however has not been used consistently, so that old confusion regarding value frequently reappears. The value of something is a quantity counted in common units of value called numeraire, which may even be an imaginary good. This is done to compare different goods. The unit of value is frequently confused with price, because market value is calculated as the quantity of some good multiplied by its nominal price.

Confusion between prices and costs of production:

Price is commonly confused with the notion of cost of production as in “I paid a high cost for buying my new plasma television”. Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost of production concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For marketing organizations seeking to make a profit the hope is that price will exceed cost of production so the organization can see financial gain from the transaction.

COST

Cost is the amount of money needed to buy, do or make something. It can also be defined as the effort or loss necessary to achieve something.

In business, retail and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing.

VALUE

Value is the quality (positive or negative) that renders something desirable or valuable. It is the importance or worth of something for someone.

The value of a product is the mental estimation a consumer makes of it. Formally it may be conceptualized as the relationship between the consumer´s perceived benefits in relation to the perceived costs of receiving these benefits. It is often expressed as the equation  :

Value = Benefits / Cost

Value is thus subjective (i.e., a function of consumers’ estimation) and relational (i.e., both benefits and cost must be positive values).

SOME COMMENTS ABOUT PRICE, COST AND VALUE RELATIONSHIP:

Most poorly trained salespeople tend to lower the price when they receive price resistance. The price will always seem high to a customer if the perceived value is low. The key to effectively handling price resistance is to understand this simple concept. People say they want low price, but what they really want is low-cost. What is the difference? Low price is what the customer pays for your product or service now. Low cost is what they pay for it over time. For example, if they buy an inexpensive piece of equipment to save money, and it is in constant need of repair because it breaks down a great deal, they may have saved money initially, but their cost over time will be much higher than if they had invested more in a better piece of equipment. In most cases we get what we pay for. Buy cheap and you get less value or higher cost. Buy expensive, and you get higher value or lower cost over time. What are you selling, high value or low-cost? It is better to sell high-priced product or service than a low-priced one. It is much easier to justify high price if the value is there, than poor quality and constant product/service problems. The key to success in selling is building strong relationships. Poor quality, even though the customer saved money, is not in its best long-term interest. It is better to be remembered by customers for good value at a fair price, than low quality at low price.

This is an extract of something said by Tom Connor.

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2 Comments »

  1. Something about price, value and cost relationship:

    Most poorly trained salespeople tend to lower the price when they receive price resistance.

    The price will always seem high to a customer if the perceived value is low. The key to effectively handling price resistance is to understand this simple concept.

    People say they want low price, but what they really want is low cost. What is the difference?

    Low price is what the customer pays for your product or service now. Low cost is what they pay for it over time. For example, if they buy an inexpensive piece of equipment to save money, and it is in constant need of repair because it breaks down a great deal, they may have saved money initially, but their cost over time will be much higher than if they had invested more in a better piece of equipment.

    In most cases we get what we pay for. Buy cheap and you get less value or higher cost. Buy expensive, and you get higher value or lower cost over time.

    What are you selling, high value or low cost? It is better to sell high priced product or service than a low priced one. It is much easier to justify high price if the value is there, than poor quality and constant product/service problems.

    The key to success in selling is building strong relationships. Poor quality, even though the customer saved money, is not in its best long term interest. It is better to be remembered by customers for good value at a fair price, than low quality at low price.

    It is an extract of something said by Tom Connor.

    Comment by Paula — March 7, 2010 @ 12:41 pm |Reply

  2. Pls, if you are using someone else definitions, quote them (in web terms (link them).
    Have a nice trip to logistics!

    Comment by josepe — March 12, 2010 @ 11:58 am |Reply


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