The difference between cost and value
Understand the difference between the cost of producing your product, the price for providing it and the value customers attach to it.
Knowing the difference between cost and value can increase profitability. You also need to understand the:
- cost of your product or service is the amount you spend to produce it
- price is your financial reward for providing the product or service
- value is what your customer believes the product or service is worth to them
For example, the cost for a plumber to fix a burst pipe at a customer's home may be 拢5 for travel, materials costing 拢2.50 and an hour's labour at 拢10. However, the value of the service to the customer is far greater than the 拢17.50 cost. The service may have prevented damage caused by a leak. The plumber may decide to base his price on value, rather than cost, and charge a total of 拢50.
Assess the value of your offering
Pricing should be in line with the value of the benefits that your business provides for its customers, while also bearing in mind the prices your competitors charge.
To maximise your profitability, find out:
- what benefits your customers gain from using your product or service
- the criteria your customers use for buying decisions - for example, speed of delivery, convenience or reliability
- what value your customers place on receiving the benefits you provide
Wherever possible, set prices that reflect the value you provide - not just the cost.